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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1995
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 .....................
1-7080
COMMISSION FILE NUMBER ........................................................
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Senior Reset Notes, Due November 1, New York Stock Exchange
2000
Senior Reset Notes, Due December 1, New York Stock Exchange
2000
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 1, 1996, 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 1995 Annual Report--Parts I, II and IV.
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PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Financial Services Corporation (the 'Company' or 'Reliance
Financial') owns all of the common stock of Reliance Insurance Company. Reliance
Insurance Company and its property and casualty insurance subsidiaries (the
'Reliance Property and Casualty Companies') underwrite a broad range of
commercial lines of property and casualty 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 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 1995,
Reliance National accounted for 49% of the net premiums written by the Reliance
Property and Casualty Companies. Reliance Insurance offers commercial property
and casualty insurance coverages primarily 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 casualty treaty
and facultative 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 $1,774.6 million (73%) of the 1995
premiums earned by Reliance Insurance Company and its property and casualty and
title insurance subsidiaries (the 'Reliance Insurance Group').
Title insurance business is conducted by Commonwealth Land Title Insurance
Company and Transnation Title Insurance Company (formerly Transamerica Title
Insurance Company) and their respective subsidiaries ('Commonwealth/Transnation
Title'). Commonwealth/Transnation Title is the third largest title insurance
operation in the United States, in terms of 1994 total premiums and fees.
Commonwealth/Transnation Title accounted for $671.9 million (27%) of the
Reliance Insurance Group's 1995 premiums earned.
Business segment information for the years ended December 31, 1995, 1994
and 1993 is set forth in Note 16 to the Company's consolidated financial
statements (the 'Consolidated Financial Statements'), which segment information
is included in the Company's 1995 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 has been pledged by the
Company to secure certain indebtedness. See Note 8 to the Consolidated Financial
Statements. Reliance Insurance Company owns all of the common stock of
Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company. The Company is a wholly-owned subsidiary of Reliance Group Holdings,
Inc. ('Reliance Group Holdings'). Approximately 45% 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, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1995 1994
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RELIANCE RELIANCE
RELIANCE RELIANCE REINSURANCE/ RELIANCE RELIANCE REINSURANCE/
NATIONAL INSURANCE SURETY TOTAL NATIONAL INSURANCE SURETY TOTAL
-------- --------- ------------ ------ -------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability....... $371 $ 98 $ -- $ 469 $347 $ 76 $ -- $ 423
Workers' Compensation... 141 125 -- 266 179 134 -- 313
Automobile.............. 88 152 -- 240 109 135 -- 244
Multiple Peril.......... 26 159 -- 185 32 148 -- 180
Surety.................. -- -- 139 139 -- -- 118 118
Reinsurance............. -- -- 119 119 -- -- 125 125
Ocean and Inland
Marine................. 66 53 -- 119 44 60 -- 104
Involuntary............. 53 28 -- 81 82 32 -- 114
Fire and Allied......... 34 34 -- 68 26 24 -- 50
Accident and Health..... 58 -- -- 58 52 -- -- 52
Other................... 27 8 -- 35 19 22 -- 41
--- --- --- ------ --- --- --- ------
Total.................. $864 $ 657 $258 $1,779 $890 $ 631 $243 $1,764
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
Percent of Total........ 49% 37% 14% 100% 50% 36% 14% 100%
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
<CAPTION>
1993
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RELIANCE
RELIANCE RELIANCE REINSURANCE/
NATIONAL INSURANCE SURETY TOTAL
-------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
General Liability....... $288 $ 82 $ -- $ 370
Workers' Compensation... 232 146 -- 378
Automobile.............. 119 141 -- 260
Multiple Peril.......... 33 154 -- 187
Surety.................. -- -- 107 107
Reinsurance............. -- -- 124 124
Ocean and Inland
Marine................. 54 51 -- 105
Involuntary............. 87 27 -- 114
Fire and Allied......... 19 21 -- 40
Accident and Health..... 36 -- -- 36
Other................... 4 46 -- 50
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Total.................. $872 $ 668 $231 $1,771
--- --- --- ------
--- --- --- ------
Percent of Total........ 49% 38% 13% 100%
--- --- --- ------
--- --- --- ------
</TABLE>
2
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The following table sets forth underwriting results for the Reliance
Property and Casualty Companies for the years ended December 31, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written... $1,779.0 $1,764.3 $1,770.6
Underwriting loss(1)... (45.6) (97.3) (175.6)
Combined ratio......... 101.8% 104.4% 110.8%
</TABLE>
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(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1995, 1994 and 1993 of $25.7 million, $50.1 million and $39.3
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, 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>
1995........ $1,769,064 $841,127 $3,102,688 $5,538,533 $ 4,410,197 $1,128,336 $ 1,404,781
1994........ 1,773,196 833,643 3,033,016 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
</TABLE>
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* Includes Reliance Insurance Company's investment in title insurance operations
of $182.2 million at December 31, 1995.
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,
Spain and Germany, and in the Americas through offices in Canada, Mexico and
Argentina. In 1995, California, New York, Texas and Pennsylvania accounted for
approximately 14%, 10%, 8% 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 37th among property and
casualty insurance companies and groups in terms of net premiums written during
1994, 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') has assigned an 'A'
rating to the claims-paying ability of the Reliance Property and Casualty
Companies. S&P's ratings are based on a 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. The Best and S&P 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
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Companies compete, management believes that the current ratings are adequate to
enable the Reliance Property and Casualty Companies to compete successfully.
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 1995, Reliance National
accounted for 49% of the net premiums written by the Reliance Property and
Casualty Companies. Reliance National, which conducts business nationwide, is
headquartered in New York City and has marketing offices in seven states.
Reliance National also conducts business in the European Community through
offices located in the United Kingdom, the Netherlands, Spain and Germany and in
the Americas through offices in Canada, Mexico and Argentina. Reliance National
distributes its products through national and regional insurance brokers, as
well as program agents. Net premiums written by Reliance National were $864.4
million, $889.7 million and $872.2 million for the years ended December 31,
1995, 1994 and 1993, respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of one or more departments which focus 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, provides
workers' compensation, commercial automobile and general liability
coverages (primarily on a retrospectively rated, high deductible and
captive insurance arrangement basis) to Fortune 1,000 companies,
multinationals and the construction and transportation industries. It
also provides environmental pollution coverages (primarily on a claims
made basis) for consultants, contractors, transporters and certain other
insureds.
o Excess and Surplus Lines primarily provides professional liability
insurance to architects, engineers, lawyers, healthcare providers and
other professionals, and excess and umbrella coverages.
o Financial and Specialty Coverages provides ocean marine, aviation and
space satellite risk coverages, as well as certain non-traditional
insurance products.
o International writes predominantly commercial casualty and property
insurance products, including specialized coverages, such as excess
casualty, directors and officers liability and fidelity insurance, in
certain international markets.
o Financial Products provides directors and officers liability insurance,
errors and omissions insurance and fidelity and fiduciary coverages.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs.
o Property primarily provides commercial property coverage focusing on
excess and specialty commercial property.
o Non-Standard Automobile, a recently constituted division, expects to
provide primarily non-standard personal automobile insurance for drivers
unable to obtain insurance in the standard automobile insurance market.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, retrospectively rated policies, high deductible
policies and reinsurance. Approximately 22% of Reliance National's net premiums
written during 1995 were written on a 'claims-made' basis which provides
coverage only for claims reported during the policy period or within an
established reporting period, as opposed to 'occurrence' basis policies which
provide coverage for events that occur during the policy
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period without regard for when the claim is reported. Claims-made policies
mitigate the 'long tail' nature of the risks insured.
Approximately 9% of Reliance National's net premiums written during 1995
were written on a retrospectively rated basis, whereby the insured effectively
pays for a large portion or, in many cases, all of its losses. Approximately 9%
of Reliance National's net premiums written during 1995 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 payments for losses made by an insured under
a high deductible policy are not considered premiums 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, insureds 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 90% of Reliance National's net
premiums written during 1995 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, 1995, was $2.5 million per occurrence. Reliance National also wrote
a finite risk policy under which its maximum loss for 1995, after application of
retrospective premium payments, could have been $3.3 million.
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 2,600 independent agents, program agents and brokers.
Reliance Insurance's insureds 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
multiple peril, property, general liability, commercial automobile and workers'
compensation (a majority of workers' compensation insurance is written on a
retrospectively rated basis). Reliance Insurance is headquartered in
Philadelphia and operates in 50 states, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands. Net premiums written by Reliance Insurance were
$656.4 million (including $7.8 million of personal lines premiums), $631.0
million (including $20.7 million of personal lines premiums) and $668.2 million
(including $45.4 million of personal lines premiums) for the years ended
December 31, 1995, 1994 and 1993, respectively.
Reliance Insurance is organized into the following four operating
divisions:
o The Commercial Accounts division focuses on accounts with annual premiums
of up to $1 million. This division offers a broad range of traditional
commercial coverages, primarily written on a guaranteed cost basis.
o The Special Risk division provides underwriting of excess and surplus
coverages (generally with lower net retentions than for other commercial
lines written by Reliance Insurance) for risks with non-standard
exposures.
o The Large Accounts division 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 division primarily provides
workers' compensation insurance and approximately 80% 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 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 Insurance's credit
exposure.
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o The Program division provides property and liability insurance programs,
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 Commercial Accounts division and the Large Accounts division provide
their products and services through a decentralized network of regional and
branch offices. This organization allows the Commercial Accounts division and
the Large Accounts division to place major responsibility and accountability for
underwriting, sales, and customer service close to the insured. The Special Risk
division has three regional offices and the Program division has one central
office. Reliance Insurance manages its claims through a decentralized network of
regional and branch offices, which allows the point of service to be close to
the insured.
Reliance Insurance has substantially withdrawn from traditional 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 0.4% of their net premiums written from traditional personal lines in
1995, compared with 1.2% in 1994 and 2.6% in 1993.
Reliance Surety. Reliance Surety is a leading writer of surety 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 claims to minimize losses
and maximize recoveries. Reliance Surety has enjoyed long relationships with the
major contractors it has insured. Reliance Surety's Firemark and Express Surety
operations target smaller contractors, a market traditionally less fully
serviced by national surety companies. Reliance Surety is headquartered in
Philadelphia and conducts business nationwide through 32 branch offices and
approximately 2,250 independent agents and brokers. Net premiums written by
Reliance Surety were $139.3 million, $118.0 million and $106.7 million for the
years 1995, 1994 and 1993, 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.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on both a treaty (blocks of risk) and facultative (individual risks) basis and,
to a lesser extent, property reinsurance on a treaty basis. The business of
Reliance Reinsurance is primarily conducted on a treaty 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 with 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 premiums
written by
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Reliance Reinsurance were $119.0 million, $125.6 million and $123.6 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
Title Insurance. Commonwealth/Transnation Title 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/Transnation Title provides title services for
large and multi-state commercial transactions. Through the Commonwealth OneStop
operation, Commonwealth/Transnation Title provides national and regional 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/Transnation Title is the third largest title
insurance operation in the United States, based on 1994 total premiums and fees.
Commonwealth/Transnation Title had premiums and fees of $671.9 million, $856.8
million and $893.4 million for the years 1995, 1994 and 1993, respectively.
S&P has assigned an 'A' rating to the claims-paying ability of
Commonwealth/Transnation Title. S&P's ratings are based on a 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. Duff & Phelps
Credit Rating Co. ('Duff & Phelps') has assigned an 'A+' rating to the
claims-paying ability of Commonwealth/Transnation Title. Duff & Phelps ratings
are based on a quantitative and qualitative analysis, with particular emphasis
on fundamental factors, recent operating results, reserves, capitalization and
invested assets. An 'A+' rating is assigned to those companies which have a high
claims paying ability; protection factors are average and there is an
expectation of variability in risk over time due to economic and/or underwriting
conditions. The S&P and Duff & Phelps ratings are not designed for the
protection of investors and do not constitute recommendations to buy, sell or
hold any security.
Commonwealth/Transnation Title is organized into ten regions with more than
325 offices covering all 50 states, as well as Puerto Rico and the Virgin
Islands. In 1995, California, Texas, Florida, New York, Pennsylvania, Washington
and Michigan accounted for approximately 11%, 11%, 10%, 7%, 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.
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.
Information Technology and Inspection Services. RCG International, Inc.
('RCG'), a subsidiary of the Reliance Insurance Group, and its subsidiaries
primarily provide information technology and inspection services to industry,
government and non-profit organizations, principally in the United States and
Europe, as well as in Canada, Asia, South America, Africa and Australia. The
information technology services consist of computer-related professional
services to large corporate clients. The inspection services consist of pipeline
and equipment inspection and procurement services in the energy industry. RCG
and its subsidiaries had revenues of $150.8 million, $141.6 million and $116.8
million for 1995, 1994 and 1993, respectively.
7
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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.
Reliance National and Reliance Insurance. During 1995, the highest net
retention per occurrence for a casualty loss was $2.4 million for Reliance
National and $2.8 million for Reliance Insurance. In addition, in 1995 each of
Reliance National and Reliance Insurance purchased 'casualty clash' coverage to
provide protection in the event of losses incurred by multiple coverages on one
occurrence. Under such casualty clash coverages, Reliance National's highest net
retention for casualty losses up to $70 million was $5 million and Reliance
Insurance's highest net retention for casualty losses up to $60 million was $4.6
million. Where appropriate, Reliance National and Reliance Insurance obtain
facultative reinsurance to provide protection in addition to such casualty
treaty coverages.
During 1995, the highest net retention per loss for a property risk was
$2.5 million for Reliance National and $3.2 million for Reliance Insurance.
Reliance National also wrote a finite risk policy under which its maximum loss
for 1995, after application of retrospective premium payments, could have been
$3.3 million. In addition, during 1995, 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
property losses attributable to a single catastrophe of $107 million, Reliance
National and Reliance Insurance together retained a maximum loss exposure of
$19.6 million. Any net retained property loss from a single catastrophe beyond
$107 million is not reinsured and is retained by Reliance National and Reliance
Insurance together. Renewal of property 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 property 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 $25.7 million in 1995 ($78.5 million before insurance
ceded), compared to $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. Catastrophe losses,
including losses incurred by Reliance Reinsurance on insurance assumed, were
$39.3 million in 1993 ($88.5 million before insurance ceded).
A catastrophic event can cause losses in lines of insurance other than
property. Each of 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 $270 million
would be covered by Reliance National's casualty clash coverage.
8
<PAGE>
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.
In 1995, Reliance Insurance Company entered into an aggregate excess of
loss reinsurance agreement. This agreement indemnifies the Reliance Property and
Casualty Companies for ultimate net property and casualty insurance losses in
excess of a specified retention for the 1995 accident year, up to a maximum
aggregate limit of $100 million.
Reliance Surety. Reliance Surety retains 100% of losses on surety bonds up
to $2 million. For surety bonds in excess of $2 million, Reliance Surety obtains
reinsurance that provides various layers of coverage such that the maximum
retained loss for a single surety bond of $50 million is not greater than $20
million. In addition, to protect against multiple losses from any one principal
insured, Reliance Surety reinsures approximately 95% of net losses between $3
million and $30 million for any one principal insured. Thus, the maximum loss on
any one principal insured, where net retained losses by Reliance Surety after
primary reinsurance is $30 million, would not exceed $4.25 million. 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. Where appropriate, Reliance Surety obtains facultative
reinsurance to provide protection in addition to such reinsurance.
Reliance Reinsurance. 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 assumed property
reinsurance of $6.75 million in excess of a $1.75 million per occurrence
retention, with a contractual provision for a reinstatement. In 1994, Reliance
Reinsurance also wrote a specific catastrophe book of business within an
aggregate limit of $17.7 million for any one event, not subject to the above
protection. As of December 31, 1994, Reliance Reinsurance ceased writing a
specific catastrophe book of business.
Commonwealth/Transnation Title. Commonwealth/Transnation Title generally
retains no more than $60 million on any one risk, although it often retains less
than this amount, with reinsurance placed with other title companies.
Commonwealth/Transnation Title also purchases reinsurance from an international
syndicate, including Lloyd's of London, which provides coverage for 80% of
losses between $20 million and $60 million, on any one risk. The largest net
loss that has been paid by Commonwealth/Transnation Title on any one risk was
approximately $4 million.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $1.3 billion and $1.2 billion in 1995 and
1994, 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, 1995,
the Reliance Insurance Group had reinsurance recoverables of $3.2 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 and a staff of analysts 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 $6.4 million reserved for potentially unrecoverable
reinsurance at December 31, 1995. 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.
9
<PAGE>
In 1995, the Reliance Property and Casualty Companies did not cede more
than 4% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 8.4% of total ceded premiums. The Reliance Insurance Group's ten
largest reinsurers, based on 1995 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1995
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
Lloyd's of London................................. $ 108.1 (1)
American Re-Insurance Company..................... 105.9 A+
Hertz International Reinsurance Ltd............... 59.6 (2)
Commercial Risk Re-Insurance Company.............. 42.6 (3)
Swiss Reinsurance America Corporation............. 34.4 A
Zurich Reinsurance Centre, Inc.................... 32.7 A
Kemper Reinsurance Company........................ 32.3 A-
International Industrial Indemnity Company
(formerly TRN Insurance Company)................ 32.1 (2)
Transatlantic Reinsurance Company................. 30.0 A+
G.I.O. Insurance Ltd.............................. 29.3 (4)
</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 rating of NA-3 (Insufficient Operating Experience), as the
reinsurer has not accumulated five years of representative operating
experience. Recoverables from such reinsurer are fully collateralized.
(4) Reinsurer is not rated by Best. The S&P rating for the claims paying ability
of such reinsurer is 'A'. Recoverables from such reinsurer are fully
collateralized.
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.
10
<PAGE>
PROPERTY AND CASUALTY LOSS RESERVES
As of March 1, 1996, the Reliance Insurance Group had a staff of 101
actuaries, of whom 20 are fellows of the Casualty Actuarial Society and one is a
fellow of the Society of Actuaries. This staff regularly performs comprehensive
analyses of reserves and reviews the pricing and reserving methodologies of the
Reliance Insurance Group. Although the Company believes, in light of present
facts and current legal interpretations, that the Reliance Insurance Group's
overall property and casualty reserve levels are adequate to meet its
obligations under existing policies, due to the inherent uncertainty and
complexity of the reserving process, the ultimate liability may be more or less
than such reserves.
The following tables present information relating to the liability for
unpaid claims and related expenses ('loss reserves') for the Reliance Property
and Casualty Companies. The table below provides a reconciliation of the
beginning to ending liability balances for the years ended December 31, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $5,581,483 $5,048,442 $4,571,792
Less reinsurance recoverables........... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,127,781 2,931,528 2,702,992
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year..................... 1,163,447 1,274,649 1,195,425
Increase in provision for insured
events of prior years............ 38,512 22,444 40,169
---------- ---------- ----------
Total provision.................. 1,201,959 1,297,093 1,235,594
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................. 271,915 321,538 229,778
Attributable to insured events of
prior years...................... 868,622 780,961 776,881
---------- ---------- ----------
Total payments................... 1,140,537 1,102,499 1,006,659
---------- ---------- ----------
Foreign currency translation............ (9,768) 1,659 (399)
---------- ---------- ----------
Net loss reserves, end of year.......... 3,179,435 3,127,781 2,931,528
Plus reinsurance recoverables........... 2,679,917 2,453,702 2,116,914
---------- ---------- ----------
Loss reserves, end of year*............. $5,859,352 $5,581,483 $5,048,442
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
* Loss reserves exclude the loss reserves of title insurance operations of
$240.8 million, $228.1 million and $204.7 million at December 31, 1995, 1994
and 1993, respectively.
Policy claims and settlement expenses include a provision for insured
events of prior years of $38.5 million, $22.4 million and $40.2 million for the
years 1995, 1994 and 1993, respectively. The provision for all years includes
adverse development related to prior year asbestos-related and environmental
pollution claims, which primarily affect general liability and multiple peril
lines of business. The 1995 provision also includes adverse development in other
general liability, automobile and reinsurance lines, partially offset by
favorable development in workers' compensation. The 1994 provision also included
adverse development in other general liability lines, partially offset by
favorable development in workers' compensation. The 1993 provision also included
adverse development from workers' compensation reinsurance pools, partially
offset by favorable development in other general liability lines.
11
<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, 1995. A redundancy or deficiency indicates the cumulative
percentage change, as of December 31, 1995, 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 1985 through
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 1985 through 1994, the Company has experienced deficiencies in its
estimated liability for loss reserves. The table includes provisions
specifically made to strengthen prior years' loss reserves of $156.0 million in
1991 and $100.0 million in 1986. 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,
----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $3,179,435 $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822 $1,644,057
Net liability reestimated
as of:
One year later........... -- 101.2% 100.8% 101.5% 101.3% 114.4% 104.8% 104.8%
Two years later.......... -- -- 101.7% 103.1% 104.4% 115.2% 117.0% 113.5%
Three years later........ -- -- -- 104.0% 105.7% 119.6% 118.2% 121.8%
Four years later......... -- -- -- -- 106.7% 120.7% 120.9% 123.2%
Five years later......... -- -- -- -- -- 122.0% 122.2% 127.8%
Six years later.......... -- -- -- -- -- -- 123.8% 128.7%
Seven years later........ -- -- -- -- -- -- -- 130.7%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
Redundancy (Deficiency)... -- (1.2%) (1.7%) (4.0%) (6.7%) (22.0%) (23.8%) (30.7%)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Paid (cumulative) as of:
One year later........... -- 27.8% 26.6% 28.7% 29.0% 36.6% 40.7% 41.6%
Two years later.......... -- -- 44.9% 48.0% 48.6% 57.9% 65.4% 71.6%
Three years later........ -- -- -- 61.1% 62.1% 72.8% 82.2% 86.4%
Four years later......... -- -- -- -- 71.6% 83.0% 91.3% 97.2%
Five years later......... -- -- -- -- -- 90.3% 97.8% 103.0%
Six years later.......... -- -- -- -- -- -- 103.1% 107.3%
Seven years later........ -- -- -- -- -- -- -- 111.5%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
<CAPTION>
DECEMBER 31,
-----------------------------------
1987 1986 1985
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $1,494,227 $1,425,942 $1,248,713
Net liability reestimated
as of:
One year later........... 107.8% 106.6% 122.1%
Two years later.......... 112.0 115.6 134.5
Three years later........ 118.5 121.6 142.5
Four years later......... 125.0 127.2 150.4
Five years later......... 126.7 132.3 155.1
Six years later.......... 131.8 135.1 161.2
Seven years later........ 133.1 140.0 163.5
Eight years later........ 135.4 141.4 168.5
Nine years later......... -- 143.4 169.3
Ten years later.......... -- -- 170.8
Redundancy (Deficiency)... (35.4%) (43.4%) (70.8%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later........... 38.6% 42.0% 48.1%
Two years later.......... 65.8 68.4 79.1
Three years later........ 88.2 88.1 98.9
Four years later......... 99.5 103.9 114.4
Five years later......... 106.2 112.1 127.3
Six years later.......... 110.7 117.1 134.9
Seven years later........ 113.9 120.8 138.5
Eight years later........ 117.4 123.7 141.9
Nine years later......... -- 126.9 144.1
Ten years later.......... -- -- 146.7
</TABLE>
- ------------------
(1) The gross liability for unpaid claims and related expenses was $5.9 billion
at December 31, 1995. The gross liability for unpaid claims and related
expenses for years 1994 and prior was redundant by $30.7 million at December
31, 1995.
12
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1995 and 1994 reported in the 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,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability reported under statutory accounting
practices....................................... $3,102,688 $3,033,016
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (12,758) (9,858)
Additional discount of workers' compensation
reserves........................................ 98,799 104,145
Foreign currency translation...................... (9,294) 478
---------- ----------
Net liability reported............................ $3,179,435 $3,127,781
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for gross loss
reserves at December 31, 1995 and 1994 reported in the Consolidated Financial
Statements and the liability which would be reported in accordance with
statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting
practices....................................... $5,717,321 $5,395,846
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (14,884) (11,984)
Additional discount of workers' compensation
reserves........................................ 179,987 198,808
Foreign currency translation...................... (23,072) (1,187)
---------- ----------
Liability reported................................ $5,859,352 $5,581,483
---------- ----------
---------- ----------
</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 and the economic environment in which property and
casualty companies operate. 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 1995, the Reliance Property and Casualty Companies used an independent
actuarial
13
<PAGE>
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. Estimation of loss reserves for long tail 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 long tail 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 and professional
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
limit the potential loss from a single event through the extensive 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 $235.7 million, $245.7 million and $284.7 million at December 31,
1995, 1994 and 1993, respectively. The discount in 1995 was increased by $1.8
million, which was more than offset by discount amortization of $11.8 million,
resulting in a reduction in pre-tax income of $10.0 million. 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 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, 1995 are $178.6
million ($130.7 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims. The following
table presents information relating to the net loss reserves pertaining to
asbestos-related and environmental pollution claims for the years ending
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss reserves, beginning of year......... $130,143 $122,034 $ 94,253
Provision for policy claims and related
expenses................................... 25,904 28,279 52,630
Payments for policy claims and related
expenses................................... (25,341) (20,170) (24,849)
-------- -------- --------
Net loss reserves, end of year............... $130,706 $130,143 $122,034
-------- -------- --------
-------- -------- --------
</TABLE>
Included in the December 31, 1995 net loss reserves for asbestos-related
and environmental pollution claims are $33.8 million of loss costs for claims
incurred but not reported, $51.9 million of loss costs for reported claims and
$45.0 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
affect 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 analysis by specialized claims personnel, actuarial
techniques and management's judgment. Coverage and claim settlement issues,
related to policies written in prior years, such as the
14
<PAGE>
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.
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 $25.3 million (including $7.3
million of related expenses), $20.2 million (including $7.9 million of related
expenses) and $24.8 million (including $8.1 million of related expenses) for the
years ended December 31, 1995, 1994 and 1993, respectively. The increase in net
paid losses and related expenses in 1995 from 1994 reflects the settlement of a
large environmental pollution claim. Related expenses consist primarily of legal
costs. Total payments for all property and casualty insurance policy claims and
related expenses were $1.14 billion, $1.10 billion and $1.01 billion for the
years ended December 31, 1995, 1994 and 1993, respectively. The following table
presents information related to the number of insureds with asbestos-related and
environmental pollution claims outstanding:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of
year...................................................... 666 661
Additional insureds with claims during the year............. 463 307
Insureds with closed or settled claims during the year...... (379) (302)
---- ----
Number of insureds with outstanding claims, end of year..... 750 666
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims was $37,500 and $34,200 for the years 1995 and
1994, respectively. The increase in the average net paid loss reflects the
settlement of a large environmental pollution claim. As of December 31, 1995,
the Company was involved in approximately 46 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 29 of the Company's 1995 Annual Report, which section is incorporated
herein by reference, and Note 2 to the Consolidated Financial Statements.
15
<PAGE>
At December 31, 1995, the Company's investment portfolio was $4.0 billion
(at cost) with 90% in fixed maturities and short-term securities (including
redeemable preferred stock and cash) and 10% in equity securities, approximately
40% of which were convertible preferred stock. The following table details the
distribution of the Company's investments at December 31, 1995:
<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...................... $ 679,007 $ 685,376 $ 685,376
States, municipalities and
political subdivisions........... 125,967 133,093 133,093
Foreign-government................. 30,253 31,765 31,765
Foreign-other...................... 85,889 89,380 89,380
Public utilities................... 305,652 313,906 313,906
Convertibles and bonds with
warrants attached................ 41,146 47,253 47,253
All other corporate bonds and
notes............................ 679,772 699,893 699,893
Redeemable preferred stock............ 351,824 371,329 371,329
---------- ---------- ----------
2,299,510 2,371,995 2,371,995
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and
political subdivisions........... 11,822 11,797 11,822
Foreign-government................. 133,252 139,042 133,252
Foreign-other...................... 21,000 23,008 21,000
Public utilities................... 296,456 309,920 296,456
All other corporate bonds and
notes............................ 149,027 158,282 149,027
Redeemable preferred stock............ 142,006 149,410 142,006
---------- ---------- ----------
753,563 791,459 753,563
---------- ---------- ----------
Total fixed maturities........... 3,053,073 3,163,454 3,125,558
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities................... 3,333 5,339 5,339
Banks, trusts and insurance
companies........................ 38,289 38,335 38,335
Industrial and other............... 190,863 430,275 430,275
Nonredeemable preferred stock......... 175,569 198,719 198,719
---------- ---------- ----------
408,054 672,668 672,668
---------- ---------- ----------
Short-term investments(2)............... 551,093 551,093 551,093
---------- ---------- ----------
Total investment portfolio....... $4,012,220 $4,387,215 $4,349,319
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST AND CARRYING
VALUE
-----------------
<S> <C>
(IN THOUSANDS)
Mortgage loans(3)............. $ 17,465
Investments in real estate.... 278,510
</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, 1995, had a
carrying value of $156.4 million and a market value of $140.5 million. See
'--Investee Company.'
(2) Includes cash of $50.8 million.
(3) In the Company's Consolidated Financial Statements, mortgage loans are
included in other accounts and notes receivable.
16
<PAGE>
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 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, 1995, 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...................... $1,921,040 $1,945,017 61%
BBB........................... 846,049 857,198 27
---------- ---------- ---
Total investment grade..... 2,767,089 2,802,215 88
---------- ---------- ---
BB to B....................... 298,964 301,697 10
CCC to C...................... 80 80 --
Non-rated..................... 59,425 59,462 2
---------- ---------- ---
Total...................... $3,125,558 $3,163,454 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade and non-rated 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 an in-depth analysis of individual
company's fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of 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 1, 1996, the Reliance Insurance Group owned 3,578,634 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 1, 1996, the
market value of the Reliance Insurance Group's investment in Symbol was
$132,857,000 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $27,252,000. The board of directors of Symbol
includes certain executive officers of the Company.
As of March 1, 1996, the Reliance Insurance Group owned 2,176,000 shares of
Human Genome Sciences, Inc. ('Human Genome'), representing 12.0% of the then
outstanding common stock of Human
17
<PAGE>
Genome. Human Genome specializes in human genetic research designed to detect
and treat human illnesses. As of March 1, 1996, the market value of the Reliance
Insurance Group's investment in Human Genome was $84,864,000 (based upon the
last reported sales price on such date as reported by the Nasdaq National
Market), with a cost basis of $42,219,000.
At December 31, 1995, the Company's real estate operations had holdings
with a carrying value of $278.5 million, which includes nine shopping centers
with an aggregate carrying value of $129.4 million, office buildings and other
commercial properties with an aggregate carrying value of $87.9 million, and
undeveloped land with a carrying value of $61.2 million.
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December 31,
1995, 1994, and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1).................. $3,394,988 $3,213,556 $3,050,018
Net investment income................... 243,268 221,771 210,916
Realized gains.......................... 10,521 16,556 59,252
Increase (decrease) in unrealized
gains................................. 329,457 (342,676) 51,787
Average annual yield:
Net investment income.............. 7.17% 6.90% 6.92%
Realized gains..................... 0.31 0.51 1.94
Increase (decrease) in unrealized
gains............................ 9.70 (10.66) 1.70
---------- ---------- ----------
Return on fixed maturities.............. 17.18% (3.25)% 10.56%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities(2):
Average investments(1).................. $ 600,206 $ 540,139 $ 622,435
Net investment income................... 19,317 26,251 28,259
Realized gains.......................... 23,811 1,611 98,944
Increase (decrease) in unrealized
gains................................. 182,507 (6,849) (9,670)
Average annual yield:
Net investment income.............. 3.22% 4.86% 4.54%
Realized gains..................... 3.97 0.30 15.89
Increase (decrease) in unrealized
gains............................ 30.40 (1.27) (1.55)
---------- ---------- ----------
Return on equity securities............. 37.59% 3.89% 18.88%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed
maturities and equity securities(3)... 20.25% (2.22)% 11.97%
---------- ---------- ----------
---------- ---------- ----------
</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, 1995, 1994 and 1993.
(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, 1995 fixed maturity portfolio market value
would be approximately 0.75%.
The carrying value and market value at December 31, 1995 of fixed
maturities for which interest is payable on a deferred basis was $100.2 million.
18
<PAGE>
INVESTEE COMPANY
As of March 1, 1996, the Reliance Insurance Group owned 6,574,445 shares of
common stock of Zenith National Insurance Corp. ('Zenith'), representing 37.0%
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 1, 1996 the market value of the Reliance Insurance
Group's investment in Zenith was $156,143,000 (based upon the closing price on
such date as reported by the NYSE), with a carrying value of $156,404,000.
Certain executive officers of the Company serve, at the Company's request, as
directors of Zenith. The Company's investment in Zenith is accounted for by the
equity method. See Note 3 to the Consolidated Financial Statements.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, 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.
In addition, other states may regulate licensed insurers as though they
were domestic insurers for insurance holding company purposes. The State of
California, for example, presently treats certain insurance subsidiaries of
Reliance Insurance Company, which are not domiciled in California, as
'commercially domiciled' California insurers. As a result, 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 law of the states of domicile of such subsidiaries. The California
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
a dividend is reasonable in relation to an insurance company's outstanding
liabilities and financial needs are substantially the same as the laws of the
states of domicile of such subsidiaries of Reliance Insurance Company that are
'commercially domiciled' California insurers.
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
19
<PAGE>
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.
Total common stock dividends paid by Reliance Insurance Company during
1995, 1994 and 1993 were $111.5 million, $111.5 million and $130.6 million,
respectively. During 1996, $165.4 million would be available for dividend
payments by Reliance Insurance Company under Pennsylvania 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 test in
effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required prior approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely affect the
Company's ability to service its debt and to pay dividends on its common stock.
The National Association of Insurance Commissioners (the 'NAIC') 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
policyholders' surplus 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.
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.
20
<PAGE>
On November 28, 1994, Reliance Insurance Company and several of its
affiliates received an order from the outgoing Insurance Commissioner ordering
refunds totaling $72.3 million, inclusive of interest. On January 31, 1996, the
Company reached a settlement with the California Department of Insurance
resolving its total liability for refunds and interest under Proposition 103.
The settlement requires the Company to pay $15.6 million in refunds and interest
on certain policies issued or renewed between November 8, 1988 and November 7,
1989. Although the Company believes that the California Department of Insurance
misapplied Proposition 103 as it relates to it, the Company agreed to the
settlement to avoid prolonging the matter further. In the fourth quarter of
1995, the Company recorded a pre-tax charge of $4.0 million related to
Proposition 103. The fourth quarter 1995 charge represents the difference
between the settlement amount and the pre-tax charge of $11.6 million the
Company had taken in the fourth quarter of 1994 to provide for Proposition 103
refunds and interest.
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.
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/Transnation Title competes with other 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.
SALE OF NON-CORE OPERATIONS
In July 1993, the Company completed the sale of its life insurance
subsidiary, United Pacific Life Insurance Company. 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, through a public offering of 100%
of the common stock of CMAC Investment Corporation.
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, 1995, the Company and its
consolidated subsidiaries employed approximately 8,630 persons in approximately
460 offices.
21
<PAGE>
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 against it 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.
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. The Superintendent
has informed Prometheus that he intends to pursue court approval of the
settlement. The settlement agreement will not become effective until final
approval by the court and there is no assurance that such approval will be
obtained.
See Note 15 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of March 1, 1996, all 1,000 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 31
of the Reliance Financial 1995 Annual Report, which information is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Item 6 is not required pursuant to the reduced disclosure requirements
applicable to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in 'Reliance Financial Services Corporation and
Subsidiaries Financial Review' on pages 26 through 31 of the Reliance Financial
1995 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 24 of the Reliance Financial 1995 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 24 of the Reliance
Financial 1995 Annual Report, are incorporated herein by reference.
PAGE REFERENCE
-------------------
1995
ANNUAL
FORM 10-K REPORT
--------- ------
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................ A-1 25
Consolidated Financial Statements at December 31, 1995
and 1994 and for the three years ended December 31,
1995:
Statement of Income................................ 1
Balance Sheet...................................... 2
Statement of Changes in Shareholder's Equity....... 3
Statement of Cash Flows............................ 4
Notes to Financial Statements (1-17)............... 5-24
2. FINANCIAL STATEMENT SCHEDULES.
I -- Summary of Investments -- Other Than Investments in A-2
Related Parties....................................
II -- Condensed Financial Information of the Registrant at
December 31, 1995 and 1994 and for the three years
ended December 31, 1995:
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
Pursuant to Rule 1-02(w) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. met the definition of a
'significant subsidiary' in 1993 and 1994. 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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
3.1 Reliance Financial's Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) 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 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).
10.4 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).
10.5 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).
13.1 Reliance Financial 1995 Annual Report.
27.1 Financial Data Schedule.
**+28.1 Schedule P from the statutory reports of the Reliance Property and
Casualty Companies.
- ------------------
* 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.
+ Schedule P from the statutory reports of Zenith National Insurance Corp.,
37.0% 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.
** Incorporated by reference to Exhibit 28.1 to the Reliance Group Holdings
Annual Report on Form 10-K for the year ended Decembr 31, 1995.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the year ended December 31, 1995.
24
<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 27TH DAY OF
MARCH, 1996.
RELIANCE GROUP HOLDINGS, INC.
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.
SIGNATURES TITLE DATE
- ---------------------- ---------------------------------------- --------------
SAUL P. STEINBERG Chairman of the Board, Principal March 27, 1996
- ---------------------- Executive Officer and Director
SAUL P. STEINBERG
GEORGE E. BELLO Principal Accounting Officer March 27, 1996
- ---------------------- and Director
GEORGE E. BELLO
LOWELL C. FREIBERG Principal Financial Officer March 27, 1996
- ---------------------- and Director
LOWELL C. FREIBERG
GEORGE R. BAKER Director March 27, 1996
- ----------------------
GEORGE R. BAKER
DENNIS A. BUSTI Director March 27, 1996
- ----------------------
DENNIS A. BUSTI
THOMAS P. GERRITY Director March 27, 1996
- ----------------------
THOMAS P. GERRITY
25
<PAGE>
SIGNATURES TITLE DATE
- ---------------------- ---------------------------------------- --------------
JEWELL J. MCCABE Director March 27, 1996
- ----------------------
JEWELL J. MCCABE
IRVING SCHNEIDER Director March 27, 1996
- ----------------------
IRVING SCHNEIDER
BERNARD L. SCHWARTZ Director March 27, 1996
- ----------------------
BERNARD L. SCHWARTZ
RICHARD E. SNYDER Director March 27, 1996
- ----------------------
RICHARD E. SNYDER
Director March 27, 1996
- ----------------------
THOMAS J. STANTON, JR.
ROBERT M. STEINBERG Director March 27, 1996
- ----------------------
ROBERT M. STEINBERG
JAMES E. YACOBUCCI Director March 27, 1996
- ----------------------
JAMES E. YACOBUCCI
26
<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, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, and have issued our report thereon dated
February 26, 1996 (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 1995 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 26, 1996
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, 1995
<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................. $ 679,007 $ 685,376 $ 685,376
States, municipalities and
political subdivisions...... 125,967 133,093 133,093
Foreign--government........... 30,253 31,765 31,765
Foreign--other................ 85,889 89,380 89,380
Public utilities.............. 305,652 313,906 313,906
Convertibles and bonds with
warrants attached........... 41,146 47,253 47,253
All other corporate bonds and
notes....................... 679,772 699,893 699,893
Redeemable preferred stocks...... 351,824 371,329 371,329
---------- ---------- -------------
2,299,510 2,371,995 2,371,995
---------- ---------- -------------
Fixed maturities held for
investment:
Bonds and notes:
States, municipalities and
political subdivisions...... 11,822 11,797 11,822
Foreign--government........... 133,252 139,042 133,252
Foreign--other................ 21,000 23,008 21,000
Public utilities.............. 296,456 309,920 296,456
All other corporate bonds and
notes....................... 149,027 158,282 149,027
Redeemable preferred stocks...... 142,006 149,410 142,006
---------- ---------- -------------
753,563 791,459 753,563
---------- ---------- -------------
Equity securities:
Common stocks:
Public utilities.............. 3,333 5,339 5,339
Banks, trusts and insurance
companies................... 38,289 38,335 38,335
Industrial and other.......... 190,863 430,275 430,275
Nonredeemable preferred stocks... 175,569 198,719 198,719
---------- ---------- -------------
408,054 672,668 672,668
---------- ---------- -------------
Short-term investments............. 500,284 500,284 500,284
---------- ---------- -------------
Cash............................... 50,809 50,809 50,809
---------- ---------- -------------
$4,387,215
----------
----------
Mortgage loans(1).................. 17,465 17,465
Investments in real estate......... 278,510 278,510
---------- -------------
$4,308,195 $ 4,645,294
---------- -------------
---------- -------------
</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 1995 1994 1993
- ----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
REVENUES:
Dividends from subsidiaries........ $111,467 $111,467 $130,639
Interest and other income,
principally from affiliates...... 20,821 15,136 18,560
-------- -------- --------
132,288 126,603 149,199
-------- -------- --------
EXPENSES:
Interest........................... 15,811 15,244 18,423
General and administrative......... 1,191 2,051 537
-------- -------- --------
17,002 17,295 18,960
-------- -------- --------
115,286 109,308 130,239
Income tax (provision) benefit..... (859) 760 140
-------- -------- --------
INCOME BEFORE EQUITY IN
SUBSIDIARIES AND INVESTEE
COMPANY.......................... 114,427 110,068 130,379
Equity in subsidiaries (net income
less dividends received)......... 58,056 18,992 42,529
Equity in investee company......... 7,792 9,478 12,441
Loss on disposal of discontinued
operations of investee company... (4,497) -- --
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE............. 175,778 138,538 185,349
Extraordinary item--early
extinguishment of debt........... (3,363) -- (3,666)
Cumulative effect of change in
accounting for subsidiaries'
income taxes..................... -- -- 24,335
-------- -------- --------
NET INCOME......................... $172,415 $138,538 $206,018
-------- -------- --------
-------- -------- --------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1995 1994
- --------------------------------------------------------------
(Dollars in thousands, except
per-share amount)
<S> <C> <C>
Cash............................... $ 39 $ 8,923
Investments in subsidiaries........ 1,388,975 1,051,404
Notes receivable from parent
company.......................... 184,108 187,065
Other assets....................... 14,443 19,238
---------- ----------
$1,587,565 $1,266,630
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- --------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued
expenses......................... $ 2,122 $ 2,137
Federal income taxes due to parent
company.......................... 18,866 19,818
Term loans and short-term debt..... 158,500 100,000
Debentures and notes............... 40,318 80,596
---------- ----------
219,806 202,551
---------- ----------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10
per-share, 1,000 shares
authorized, issued and
outstanding................... -- --
Additional paid-in capital....... 678,349 678,502
Retained earnings (including
undistributed net income of
subsidiaries of $328,356 and
$267,005)..................... 496,839 434,676
Net unrealized gain (loss) on
investments of subsidiaries... 219,356 (27,881)
Net unrealized loss on foreign
currency translation of
subsidiaries.................. (26,785) (21,218)
---------- ----------
1,367,759 1,064,079
---------- ----------
$1,587,565 $1,266,630
---------- ----------
---------- ----------
</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 1995 1994 1993
- -------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 172,415 $ 138,538 $ 206,018
Equity in undistributed net income
of subsidiaries and investee
company.......................... (61,351) (28,470) (79,305)
Other--net......................... 3,574 821 3,319
--------- --------- ---------
114,638 110,889 130,032
--------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital contribution to
subsidiary....................... (33,631) (15,000) (5,000)
Other--net......................... -- -- 755
--------- --------- ---------
(33,631) (15,000) (4,245)
--------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Decrease (increase) in notes
receivable from parent
company--net..................... 2,957 (17,365) (14,212)
Increase (decrease) in term loans
and short-term debt--net......... 58,500 (5,000) 105,000
Repurchases of debentures.......... (40,348) (9,125) (80,060)
Debt issuance costs................ (1,000) -- (6,750)
Dividends.......................... (110,000) (85,187) (100,064)
--------- --------- ---------
(89,891) (116,677) (96,086)
--------- --------- ---------
Increase (decrease) in cash........ (8,884) (20,788) 29,701
Cash, beginning of year............ 8,923 29,711 10
--------- --------- ---------
Cash, end of year.................. $ 39 $ 8,923 $ 29,711
--------- --------- ---------
--------- --------- ---------
</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 COLUMN I COLUMN J
- ----------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
OF
DEFERRED UNPAID POLICY DEFERRED
POLICY CLAIMS AND NET CLAIMS AND POLICY OTHER
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT ACQUISITION INSURANCE PREMIUMS
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES COSTS EXPENSES WRITTEN
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31,
1995:
Property and
casualty..... $194,648 $ 5,859,352 $ 1,299,465 $ 1,774,591 $247,343 $ 1,201,959 $411,979 $197,112 $ 1,779,040
-----------
-----------
Title.......... -- 240,777 -- 671,947 27,946 58,486 -- 629,051
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
$194,648 $ 6,100,129 $ 1,299,465 $ 2,446,538 $275,289 $ 1,260,445 $411,979 $826,163
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
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 $183,755 $ 1,764,290
-----------
-----------
Title.......... -- 228,063 -- 856,774 26,613 75,867 -- 776,149
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
$181,938 $ 5,809,546 $ 1,288,454 $ 2,634,092 $258,912 $ 1,372,960 $387,924 $959,904
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
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 $174,609 $ 1,770,597
-----------
-----------
Title.......... -- 204,695 -- 893,364 24,282 81,803 -- 780,138
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
$178,129 $ 5,253,137 $ 1,276,331 $ 2,464,903 $250,799 $ 1,317,397 $327,437 $954,747
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
--------- ----------- ----------- ----------- --------- ----------- --------- ---------
</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, 1995:
Premiums:
Property and casualty............ $2,707,978 $1,284,023 $ 350,636 $1,774,591 19.76%
Title............................ 671,222 1,649 2,374 671,947 .35
---------- ---------- --------- ----------
$3,379,200 $1,285,672 $ 353,010 $2,446,538 14.43
---------- ---------- --------- ----------
---------- ---------- --------- ----------
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
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</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,
1995......... $ 194,648 $5,859,352 $235,664 $1,299,465 $1,774,591 $ 247,343 $1,163,447 $38,512
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
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
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
<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,
1995......... $411,979 $1,140,537 $1,779,040
------------ ---------- ----------
------------ ---------- ----------
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
------------ ---------- ----------
------------ ---------- ----------
</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 1995 and 1994 and 3% to 6% in 1993. Discount shown relates
to net liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns.
A-8
<PAGE>
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ------- ------------------------------------------------------------ ----------
3.1 Reliance Financial's Certificate of Incorporation, as
amended (incorporated by reference to Exhibit 3(a) 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 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).
10.4 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).
10.5 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).
13.1 Reliance Financial 1995 Annual Report.
27.1 Financial Data Schedule.
**+28.1 Schedule P from the statutory reports of the Reliance
Property and Casualty Companies.
- ------------------
* 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.
+ Schedule P from the statutory reports of Zenith National Insurance Corp.,
37.0% 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.
** Incorporated by reference to Exhibit 28.1 to the Reliance Group Holdings
Annual Report on Form 10-K for the year ended Decembr 31, 1995.
<PAGE>
CONTENTS
Financial Statements 1
Independent Auditors' Report 25
Financial Review 26
Market and Dividend Information 31
Directors 32
Officers 33
Corporate Data 34
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>
[This page intentionally left blank]
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
REVENUES:
Premiums earned....................... $2,446,538 $2,634,092 $2,464,903
Net investment income................. 275,289 258,912 250,799
Gain on sales of investments.......... 29,110 9,218 158,196
Interest income from parent company... 20,408 14,864 18,491
Other................................. 150,751 141,609 116,802
---------- ---------- ----------
2,922,096 3,058,695 3,009,191
---------- ---------- ----------
CLAIMS AND EXPENSES:
Policy claims and settlement
expenses............................ 1,260,445 1,372,960 1,317,397
Policy acquisition costs.............. 411,979 387,924 327,437
Interest.............................. 20,904 20,231 21,365
Other insurance expenses.............. 826,163 959,904 954,747
Other................................. 146,373 137,877 119,186
---------- ---------- ----------
2,665,864 2,878,896 2,740,132
---------- ---------- ----------
INCOME BEFORE INCOME TAXES, MINORITY
INTERESTS AND EQUITY IN INVESTEE
COMPANY............................. 256,232 179,799 269,059
Provision for income taxes............ (82,900) (47,982) (92,994)
Minority interests.................... (849) (2,757) (3,157)
Equity in investee company............ 7,792 9,478 12,441
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS..... 180,275 138,538 185,349
Loss on disposal of discontinued
operations of investee company...... (4,497) -- --
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.............................. 175,778 138,538 185,349
Extraordinary item--early
extinguishment of debt.............. (3,363) -- (3,666)
Cumulative effect of change in
accounting for income taxes......... -- -- 24,335
---------- ---------- ----------
NET INCOME............................ $ 172,415 $ 138,538 $ 206,018
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1995 1994
- ------------------------------------------------------------------
(Dollars in thousands, except per-share amount)
<S> <C> <C>
Marketable securities:
Fixed maturities held for
investment--at amortized cost
(quoted market $791,459 and
$1,053,551)....................... $ 753,563 $1,166,020
Fixed maturities available for
sale--at quoted market (amortized
cost $2,299,510 and $1,945,919)... 2,371,995 1,839,312
Equity securities--at quoted market
(cost $408,054 and $482,529)...... 672,668 564,636
Short-term investments............. 500,284 229,906
Cash.................................... 50,848 46,814
Premiums receivable..................... 1,075,226 1,079,393
Other accounts and notes receivable..... 130,555 176,119
Reinsurance recoverables................ 3,163,073 2,937,533
Federal and foreign income taxes,
including deferred taxes.............. 9,784 161,013
Notes receivable from parent company.... 184,108 187,065
Investments in real estate--at cost,
less accumulated depreciation......... 278,510 289,465
Investment in investee company.......... 156,404 147,513
Deferred policy acquisition costs....... 194,648 181,938
Other assets............................ 354,254 331,038
---------- ----------
$9,895,920 $9,337,765
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------
<S> <C> <C>
Unearned premiums....................... $1,299,465 $1,288,454
Unpaid claims and related expenses...... 6,100,129 5,809,546
Accounts payable and accrued expenses... 586,902 650,374
Reinsurance ceded premiums payable...... 325,246 291,844
Senior reset notes...................... 40,318 80,596
Term loans and short-term debt.......... 176,101 129,355
Minority interests--redeemable preferred
stock of a subsidiary................. -- 23,517
---------- ----------
8,528,161 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......... 678,349 678,502
Retained earnings.................. 496,839 434,676
Net unrealized gain (loss) on
investments....................... 219,356 (27,881)
Net unrealized loss on foreign
currency translation.............. (26,785) (21,218)
---------- ----------
1,367,759 1,064,079
---------- ----------
$9,895,920 $9,337,765
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
NET
UNREALIZED
NET LOSS ON
ADDITIONAL UNREALIZED FOREIGN
COMMON PAID-IN RETAINED GAIN (LOSS) ON CURRENCY SHAREHOLDER'S
STOCK CAPITAL EARNINGS INVESTMENTS TRANSLATION EQUITY
------ ---------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993..................... $ -- $ 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
Transactions of investee company............. -- (153) -- 8,693 -- 8,540
Net income................................... -- -- 172,415 -- -- 172,415
Loss on early extinguishment of redeemable
preferred stock of a subsidiary............ -- -- (252) -- -- (252)
Dividends.................................... -- -- (110,000) -- -- (110,000)
Appreciation after deferred income taxes..... -- -- -- 238,544 -- 238,544
Foreign currency translation................. -- -- -- -- (5,567) (5,567)
------ ---------- --------- -------------- ----------- -------------
BALANCE, DECEMBER 31, 1995................... $ -- $ 678,349 $ 496,839 $ 219,356 $ (26,785) $ 1,367,759
------ ---------- --------- -------------- ----------- -------------
------ ---------- --------- -------------- ----------- -------------
</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 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 172,415 $ 138,538 $ 206,018
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....... (29,110) (9,218) (158,196)
Deferred policy acquisition
costs............................ (12,710) (3,809) (54,779)
Premiums and other receivables and
reinsurance recoverables......... (238,754) (480,590) (221,956)
Unearned premiums, unpaid claims
and related expenses............. 315,288 566,873 581,141
Accounts payable, accrued expenses
and other........................ 30,885 106,239 (56,079)
---------- ---------- ----------
238,014 318,033 271,814
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities
available for sale.................... 536,795 441,401 341,168
Proceeds from sales of fixed maturities
held for investment................... 39,218 18,481 --
Proceeds from redemptions of fixed
maturities available for sale......... 49,218 60,752 170,281
Proceeds from redemptions of fixed
maturities held for investment........ 54,038 15,785 273,921
Proceeds from sales of equity
securities............................ 400,635 189,895 1,016,308
(Increase) decrease in short-term
investments--net...................... (283,141) 151,965 240,884
Purchases of fixed maturities available
for sale.............................. (514,491) (587,581) (958,817)
Purchases of fixed maturities held for
investment............................ (108,053) (265,672) (586,677)
Purchases of equity securities.......... (262,075) (209,506) (680,760)
Discontinued operations................. -- 15,550 69,157
Other--net.............................. (20,710) (72,905) (23,067)
---------- ---------- ----------
(108,566) (241,835) (137,602)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in notes receivable
from parent company................... 2,957 (17,365) (14,212)
Increase in term loans.................. 120,298 75,272 105,248
Increase (decrease) in short-term
debt--net............................. (5,400) 10,652 183
Repayment of term loans................. (68,152) (81,942) (2,536)
Repurchases of debentures and notes..... (40,348) (19,062) (80,060)
Debt issuance costs..................... (1,000) -- (6,750)
Dividends............................... (110,000) (85,187) (100,064)
Redemption of redeemable preferred stock
of a subsidiary....................... (23,769) (3,360) (3,360)
---------- ---------- ----------
(125,414) (120,992) (101,551)
---------- ---------- ----------
Increase (decrease) in cash............. 4,034 (44,794) 32,661
Cash, beginning of year................. 46,814 91,608 58,947
---------- ---------- ----------
Cash, end of year....................... $ 50,848 $ 46,814 $ 91,608
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid........................... $ 16,300 $ 16,400 $ 19,600
---------- ---------- ----------
---------- ---------- ----------
Income taxes paid....................... $ 55,000 $ 44,500 $ 136,900
---------- ---------- ----------
---------- ---------- ----------
</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.
See notes to consolidated financial statements
4
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's principal operations consist of property and casualty insurance
and title insurance. The Company's property and casualty insurance business
consists of four principal operations: Reliance National, Reliance Insurance,
Reliance Reinsurance and Reliance Surety. Reliance National offers, through
national and regional brokers and program agents, 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 1995, Reliance National accounted for
49% of the net premiums written by the Company's property and casualty insurance
operations. The Reliance Insurance operation offers, through independent agents,
program agents and brokers, commercial property and casualty insurance coverages
for mid-sized companies primarily 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 offers, through reinsurance brokers, treaty and facultative
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 and conducts its business through
branch offices, independent agents and brokers. The Company's property and
casualty insurance operations accounted for $1,774,591,000 (73%) of the
Company's 1995 net premiums earned.
The Company's title insurance business consists of Commonwealth Land Title
Insurance Company, Transnation Title Insurance Company and their subsidiaries
('Commonwealth/Transnation'). Commonwealth/Transnation writes, through direct
and agency operations, title insurance for residential and commercial real
estate nationwide and provides escrow and settlement services in connection with
real estate closings. Commonwealth/Transnation accounted for $671,947,000 (27%)
of the Company's 1995 net premiums earned.
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. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such statements
include informed estimates and judgements of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Actual results may differ from these estimates.
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
5
<PAGE>
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. In November 1995, the Financial Accounting Standards Board issued a
special report which permitted a one-time reassessment of the classification of
securities designated held for investment. Accordingly, the Company reclassified
fixed maturity securities with a market value of $426,442,000 and an amortized
cost of $410,395,000 from the held for investment portfolio into the available
for sale portfolio. This reclassification resulted in an increase in
shareholder's equity of $10,431,000. Investments in equity securities include
common stocks, where the Company's 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 of voting
stock, or otherwise exercises significant influence, are reported using the
equity method of accounting. Short-term investments primarily consist of United
States government and other foreign government securities, certificates of
deposit and commercial paper carried at cost which approximates market value.
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 the discounted cash flow to be
received by the Company. Write-downs and other realized gains and losses,
determined on a specific identification basis, are included in income.
Property and casualty insurance premiums reported as earned represent the
portion of premiums written applicable to the current period, computed on a
pro-rata basis over the terms of the policies in force. 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.
Property and casualty unpaid claims and related expenses are estimated 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. The Company applies a
variety of generally accepted actuarial techniques to determine the estimates of
ultimate liability. The process of estimating claims is a complex task and the
ultimate liability may be more or less than such estimates indicate. Adjustments
of the probable ultimate liability, based on subsequent developments, are
included in operations currently.
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. The process of estimating claims is a
complex task and the actual payments may be more or less than such estimates
indicate. Changes in loss estimates, resulting from management's continuing
review process, are included in operations currently.
INVESTMENTS IN REAL ESTATE
Investments in real estate consist primarily of shopping centers and office
buildings, and are carried at cost (less accumulated depreciation), which
includes real estate taxes, interest and other carrying costs incurred prior to
substantial completion of the real estate development projects. Investments in
real estate at December 31, 1995 include $61,200,000 related to undeveloped land
which is zoned for mixed use development. Depreciation expense is provided using
the straight-line method.
6
<PAGE>
The Company's real estate properties are reviewed for impairment whenever events
or circumstances indicate that the carrying value of such properties may not be
recoverable. In performing the review for recoverability of carrying value, the
Company estimates the future undiscounted cash flows expected to result from the
use of each of its properties and their eventual disposition. These cash flow
projections reflect changes in occupancy, new leases, current rent roll, future
expirations and general market conditions. If the total expected future
undiscounted cash flows are less than the carrying value of such properties,
impairment losses are recognized on a property-by-property basis. An impairment
loss is measured by the amount that the carrying value of the property exceeds
its fair value.
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. Exchange gains and
losses resulting from foreign currency transactions are included in operations
currently.
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, 1995 and 1994 approximates their carrying value.
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's 1994 and 1993
consolidated financial statements to conform with the current year's
consolidated financial statements.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, 'Employers' Accounting for Postemployment Benefits' and
effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.' The adoption of these Statements had no
material effect on the Company's consolidated financial statements.
7
<PAGE>
2. INVESTMENTS
Fixed maturities held for investment at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities......... $ 296,456 $ 309,920 $ 13,470 $ 6
Foreign government....... 133,252 139,042 6,715 925
Corporate bonds and notes
and other.............. 181,849 193,087 11,526 288
Redeemable preferred stock.... 142,006 149,410 7,405 1
---------- ---------- ---------- ----------
$ 753,563 $ 791,459 $ 39,116 $ 1,220
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $41,358,000 and $40,138,000.
Fixed maturities available for sale at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government
and government agencies
and authorities......... $ 685,376 $ 679,007 $ 7,867 $ 1,498
States, municipalities and
political subdivisions.. 133,093 125,967 7,151 25
Public utilities.......... 313,906 305,652 8,900 646
Corporate bonds and notes
and other............... 868,291 837,060 44,864 13,633
Redeemable preferred stock..... 371,329 351,824 21,445 1,940
---------- ---------- ---------- ----------
$2,371,995 $2,299,510 $ 90,227 $ 17,742
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $603,568,000 and $585,826,000.
Fixed maturities held for investment at December 31, 1994 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
Public utilities......... $ 536,746 $ 477,942 $ 202 $ 59,006
Foreign government....... 123,306 115,647 138 7,797
Corporate bonds and notes
and other.............. 355,215 317,002 761 38,974
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.
8
<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)
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Bonds and notes:
United States government
and government agencies
and authorities........ $ 495,007 $ 528,297 $ 615 $ 33,905
States, municipalities
and political
subdivisions........... 37,306 36,982 757 433
Public utilities......... 88,602 96,631 177 8,206
Corporate bonds and notes
and other.............. 877,598 934,648 31,263 88,313
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.
As of December 31, 1995, 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
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due within one year........... $ 6,473 $ 6,558 $ 58,999 $ 59,636
Due after one year through
five years.................. 53,181 56,365 568,469 577,205
Due after five years through
ten years................... 289,905 303,838 451,229 460,217
Due after ten years........... 404,004 424,698 1,063,474 1,114,732
---------- ---------- ---------- ----------
753,563 791,459 2,142,171 2,211,790
Mortgage-backed securities.... -- -- 157,339 160,205
---------- ---------- ---------- ----------
$ 753,563 $ 791,459 $2,299,510 $2,371,995
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Net investment income consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Investment income:
Fixed maturities (1).................. $ 221,279 $ 218,970 $ 193,180
Equity securities..................... 20,187 27,390 29,640
Short-term investments................ 30,292 9,159 19,920
Other................................. 15,359 14,159 15,832
---------- ---------- ----------
287,117 269,678 258,572
Investment expenses........................ (11,828) (10,766) (7,773)
---------- ---------- ----------
$ 275,289 $ 258,912 $ 250,799
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) Includes investment income from debentures of Reliance Group Holdings, Inc.
of $10,085,000 in 1993.
9
<PAGE>
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities (1):
Realized gains........................ $ 47,764 $ 44,512 $ 83,338
Realized losses (2)................... (28,406) (28,016 ) (21,179)
---------- ---------- ----------
19,358 16,496 62,159
Equity securities (3)...................... 20,445 8,890 98,944
Other (3),(4).............................. (10,693) (16,168 ) (2,907)
---------- ---------- ----------
$ 29,110 $ 9,218 $ 158,196
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) During 1995 and 1994, the Company sold fixed maturities held for investment
with an amortized cost of $41,000,000 and $18,100,000. These sales were in
response to a significant deterioration in the issuers' creditworthiness.
(2) Includes realized losses of $7,600,000, $11,600,000 and $5,200,000 in 1995,
1994 and 1993, respectively, and write-downs of $15,700,000, $10,300,000 and
$13,200,000 in 1995, 1994 and 1993, respectively, related to non-investment
grade securities.
(3) Gain on sales of equity securities and other in 1995, 1994 and 1993 includes
write-downs of $1,500,000, $13,200,000 and $10,200,000, respectively.
(4) Includes exchange losses of $10,400,000 in 1995 related to certain foreign
currency denominated investments and realized losses of $14,500,000 in 1994
related to certain foreign currency contracts.
Net unrealized appreciation (depreciation) on investments consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Equity securities..................... $ 182,507 $ (6,849) $ (9,670)
Fixed maturities available for sale... 179,092 (193,737) 48,689
---------- ---------- ----------
361,599 (200,586) 39,019
Deferred income tax (provision) benefit.... (123,055) 66,684 (11,261)
Net unrealized appreciation (depreciation)
in investments of investee company....... 8,693 (9,002) 1,244
---------- ---------- ----------
$ 247,237 $ (142,904) $ 29,002
---------- ---------- ----------
---------- ---------- ----------
Unrealized appreciation (depreciation) on
fixed maturities held for investment..... $ 150,365 $ (148,939) $ 3,098
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
10
<PAGE>
Net unrealized gain (loss) on investments consisted of:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Equity securities:
Unrealized gains......... $ 276,760 $ 114,231 $ 100,179
Unrealized losses........ (12,146) (32,124) (11,223)
---------- ---------- ----------
264,614 82,107 88,956
---------- ---------- ----------
Fixed maturities available for
sale:
Unrealized gains......... 90,227 38,507 99,621
Unrealized losses........ (17,742) (145,114) (12,491)
---------- ---------- ----------
72,485 (106,607) 87,130
---------- ---------- ----------
337,099 (24,500) 176,086
Deferred income tax
(provision) benefit......... (118,002) 5,053 (61,631)
Net unrealized gain (loss) in
investments of investee
company..................... 259 (8,434) 568
---------- ---------- ----------
$ 219,356 $ (27,881) $ 115,023
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Fixed maturity investments carried at $529,200,000 at December 31, 1995 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 United States
government, whose aggregate carrying value is in excess of 10% of the Company's
shareholder's equity at December 31,1995 is comprised of common stock of Symbol
Technologies, Inc. with a carrying and market value of $141,356,000.
3. INVESTMENT IN INVESTEE COMPANY
Investment in investee company at December 31, 1995 and 1994 was $156,404,000
and $147,513,000 which represents the Company's investment in Zenith National
Insurance Corp. ('Zenith'). Equity income in Zenith was $7,792,000, $9,478,000
and $12,441,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. In addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations by Zenith.
The Company's prior period results of operations have not been reclassified
since amounts attributable to Zenith's life insurance operations are not
significant. Dividends received by the Company from Zenith were $6,574,000 for
each of the years ended December 31,1995, 1994 and 1993.
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C> <C>
Revenues...................... $ 519,020 $ 512,455 $ 508,412
Income from continuing
operations before income
taxes....................... 29,422 45,106 62,486
Loss on disposal of
discontinued life insurance
operations.................. (19,553) -- --
Net income.................... 6,600 37,900 53,200
Net income per-share.......... .36 1.99 2.76
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- ---------------------------------------------------------------------
(In thousands, except percentage of ownership)
<S> <C> <C>
Total assets............................... $1,115,433 $1,093,675
Senior notes............................... 74,232 74,111
Common shareholders' equity................ 330,432 309,860
Percentage of ownership.................... 37.0% 34.7%
Market value of the Company's investment in
Zenith................................... 140,529 149,569
</TABLE>
11
<PAGE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1995, retained earnings
included undistributed net income of $27,812,000 from Zenith.
4. PREMIUMS AND OTHER ACCOUNTS RECEIVABLE
As of December 31, 1995, the Company sold with limited recourse $122,400,000
and, in 1994, sold with full recourse $126,700,000 of reinsurance recoverables
and premiums receivable relating to its property and casualty insurance
operations. Pursuant to these recourse provisions, the maximum amount, at
December 31, 1995, that the Company may be obligated to repurchase is
$9,600,000.
5. NOTES RECEIVABLE FROM PARENT COMPANY
The notes receivable from parent company, Reliance Group Holdings, Inc., bear
interest at rates sufficient to cover the annual interest expense of the Company
for such funds and are due at various dates commencing June 1, 2000.
6. INCOME TAXES
Federal income tax has been computed as if the Company filed a separate
consolidated tax return with its domestic subsidiaries where their ownership is
at least 80% of outstanding voting stock. The current tax so computed is paid to
or due from Reliance Group Holdings, Inc.
Provision for income taxes consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal........ $ 54,862 $ 52,666 $ 87,627
Foreign........ 6,830 6,204 1,949
---------- ---------- ----------
61,692 58,870 89,576
Deferred federal.... 21,208 (10,888) 3,418
---------- ---------- ----------
$ 82,900 $ 47,982 $ 92,994
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Domestic and foreign income before income taxes, minority interests and equity
in investee company is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Domestic............ $ 236,718 $ 161,301 $ 263,490
Foreign............. 19,514 18,498 5,569
---------- ---------- ----------
$ 256,232 $ 179,799 $ 269,059
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax provision at
statutory rate.... $ 89,681 $ 62,930 $ 94,171
Nontaxable
investment income. (13,405) (13,989) (1,743)
Increase in
valuation
allowance......... 7,000 -- --
Impact of change in
statutory rate
from new tax act.. -- -- (4,043)
Other............... (376) (959) 4,609
---------- ---------- ----------
Provision for income
taxes............. $ 82,900 $ 47,982 $ 92,994
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
12
<PAGE>
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- ------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves....... $ 200,907 $ 197,655
Tax basis differential of
subsidiary not included in
consolidated tax return........... 111,815 120,600
Operating loss carryforwards of
subsidiary not included in
consolidated tax return........... 57,925 57,925
Unearned premium reserve........... 40,354 40,748
Accruals not currently
deductible........................ 42,569 42,878
Other.............................. 62,681 71,938
---------- ----------
516,251 531,744
Deferred tax liabilities:
Deferred policy acquisition
costs............................. 67,785 62,874
Unrealized investment gains........ 118,002 --
Investment in investee company..... 20,576 17,499
Other.............................. 81,378 83,419
---------- ----------
228,510 367,952
Valuation allowance..................... (165,803) (164,042)
---------- ----------
Net deferred tax asset.................. $ 62,707 $ 203,910
---------- ----------
---------- ----------
</TABLE>
For the year ended December 31, 1995, the Company's valuation allowance and
income tax provision were increased by $7,000,000 relating primarily to deferred
tax assets of a subsidiary that is not included in the consolidated tax return
for which it is likely that tax benefits will not be realized. The remaining
changes in the 1995 and 1994 valuation allowances relate principally to a
subsidiary that is not included in the consolidated tax return.
At December 31, 1995, a subsidiary of the Company, not included in the
consolidated tax return, had available net operating loss carryforwards ('NOL')
of approximately $165,500,000. For federal income tax purposes, approximately
$129,300,000 expires in 2001, $17,000,000 in 2002, $17,000,000 in 2004 and
$2,200,000 in 2010. 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.
The Internal Revenue Service is currently examining Reliance Group Holdings,
Inc.'s 1986 through 1990 federal income tax returns. While the outcome of the
current examinations is uncertain, the Company does not believe it is probable
that its additional tax liability, if any, will have a material adverse effect
on its consolidated financial statements.
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.
13
<PAGE>
7. UNPAID CLAIMS AND RELATED EXPENSES
The reconciliation of the beginning to ending liability for unpaid claims and
related expenses ('loss reserves') for the Company's property and casualty
insurance operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $5,581,483 $5,048,442 $4,571,792
Less reinsurance recoverables...... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,127,781 2,931,528 2,702,992
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year..................... 1,163,447 1,274,649 1,195,425
Increase in provision for insured
events of prior years............ 38,512 22,444 40,169
---------- ---------- ----------
Total provision............... 1,201,959 1,297,093 1,235,594
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................. 271,915 321,538 229,778
Attributable to insured events of
prior years...................... 868,622 780,961 776,881
---------- ---------- ----------
Total payments................ 1,140,537 1,102,499 1,006,659
---------- ---------- ----------
Foreign currency translation............ (9,768) 1,659 (399)
---------- ---------- ----------
Net loss reserves, end of year.......... 3,179,435 3,127,781 2,931,528
Plus reinsurance recoverables...... 2,679,917 2,453,702 2,116,914
---------- ---------- ----------
Loss reserves, end of year.............. $5,859,352 $5,581,483 $5,048,442
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The provision for insured events of prior years for 1995, 1994 and 1993 includes
adverse development related to asbestos-related and environmental pollution
claims, which primarily affect general liability and multiple peril lines of
business. The 1995 provision also includes adverse development in other general
liability, automobile and reinsurance lines, partially offset by favorable
development in workers' compensation. The 1994 provision also included adverse
development in other general liability lines, partially offset by favorable
development in workers' compensation. The 1993 provision also included adverse
development from workers' compensation reinsurance pools, partially offset by
favorable development in other general liability lines.
At December 31, 1995 and 1994, loss reserves include $400,200,000 and
$437,900,000 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%.
14
<PAGE>
The reconciliation of the beginning to ending loss reserves for the Company's
title insurance operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Loss reserves, beginning of year........ $ 228,063 $ 204,695 $ 173,328
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year..................... 57,900 71,060 76,955
Increase in provision for insured
events of prior years............ 586 4,807 4,848
---------- ---------- ----------
Total provision............... 58,486 75,867 81,803
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................. 2,187 4,475 2,356
Attributable to insured events of
prior years...................... 43,585 48,024 48,080
---------- ---------- ----------
Total payments................ 45,772 52,499 50,436
---------- ---------- ----------
Loss reserves, end of year.............. $ 240,777 $ 228,063 $ 204,695
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The reconciliation of the beginning to ending net loss reserves pertaining to
asbestos-related and environmental pollution claims is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net loss reserves, beginning of year.... $ 130,143 $ 122,034 $ 94,253
Provision for policy claims and related
expenses.............................. 25,904 28,279 52,630
Payments for policy claims and related
expenses.............................. (25,341) (20,170) (24,849)
---------- ---------- ----------
Net loss reserves, end of year.......... $ 130,706 $ 130,143 $ 122,034
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Included in the December 31, 1995 net loss reserves for asbestos-related and
environmental pollution claims are $33,782,000 of loss costs for claims incurred
but not reported, $51,875,000 of loss costs for reported claims and $45,049,000
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 of the Company's 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.
On April 26, 1995, the Company extended its revolving credit facility through
March 31, 2000 from December 31, 1998. In addition, the Company increased term
loan borrowings to $137,500,000 from $62,500,000 and extended the maturity dates
of the term loan borrowings through March 31, 2000. The additional $75,000,000
of borrowings under the term loan were used, in part, to redeem $25,000,000 of
the 7.866% senior reset notes and $25,000,000 of the 9.48% senior reset notes,
including $9,652,000 of notes held by Reliance Insurance Company. These
transactions resulted in an extraordinary loss of $3,363,000, net of income
taxes of $1,811,000. In addition, on May 1, 1995, all of the outstanding shares
of redeemable preferred stock of Reliance Insurance Company, which had a
carrying value of $23,517,000, were redeemed. The cost of the early redemption
in excess of the carrying value of the preferred stock, $252,000, was charged
directly to shareholder's equity.
15
<PAGE>
Senior reset notes outstanding are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- ------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
7.866% senior reset notes (interest rate
is adjustable every five years based
on Treasury Rate) due 2000............ $ 15,365 $30,713
9.48% senior reset notes (interest rate
is adjustable every three years based
on Treasury Rate) due 2000; ($25,000
and $50,000 principal amount, less
unamortized discount of $47 and $117
at December 31, 1995 and 1994)........ 24,953 49,883
---------- ----------
$ 40,318 $80,596
---------- ----------
---------- ----------
</TABLE>
The fair value of the Company's senior reset notes at December 31, 1995 and 1994
was $40,345,000 and $80,753,000 based on quoted market prices.
TERM LOANS AND SHORT-TERM DEBT
At December 31, 1995, term loans and short-term debt aggregated $176,101,000 and
consisted of $168,248,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 5.2% to 10.5% and $7,853,000 of
short-term debt. The weighted average interest rate on short-term debt was 7.5%
and 7.4% at December 31, 1995 and 1994. The Company believes that the fair value
of its term loans and short-term debt at December 31, 1995 and 1994 approximates
carrying value.
Maturities and sinking fund payments of the senior reset notes as well as 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
- ---------------------------------------
(In thousands)
<S> <C> <C>
1996.......... $ -- $ 8,336
1997.......... -- 21,065
1998.......... -- 20,000
1999.......... -- 50,000
2000.......... 40,365 65,000
</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 March 31, 2000. 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, 1995, borrowings aggregating
$21,000,000 were outstanding under this facility. All of the common stock of
Reliance Insurance Company, 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 February 14, 1996, the Company could pay up to
$352,400,000 in dividends without violating the more restrictive minimum net
worth requirement.
16
<PAGE>
9. DIVIDENDS OF SUBSIDIARIES
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.
Total common stock dividends paid by Reliance Insurance Company during 1995,
1994 and 1993 were $111,467,000, $111,467,000 and $130,639,000, respectively.
During 1996, $165,400,000 would be available for dividend payments by Reliance
Insurance Company under Pennsylvania 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 law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required prior approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely affect the
Company's ability to service its debt and to pay dividends on its common stock.
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.
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, 1995
and 1994, reinsurance recoverables include $472,925,000 and $463,380,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
17
<PAGE>
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------------------
(In thousands)
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct......... $2,748,439 $2,707,978 $2,654,437 $2,630,549 $2,587,149 $2,531,478
Assumed........ 325,226 350,636 330,261 345,398 323,422 304,422
Ceded.......... (1,294,625) (1,284,023) (1,220,408) (1,198,629) (1,139,974) (1,264,361)
---------- ---------- ---------- ---------- ---------- ----------
Net premiums... $1,779,040 $1,774,591 $1,764,290 $1,777,318 $1,770,597 $1,571,539
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</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 1995 1994 1993
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Gross....................................... $1,987,055 $2,220,285 $2,097,428
Reinsurance recoveries...................... (785,096) (923,192) (861,834)
---------- ---------- ----------
Net policy claims and settlement expenses... $1,201,959 $1,297,093 $1,235,594
---------- ---------- ----------
---------- ---------- ----------
</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 Company's ten largest reinsurers, based on 1995 ceded
premiums, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(In thousands)
<S> <C>
Lloyd's of London......................... $ 108,070
American Re-Insurance Company............. 105,938
Hertz International Reinsurance Ltd. ..... 59,583
Commercial Risk Re-Insurance Co. ......... 42,593
Swiss Reinsurance America Corporation..... 34,380
Zurich Reinsurance Centre, Inc. .......... 32,741
Kemper Reinsurance Company................ 32,291
International Industrial Indemnity Company
(formerly TRN Insurance Company)........ 32,126
Transatlantic Reinsurance Company......... 29,986
G.I.O. Insurance Ltd. .................... 29,288
</TABLE>
The Company has entered into an aggregate excess of loss reinsurance agreement.
This agreement indemnifies the Company for ultimate net property and casualty
insurance losses in excess of a specified retention for the 1995 accident year
up to a maximum aggregate limit of $100,000,000.
11. OTHER INSURANCE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Salaries and commissions......... $ 563,680 $ 704,254 $ 684,362
Taxes, other than income taxes... 48,603 34,849 54,049
Rent............................. 55,848 54,863 50,852
Policyholders' dividends......... 7,065 2,630 6,342
Other............................ 150,967 163,308 159,142
----------- ----------- -----------
$ 826,163 $ 959,904 $ 954,747
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
18
<PAGE>
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 1995 1994 1993
- --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the period... $ 7,959 $ 10,255 $ 7,882
Interest cost on projected benefit obligation..... 13,689 12,941 12,495
Actual return on plan assets...................... (28,748) 8,920 (25,596)
Net amortization and deferral..................... 13,303 (26,252) 10,068
Effect of plan curtailment........................ -- -- (1,212)
-------- --------- ---------
$ 6,203 $ 5,864 $ 3,637
-------- --------- ---------
-------- --------- ---------
</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 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested............................................. $ 158,753 $ 118,580
Nonvested.......................................... 9,971 6,890
--------- ---------
Accumulated benefit obligation.......................... 168,724 125,470
Effect of anticipated future compensation levels........ 36,022 26,675
--------- ---------
Projected benefit obligation............................ 204,746 152,145
Plan assets at market value............................. (164,877) (144,347)
--------- ---------
Projected benefit obligation in excess of plan assets... 39,869 7,798
Unrecognized net asset at date of adoption.............. 8,455 10,076
Unrecognized net loss................................... (25,166) (919)
--------- ---------
Accrued pension cost.................................... $ 23,158 $ 16,955
--------- ---------
--------- ---------
</TABLE>
No contributions under the Company's noncontributory trusteed defined benefit
pension plan were made during 1995. Contributions were $3,391,000 and $4,381,000
in 1994 and 1993.
The assumptions used to measure the projected benefit obligation at December 31,
1995 and 1994 include a discount rate of 7.5% and 9.0% and a weighted average
rate of compensation increase of 5.4% and 5.9%. The expected long-term
investment rate of return on plan assets for the years ended December 31, 1995
and 1994 was 9.5% and 10.0%.
Contributions under the Company's defined contribution plans were $4,105,000,
$5,095,000 and $6,353,000 in 1995, 1994 and 1993, 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 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the period.................. $ 167 $ 226 $ 242
Interest cost on accumulated postretirement benefit obligation... 713 715 893
Net amortization and deferral.................................... 624 790 1,141
-------- --------- ---------
$ 1,504 $ 1,731 $ 2,276
-------- --------- ---------
-------- --------- ---------
</TABLE>
19
<PAGE>
The components of the accumulated postretirement benefit obligation are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- ----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................. $ 5,597 $ 5,743
Other active plan participants........... 3,618 3,001
---------- --------
Accumulated benefit obligation................ 9,215 8,744
Unrecognized net gain......................... 92 853
Unrecognized transition obligation............ (7,963) (8,630)
---------- --------
Accrued postretirement benefit cost........... $ 1,344 $ 967
---------- --------
---------- --------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1995 was 12.0% for 1996
decreasing until it reaches 6.0% in 2008, 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, 1995 and the 1995 net postretirement health care cost by
approximately 2.9% and 2.2%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1995 and 1994 was
7.5% and 9.0%.
13. STATUTORY INFORMATION
Statutory net income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Property and casualty insurance operations... $225,989 $ 123,970 $217,353
Title insurance operations................... 12,439 32,421 43,904
</TABLE>
Statutory policyholders' surplus is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- -------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Property and casualty insurance operations (1)... $1,128,336 $908,538
Title insurance operations....................... 182,167 180,757
</TABLE>
(1) Includes Reliance Insurance Company's investment in title insurance
operations. Also reflects a reduction in statutory loss reserves of
$98,800,000 and $104,100,000 at December 31, 1995 and 1994, representing
discounts of workers' compensation reserves in excess of GAAP discounts.
14. RELATED PARTY TRANSACTION
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.
15. 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>
On November 28, 1994, Reliance Insurance Company and several of its affiliates
received an order from the outgoing Insurance Commissioner ordering refunds
totaling $72,300,000 inclusive of interest. On January 31, 1996, the Company
reached a settlement with the California Department of Insurance resolving its
total liability for refunds and interest under Proposition 103. The settlement
requires the Company to pay $15,600,000 in refunds and interest on certain
policies issued or renewed between November 8, 1988 and November 7, 1989.
Although the Company believes that the California Department of Insurance
misapplied Proposition 103 as it relates to it, the Company agreed to the
settlement to avoid prolonging the matter further. In the fourth quarter of
1995, the Company recorded a pre-tax charge of $4,000,000 related to Proposition
103. The fourth quarter 1995 charge represents the difference between the
settlement amount and the pre-tax charge of $11,600,000 the Company had taken in
the fourth quarter of 1994 to provide for Proposition 103 refunds and interest.
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 against it 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 Frank B. Hall &
Co. Inc. ('Hall') which the Superintendent took possession of in 1985, commenced
an action in the Supreme Court of the State of New York seeking damages of not
less than $140,000,000 against Hall, various subsidiaries of Hall, Hall's and
Union Indemnity's independent auditors and certain individuals who were former
officers and directors of Union Indemnity. The Superintendent sought to hold the
defendants liable for the insolvency of Union Indemnity alleging, among other
claims, that Hall breached fiduciary and other duties owed to Union Indemnity
and violated provisions of the New York State Insurance Code, that Union
Indemnity did not have a separate operating identity, and that Hall and the Hall
subsidiaries named as defendants constituted a single enterprise which was
liable for Union Indemnity's obligations to its policyholders and other
creditors.
In July 1987, American Centennial Insurance Company, International Fidelity
Insurance Company, and Ranger Insurance Company (the 'American Centennial
Plaintiffs') commenced an action in the Supreme Court of the State of New York
against Hall, two subsidiaries of Hall, and certain individuals who were former
officers and directors of Union Indemnity seeking to hold the defendants liable
for certain alleged reinsurance obligations of Union Indemnity, certain
misrepresentations concerning Union Indemnity's financial position and the
breach of certain duties owed to the American Centennial Plaintiffs. The
American Centennial Plaintiffs sought damages of at least $54,900,000 and
punitive damages against all defendants.
The action brought by the Superintendent was settled by an agreement, dated June
2, 1989, under which Hall, now known as Prometheus Funding Corp. ('Prometheus'),
will make an initial payment of $19,000,000 and additional payments aggregating
$29,000,000 over a ten-year period without interest as follows: $1,500,000 each
in years one and two; $2,000,000 each in years three and four; $5,000,000 in
year five; $4,500,000 each in years six and seven; $4,000,000 in year eight; and
$2,000,000 each in years nine and ten. The settlement agreement provides for the
entry of an order by the court barring other claims against Hall relating to
Union Indemnity, including the claims by the American Centennial Plaintiffs
described above. The settlement agreement was submitted to the court for
approval in October 1989 and objections were filed by various parties. The
Superintendent has informed Prometheus that he intends to pursue court approval
of the settlement. The settlement agreement will not become effective until
final approval by the court and there is no assurance that such approval will be
obtained. 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. Prometheus has received an aggregate of
$20,000,000 in insurance proceeds in connection with this matter from its
insurance carrier.
21
<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.
At December 31, 1995, the partnership's total outstanding debt was $172,080,000,
including borrowings of $6,563,000 under a line of credit with Reliance Group
Holdings, Inc. As of December 31, 1995, the Company guaranteed $38,000,000 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. In addition, the Company will receive 48% of any cumulative
net profit (as defined) realized from the activities of the partnership.
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'). Under the terms of the sale, the Company
agreed to provide $18,000,000 per year until 2007 of reinsurance brokerage
commissions to Aon.
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, 1995, 1994 and 1993 was $92,300,000,
$92,400,000 and $92,000,000, respectively.
At December 31, 1995, future net minimum rental payments required under
noncancelable leases are as follows:
<TABLE>
<CAPTION>
- --------------------------------
(In thousands)
<S> <C>
1996.................. $ 59,757
1997.................. 47,909
1998.................. 31,912
1999.................. 25,243
2000.................. 9,993
2001 and thereafter... 13,328
--------
$188,142
--------
--------
</TABLE>
22
<PAGE>
16. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
REVENUES:
Property and casualty insurance
Premiums earned............................. $1,774,591 $1,777,318 $1,571,539
Net investment income....................... 247,343 232,299 226,517
Gain on sales of investments................ 27,381 8,702 153,410
---------- ---------- ----------
2,049,315 2,018,319 1,951,466
---------- ---------- ----------
Title insurance
Premiums earned............................. 671,947 856,774 893,364
Net investment income....................... 27,946 26,613 24,282
Gain on sales of investments................ 1,729 516 4,786
---------- ---------- ----------
701,622 883,903 922,432
---------- ---------- ----------
Other............................................ 171,159 156,473 135,293
---------- ---------- ----------
$2,922,096 $3,058,695 $3,009,191
---------- ---------- ----------
---------- ---------- ----------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS
AND EQUITY IN INVESTEE COMPANY:
Property and casualty insurance
Underwriting................................ $ (45,644) $ (97,343) $ (175,565)
Net investment income....................... 247,343 232,299 226,517
Gain on sales of investments................ 27,381 8,702 153,410
---------- ---------- ----------
229,080 143,658 204,362
---------- ---------- ----------
Title insurance.................................. 14,012 31,326 59,966
---------- ---------- ----------
Other............................................ 13,140 4,815 4,731
---------- ---------- ----------
$ 256,232 $ 179,799 $ 269,059
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance.................. $9,100,210 $8,541,019 $7,959,886
Title insurance.................................. 572,267 550,160 547,707
Other............................................ 223,443 246,586 270,319
---------- ---------- ----------
$9,895,920 $9,337,765 $8,777,912
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Income 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 before income
taxes, minority interests and equity in investee company by segment is before
allocation of corporate interest expense. The pre-tax results of RCG
International, Inc. (a subsidiary of the property and casualty insurance
operations) are included in Other.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
23
<PAGE>
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 Quarter
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned........................................ $604,666 $599,957 $618,831 $623,084
Net investment income.................................. 69,378 66,362 68,727 70,822
Gain on sales of investments........................... 8,286 7,669 10,187 2,968
Interest income from parent company.................... 4,917 5,362 5,166 4,963
Other.................................................. 37,817 40,657 36,512 35,765
-------- -------- -------- --------
$725,064 $720,007 $739,423 $737,602
-------- -------- -------- --------
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS...................... $ 44,402 $ 46,386 $ 50,464 $ 39,023
Loss on disposal of discontinued operations of investee
company.............................................. -- -- (4,497) --
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM....................... 44,402 46,386 45,967 39,023
Extraordinary item--early extinguishment of debt....... -- (3,363) -- --
-------- -------- -------- --------
NET INCOME............................................. $ 44,402 $ 43,023 $ 45,967 $ 39,023
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1994 Quarter
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
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>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholder
Reliance Financial Services Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of Reliance
Financial Services Corporation (a subsidiary of Reliance Group Holdings, Inc.)
and subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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, 1995 and 1994 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 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 26, 1996
25
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $159.7 million in 1995 compared to $132.5 million in 1994 and
$82.5 million in 1993. These increases resulted from continued improvement in
the underwriting results of the property and casualty insurance operations.
After-tax gains on sales of investments were $20.6 million in 1995, which
included a gain of $1.7 million from the sales of certain consulting operations,
compared to $6.0 million in 1994 and $102.8 million in 1993.
Net income was $172.4 million in 1995, which included a loss of $4.5 million on
the disposal of discontinued life insurance operations by Zenith National
Insurance Corp. ('Zenith'), an investee company, and an extraordinary loss of
$3.4 million from the early extinguishment of debt. Net income in 1994 was
$138.5 million and $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.'
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The property and casualty insurance operations reported pretax income, before
gains on sales of investments, of $201.7 million in 1995 compared to $135.0
million in 1994 and $51.0 million in 1993. Gains on sales of investments were
$27.4 million in 1995 compared to $8.7 million in 1994 and $153.4 million in
1993.
Property and casualty insurance underwriting results improved significantly in
1995. The combined ratios (calculated on a GAAP basis), after policyholders'
dividends, were 101.8%, 104.4% and 110.8% for 1995, 1994 and 1993, respectively.
The 1995 results reflect improved performance in workers' compensation, ocean
and inland marine and general liability lines, as well as record underwriting
profits in surety lines. Underwriting losses were $45.6 million in 1995 compared
to $97.3 million in 1994 and $175.6 million in 1993. Underwriting results in
1995 benefitted from lower catastrophes losses, which were $25.7 million ($78.5
million before reinsurance) compared to $50.1 million in 1994 ($134.0 million
before reinsurance) which included $44.9 million arising from the January 1994
California earthquake, and $39.3 million in 1993 ($88.5 million before
reinsurance).
Net premiums written and premiums earned for each line of property and casualty
insurance are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
(In thousands) Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General Liability.......... $ 468,951 $ 451,867 $ 423,377 $ 427,864 $ 369,895 $ 337,151
Workers' Compensation...... 265,882 290,241 312,808 323,891 377,592 360,613
Automobile................. 239,819 236,592 244,000 251,038 260,180 225,910
Multiple Peril............. 184,600 180,166 180,074 170,230 187,438 147,158
Surety..................... 139,298 127,355 117,989 108,833 106,664 97,414
Reinsurance................ 118,969 119,921 125,597 132,694 123,742 124,150
Ocean and Inland Marine.... 118,757 115,590 103,865 95,103 105,254 82,451
Involuntary................ 81,006 88,734 113,483 115,963 113,498 112,700
Fire and Allied............ 68,118 61,430 49,977 56,495 40,372 20,850
Other...................... 93,640 102,695 93,120 95,207 85,962 63,142
---------- ---------- ---------- ---------- ---------- ----------
$1,779,040 $1,774,591 $1,764,290 $1,777,318 $1,770,597 $1,571,539
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
26
<PAGE>
The increase in net premiums written in 1995, when compared to 1994, reflects
growth in international operations, particularly in general liability and ocean
and inland marine lines of business. In addition, surety premiums increased in
1995 resulting from an increase in construction activity by insureds and
increased retentions from restructuring certain reinsurance programs. These
increases were partially offset by declines in workers' compensation premiums
resulting from the shift by insureds to high deductible and captive insurance
programs, as well as a decline in premiums from involuntary insurance
facilities. The decline in net premiums written in 1994, when compared to 1993,
is primarily attributable to lower writings in workers' compensation, including
a reduction of $11.0 million in premiums as a result of certain litigation
claims in Texas. These claims were settled in 1995 for a total of $12.2 million.
This decline was substantially offset by growth in general liability, surety and
fire and allied lines of business. 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.
In addition to the effect of lower catastrophe losses, the improvement in 1995
underwriting results reflect higher underwriting profits in workers'
compensation, which were $58.5 million in 1995 compared to $12.0 million in 1994
and $11.4 million in 1993. These improvements resulted from continued favorable
trends in loss development. Underwriting results in 1995 also benefitted from
record underwriting profits in surety lines, reflecting fewer large losses.
Underwriting profits in surety lines were $41.5 million in 1995 compared to
$27.5 million in 1994 and $18.4 million in 1993. These improvements were
partially offset by higher underwriting losses in automobile lines which
experienced adverse development in various programs. The improvement in
underwriting results in 1994, when compared to 1993, reflects lower underwriting
losses in automobile and multiple peril lines and involuntary insurance
facilities. On January 31, 1996, the Company reached a settlement with the
California Department of Insurance resolving its total liability for refunds and
interest under Proposition 103. The 1995 and 1994 underwriting results include
charges of $4.0 million and $11.6 million, respectively, resulting from this
matter. See note 15 to the consolidated financial statements.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. The Company's aggregate reinsurance recoverables
were $3.16 billion at December 31, 1995, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but not
reported, unearned premiums and paid claims. The Company is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers does
not relieve the Company of its liability to insureds. In order to minimize
losses from uncollectible reinsurance, the Company places its reinsurance with a
number of different reinsurers and utilizes a security committee to approve, in
advance, the reinsurers which meet its standards of financial strength. The
Company holds substantial amounts of collateral to secure recoverables from
unauthorized reinsurers. See note 10 to the consolidated financial statements.
Policy claims and settlement expenses include a provision for insured events of
prior years of $38.5 million in 1995 compared to $22.4 million in 1994 and $40.2
million in 1993. The provision for all years includes adverse development
related to prior year asbestos-related and environmental pollution claims, which
primarily affect general liability and multiple peril lines of business. The
1995 provision also includes adverse development in other general liability,
automobile and reinsurance lines, partially offset by favorable development in
workers' compensation. The 1994 provision also included adverse development in
other general liability lines, partially offset by favorable development in
workers' compensation. The 1993 provision also included adverse development from
workers' compensation reinsurance pools, partially offset by favorable
development in other general liability lines.
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.
27
<PAGE>
The liability for property and casualty insurance loss reserves at December 31,
1995 was $5.86 billion compared to $5.58 billion at December 31, 1994. 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 $2.68 billion and $2.45 billion at December 31, 1995
and 1994, respectively, are included in the liability.
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 and the economic environment in which property and
casualty companies operate. 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. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail 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 long tail lines of business. The Company
attempts to reduce these variations in certain of its long tail lines, primarily
directors and officers liability and professional liability, by writing policies
on a claims-made basis which mitigates the long tail nature of the risks. The
Company also limits the potential loss from a single event through the extensive
use of reinsurance.
Included in the liability for loss reserves at December 31, 1995 are $178.6
million ($130.7 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 $25.3 million (including $7.3 million of related expenses),
$20.2 million (including $7.9 million of related expenses) and $24.8 million
(including $8.1 million of related expenses) for the years ended December 31,
1995, 1994 and 1993, respectively. Net payments for all property and casualty
insurance policy claims and related expenses were $1.14 billion, $1.10 billion
and $1.01 billion for the years ended December 31, 1995, 1994 and 1993,
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 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year... 666 661
Additional insureds with claims during the year................. 463 307
Insureds with closed or settled claims during the year.......... (379) (302)
---- ----
Number of insureds with outstanding claims, end of year......... 750 666
---- ----
---- ----
</TABLE>
28
<PAGE>
The average net paid loss for asbestos-related and environmental pollution
claims was $37,500 and $34,200 for the years 1995 and 1994, respectively. The
increase in the average net paid loss reflects the settlement of a large
environmental pollution claim. As of December 31, 1995, the Company was involved
in approximately 46 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
affect 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.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $247.3 million in 1995 from $232.3 million in 1994 and $226.5
million in 1993. These increases reflect growth in the size of the fixed
maturity investment portfolio.
Gains on sales of investments were $27.4 million in 1995 compared to $8.7
million in 1994 and $153.4 million in 1993. Gains on sales of investments in
1993 primarily resulted from sales of equity securities.
TITLE INSURANCE OPERATIONS
The title insurance operations reported pretax income, before gains on sales of
investments, of $12.3 million in 1995, $30.8 million in 1994 and $55.2 million
in 1993.
Premiums and fees were $671.9 million in 1995 compared to $856.8 million in 1994
and $893.4 million in 1993. The decline in premiums and fees in 1995 primarily
resulted from decreased agency revenues reflecting the weak real estate markets
that existed in late 1994 and early 1995. Premiums and fees in 1994 benefitted
from increased agency revenues reflecting the strong real estate market
conditions that existed in late 1993 and early 1994. Premiums and fees in 1993
benefitted from high levels of residential refinancing activity that existed
throughout the year.
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, which fluctuate in direct relation
to agency premiums, were $310.7 million in 1995 compared to $432.0 million in
1994 and $418.4 million in 1993. 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 $318.4 million in 1995 compared to $344.7 million in
1994 and $362.3 million in 1993. The decline in other expenses reflects cost
control programs, including staff reductions, implemented by the title insurance
operations. The expense ratio of the title insurance operations (which includes
agency commissions) increased to 93.1% in 1995 from 90.0% in 1994 and 87.3% in
1993. These increases in the expense ratio resulted from a proportionately
greater decline in premiums than expenses. The provision for policy claims
decreased to $58.5 million in 1995 from $75.9 million in 1994 and $81.8 million
in 1993 reflecting a decline in the amount of premiums.
INVESTMENT PORTFOLIO
At December 31, 1995, the Company's investment portfolio aggregated $4.01
billion (at cost), of which 10% 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, 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.
29
<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, 1995, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $299.0 million (8% of the fixed income portfolio) and $64.4 million (2% 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. See note 2 to the
consolidated financial statements.
At December 31, 1995, approximately 29% 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.
In November 1995, the Financial Accounting Standards Board issued a special
report which permitted a one-time reassessment of the classification of
securities designated held for investment. Accordingly, the Company reclassified
fixed maturity securities with a market value of $426.4 million and an amortized
cost of $410.4 million from the held for investment portfolio into the available
for sale portfolio. This reclassification resulted in an increase in
shareholder's equity of $10.4 million.
OTHER OPERATIONS
RCG International, Inc., a subsidiary of the Company, provides technical
services in the information technology and energy industries. Revenues for these
operations were $150.8 million in 1995, $141.6 million in 1994 and $116.8
million in 1993. Revenues for 1995 include a pretax gain of $2.6 million
resulting from the sales of certain consulting operations. These sales are not
expected to have a material effect on the Company's ongoing operations. The
increase in revenues in both 1995 and 1994 resulted from growth in the
information technology business. Operating expenses incurred by these operations
were $141.6 million in 1995, $134.7 million in 1994 and $111.7 million in 1993.
Revenues and expenses of the technical services operations are included in other
revenues and other expenses in the accompanying consolidated statement of
income.
At December 31, 1995, the Company's real estate operations had holdings with a
carrying value of $278.5 million, which includes nine shopping centers with an
aggregate carrying value of $129.4 million, office buildings and other
commercial properties with an aggregate carrying value of $87.9 million, and
undeveloped land with a carrying value of $61.2 million.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $7.8 million, $9.5 million and $12.4
million in 1995, 1994 and 1993, respectively, from the Company's investment in
Zenith. In addition, in 1995, the Company recognized an after-tax loss of $4.5
million on the disposal of discontinued life insurance operations by Zenith. The
decline in equity income in 1995, when compared to 1994, reflects an increase in
Zenith's property and casualty underwriting losses, particularly in workers'
compensation. The decline in equity income in 1994, when compared to 1993,
reflects a lower level of gains on sales of investments by Zenith.
30
<PAGE>
OTHER MATTERS
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At December 31, 1995,
borrowings aggregating $21 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, in part, to redeem $25 million of
the 7.866% senior reset notes and $25 million of the 9.48% senior reset notes,
including $9.7 million of notes held by Reliance Insurance Company. These
transactions resulted in an after-tax extraordinary loss of $3.4 million. In
addition, on May 1, 1995, all of the outstanding shares of redeemable preferred
stock of Reliance Insurance Company, which had a carrying value of $23.5
million, were redeemed. The cost of the early redemption in excess of the
carrying value of the preferred stock, $252,000, was charged directly to
shareholder's equity.
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.
- --------------------------------------------------------------------------------
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 both
1995 and 1994.
31
<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.
DENNIS A. BUSTI
President and
Chief Executive Officer
Reliance National 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
President, Jewell Jackson
McCabe Associates
IRVING SCHNEIDER(2)
Executive Vice President
Helmsley-Spear, Inc.
BERNARD L. SCHWARTZ(1)
Chairman & CEO of
Loral Space & Communications Ltd. and
Chairman & CEO of Globalstar
RICHARD E. SNYDER
President
Western Publishing Group
THOMAS J. STANTON, JR.(2)
Chairman Emeritus
National Westminster Bank NJ
ROBERT M. STEINBERG(1),(3)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
SAUL P. STEINBERG(1),(3)
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
32
<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
STEVEN A. RAUTENBERG
Vice President
Communications
JOEL H. ROTHWAX
Vice President
Human Resources
THOMAS J. SANDERS
Vice President and
Assistant Controller
PAUL W. ZELLER
Vice President,
Deputy General Counsel
and Assistant Secretary
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
ROBERT C. OLSMAN
President and
Chief Operating Officer
Reliance Insurance Company
GEORGE H. ROBERTS
President
Reliance Reinsurance Corp.
C. BRIAN SCHMALZ
President and
Chief Executive Officer
Reliance Surety Company
Title Insurance
HERBERT WENDER
Chairman and Chief
Executive Officer
Commonwealth Land Title
Insurance Company
RCG Information Technology
ROBERT P. BUTTACAVOLI
President and
Chief Executive Officer
RCG Information Technology, Inc.
33
<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
Transnation 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
Securities are listed on the New York
Stock Exchange
7.866% Senior Reset Notes, due 2000
9.48% Senior Reset Notes, due 2000
34
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27.1
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-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 2,371,995
<DEBT-CARRYING-VALUE> 753,563
<DEBT-MARKET-VALUE> 791,459
<EQUITIES> 672,668
<MORTGAGE> 0
<REAL-ESTATE> 278,510
<TOTAL-INVEST> 4,577,020
<CASH> 50,848
<RECOVER-REINSURE> 3,163,073
<DEFERRED-ACQUISITION> 194,648
<TOTAL-ASSETS> 9,895,920
<POLICY-LOSSES> 6,100,129
<UNEARNED-PREMIUMS> 1,299,465
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 216,419
0
0
<COMMON> 0
<OTHER-SE> 1,367,759
<TOTAL-LIABILITY-AND-EQUITY> 9,895,920
2,446,538
<INVESTMENT-INCOME> 275,289
<INVESTMENT-GAINS> 29,110
<OTHER-INCOME> 171,159
<BENEFITS> 1,260,445
<UNDERWRITING-AMORTIZATION> 411,979
<UNDERWRITING-OTHER> 826,163
<INCOME-PRETAX> 256,232
<INCOME-TAX> (82,900)
<INCOME-CONTINUING> 180,275
<DISCONTINUED> (4,497)
<EXTRAORDINARY> (3,363)
<CHANGES> 0
<NET-INCOME> 172,415
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 3,127,781
<PROVISION-CURRENT> 1,163,447
<PROVISION-PRIOR> 38,512
<PAYMENTS-CURRENT> 271,915
<PAYMENTS-PRIOR> 868,622
<RESERVE-CLOSE> 3,179,435
<CUMULATIVE-DEFICIENCY> 38,512
</TABLE>
