<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- ---------
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- ---------
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number 1-7080
RELIANCE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0113548
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 909-1100
The Registrant meets the requirements and conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with
reduced disclosure as permitted thereunder.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of May 1, 1997, 1,000 shares of common stock of Reliance Financial Services
Corporation were outstanding.
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Page
No.
-----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters Ended
March 31, 1997 and 1996 (Unaudited)....................................... 2
Consolidated Balance Sheet at March 31, 1997 (Unaudited) and
December 31, 1996......................................................... 3
Consolidated Statement of Changes in Shareholder's Equity for the
Quarter Ended March 31, 1997 (Unaudited).................................. 4
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 1997 and 1996 (Unaudited)................................. 5
Notes to Consolidated Financial Statements (Unaudited)......................... 6
Item 2. Management's Discussion and Analysis of the Consolidated
Statement of Income............................................... 8
PART II. OTHER INFORMATION, AS APPLICABLE.......................................... 12
SIGNATURES.............................................................................. 13
</TABLE>
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1997 1996
======================================================================
(In thousands)
<S> <C> <C>
Revenues:
Premiums earned ............................... $ 642,195 $ 609,867
Net investment income ......................... 74,279 70,717
Gain on sales of investments .................. 15,304 4,468
Interest income from parent company ........... 5,795 4,954
Other ......................................... 48,493 37,549
-------- -------
786,066 727,555
-------- -------
Claims and expenses:
Policy claims and settlement expenses ......... 319,226 316,707
Policy acquisition costs ...................... 106,400 95,570
Interest ...................................... 5,092 5,124
Other insurance expenses ...................... 223,062 209,925
Other ......................................... 48,980 37,146
-------- -------
702,760 664,472
-------- -------
Income before income taxes and equity in
investee company .......................... 83,306 63,083
Provision for income taxes .................... (26,400) (19,700)
Equity in investee company .................... 1,554 2,024
-------- -------
Income from continuing operations ............. 58,460 45,407
Litigation settlement of discontinued operation (7,500) --
-------- -------
Net income .................................... $50,960 $45,407
======== =======
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1997 1996
===================================================================================================================
<S> <C> <C>
(Dollars in thousands, except per share amount)
Marketable securities:
Fixed maturities held for investment -- at amortized cost
(quoted market $800,493 and $801,738) .............................. $ 803,852 $ 787,836
Fixed maturities available for sale -- at quoted market
(amortized cost $2,527,711 and $2,595,929) ......................... 2,508,622 2,623,669
Equity securities -- at quoted market (cost $458,756
and $436,053) ...................................................... 708,575 716,606
Short-term investments ................................................ 203,659 319,165
Cash ....................................................................... 42,079 38,520
Premiums receivable ........................................................ 1,249,212 1,104,331
Other accounts and notes receivable ........................................ 146,773 137,293
Reinsurance recoverables ................................................... 3,824,298 3,576,953
Federal and foreign income taxes, including deferred taxes ................. 5,286 4,390
Notes receivable from parent company ....................................... 202,821 202,272
Investments in real estate -- at cost, less accumulated
depreciation .......................................................... 275,060 275,237
Investment in investee company ............................................. 159,726 157,894
Deferred policy acquisition costs .......................................... 221,814 215,438
Other assets ............................................................... 369,579 351,016
------------ ------------
$ 10,721,356 $ 10,510,620
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Unearned premiums .......................................................... $ 1,640,272 $ 1,468,299
Unpaid claims and related expenses ......................................... 6,639,520 6,530,258
Accounts payable and accrued expenses ...................................... 470,469 529,047
Reinsurance ceded premiums payable ......................................... 390,000 365,412
Senior reset notes ......................................................... 15,365 15,365
Term loans and short-term debt ............................................. 222,504 224,167
------------ ------------
9,378,130 9,132,548
------------ ------------
Contingencies and commitments
Shareholder's equity:
Common stock, par value $.10 per-share, 1,000 shares
authorized, issued and outstanding ................................. -- --
Additional paid-in capital ............................................ 677,911 677,969
Retained earnings ..................................................... 542,300 526,340
Net unrealized gain on investments .................................... 149,428 198,786
Net unrealized loss on foreign currency translation ................... (26,413) (25,023)
------------ ------------
1,343,226 1,378,072
------------ ------------
$ 10,721,356 $ 10,510,620
============ ============
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Unrealized Foreign
Common Paid-In Retained Gain on Currency Shareholder's
Stock Capital Earnings Investments Translation Equity
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance, January 1, 1997...... $ - $677,969 $526,340 $198,786 $(25,023) $1,378,072
Transactions of investee
company ................. (58) 1,209 1,151
Net income.................... 50,960 50,960
Dividends..................... (35,000) (35,000)
Depreciation after deferred
income taxes............. (50,567) (50,567)
Foreign currency translation.. (1,390) (1,390)
------- -------- -------- -------- -------- ----------
Balance, March 31, 1997....... $ - $677,911 $542,300 $149,428 $(26,413) $1,343,226
------- -------- -------- -------- -------- ----------
------- -------- -------- -------- -------- ----------
</TABLE>
See notes to consolidated financial statements
-4-
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1997 1996
==============================================================================================================
<S> <C> <C>
(In thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES....................... $ (82,578) $ (62,946)
-------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Fixed maturities available for sale....................... 155,885 263,753
Equity securities......................................... 52,516 81,805
Maturities and repayments of:
Fixed maturities available for sale....................... 95,702 18,073
Fixed maturities held for investment...................... 1,070 22,421
Purchases of:
Fixed maturities available for sale....................... (174,762) (456,544)
Fixed maturities held for investment...................... (20,446) (21,545)
Equity securities......................................... (79,942) (143,816)
Decrease in short-term investments -- net..................... 118,575 313,538
Other -- net.................................................. (25,096) (5,556)
-------------------- -----------------
123,502 72,129
-------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from parent company............... (549) (8,006)
Increase in term loans......................................... 30,000 20,816
Increase (decrease) in short-term debt -- net.................. 3,906 (1,908)
Repayments of term loans....................................... (35,722) (10,122)
Dividends...................................................... (35,000) (20,000)
-------------------- -----------------
(37,365) (19,220)
-------------------- -----------------
Increase (decrease) in cash.................................... 3,559 (10,037)
Cash, beginning of period...................................... 38,520 50,848
-------------------- -----------------
Cash, end of period............................................ $ 42,079 $ 40,811
==================== =================
Supplemental disclosures of cash flow information:
Interest paid.................................................. $ 4,100 $ 3,100
==================== =================
Income taxes paid ............................................. $ 1,000 1,500
==================== =================
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------------
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring accruals
only) considered necessary to present fairly the financial position at March 31,
1997, and the results of operations, changes in shareholder's equity and cash
flows for all periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 1996) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. ("Zenith") was $1.6 million
for the quarter ended March 31, 1997 compared to $2.0 million in the
corresponding 1996 period.
Summarized financial information for Zenith is as follows:
Quarter Ended March 31 1997 1996
- ------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues........................................... $ 146,650 $ 134,548
Income before income taxes......................... 10,721 18,914
Net income......................................... 7,100 12,400
Net income per share............................... .40 .70
-6-
<PAGE>
3. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended March 31
--------------------------------------------------------
1997 1996
--------------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Direct........................... $ 910,488 $ 777,480 $ 774,655 $ 713,714
Assumed.......................... 110,199 83,029 96,495 73,542
Ceded............................ (513,359) (400,199) (395,667) (347,455)
----------- --------- ------------ -------------
Net Premiums..................... $ 507,328 $ 460,310 $ 475,483 $ 439,801
=========== ========= ============ =============
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows
(in thousands):
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31
---------------------------
1997 1996
-------- ----------
<S> <C> <C>
Gross............................................. $587,662 $ 464,763
Reinsurance recoveries............................ (277,196) (162,622)
-------- ------------
Net policy claims and settlement expenses......... $310,466 $ 302,141
======== ============
</TABLE>
4. LEGAL PROCEEDINGS OF DISCONTINUED OPERATION
On April 21, 1997, Prometheus Funding Corp., formerly known as Frank B. Hall &
Co. Inc. ("Hall"), agreed to amend the settlement agreement dated June 2, 1989,
which is described in note 14 of the Company's 1996 Annual Report, and pursuant
to which Hall, subject to court approval, settled the action brought by the
Superintendent of Insurance of New York relating to the liquidation of Union
Indemnity Insurance Company of New York, formerly a subsidiary of Hall. In
connection with the amendment, (i) Hall agreed to pay an additional $7.5
million, and (ii) certain parties that had filed an objection to the settlement
agreement have withdrawn that objection and have agreed to support the
settlement. Other objections remain on file. The settlement agreement, as
amended, will not become effective until final court approval and there is no
assurance that such approval will be obtained.
-7-
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED
STATEMENT OF INCOME
- -------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $48.5 million in the first quarter of 1997 compared to $42.5
million in the first quarter of 1996. This increase resulted from greater
operating profits in the property and casualty and title insurance operations.
Net income in the first quarter of 1997 was $51.0 million and includes after-tax
gains on sales of investments of $9.9 million and a charge of $7.5 million for a
litigation settlement pertaining to a subsidiary which was discontinued in 1991.
(See note 4 to the accompanying unaudited consolidated financial statements for
further discussion of this charge). Net income in the first quarter of 1996 was
$45.4 million which included after-tax gains on sales of investments of $2.9
million.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $507.3 million and $460.3
million in the first quarter of 1997 compared to $475.5 million and $439.8
million in the corresponding 1996 period. The increases in net premiums written
and earned resulted from growth in both domestic and international operations
and reflect increased writings in ocean and inland marine, accident and health
and surety lines, as well as premiums generated from the start-up of the
Company's non-standard automobile insurance business.
Property and casualty underwriting results remain strong. The combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 101.1% in the
first quarter of 1997 compared to 101.9% in the corresponding 1996 period. The
underwriting loss for the first three months of 1997 was $7.1 million compared
to $10.1 million in the corresponding 1996 period. The strong underwriting
results in 1997 reflect underwriting profits in surety, general liability and
workers' compensation lines of business, partially offset by continued
underwriting losses in the commercial automobile line.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $66.3 million during the three-month period ending March 31, 1997
from $63.4 million in the corresponding 1996 period. This increase resulted from
growth in the size of the fixed maturity investment portfolio.
-8-
<PAGE>
Gains on sales of investments were $14.3 million in the first quarter of 1997,
resulting from sales of equity securities and fixed maturity investments
available for sale, compared to $4.0 million in the corresponding 1996 period.
TITLE INSURANCE OPERATIONS
Premiums and fees increased in the first quarter of 1997 to $181.9 million from
$170.1 million in the corresponding quarter of 1996. The growth in premiums and
fees resulted from higher agency revenues reflecting the strong market
conditions that existed in the latter half of 1996. In addition, commercial
title insurance revenues increased in the first three months of 1997 when
compared to the corresponding 1996 period.
Agency commissions were $84.3 million during the three-month period ended March
31, 1997 compared to $75.8 million in the corresponding 1996 period. Other
expenses were $90.4 million in the first quarter of 1997 compared to $83.8
million in the corresponding 1996 period, and the expense ratio of the title
insurance operations (which includes agency commissions) was 95.5% in the first
quarter of 1997 compared to 93.0% in the corresponding 1996 period. The expense
ratios are generally at their highest during the first quarter as title
insurance revenues are at a seasonal low point. The provision for policy claims
was $8.8 million in the first quarter of 1997 compared to $14.6 million in the
corresponding 1996 period. The title insurance operations have benefitted from
favorable claims experience in recent years, a trend which is expected to
continue.
INVESTMENT PORTFOLIO
At March 31, 1997, the Company's investment portfolio aggregated $4.04 billion
(at cost), of which 11% was invested in equity securities. The Company seeks to
maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. The portfolio is managed
to achieve a proper balance of safety, liquidity and investment yields.
The Company's fixed maturity portfolio consists of investment grade securities
(those rated "BBB" or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities, since these issues may be more susceptible to
severe economic downturns. At March 31, 1997, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $470.1 million (13% of the fixed income portfolio) and $100.9 million (3%
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.
-9-
<PAGE>
OTHER OPERATIONS
RCG International Inc. ("RCG"), a subsidiary of the Company, primarily provides
technical services in the information technology industry. Information
technology revenues were $38.4 million in the first quarter of 1997 compared to
$30.3 million in the first quarter of 1996. The increase in revenues resulted
from increased assignments from existing and new clients. Information technology
operating expenses were $38.4 million in the first quarter of 1997 compared to
$29.4 million in the corresponding 1996 period. The increase in operating
expenses reflect higher selling, recruiting and administrative costs associated
with building the infrastructure of the information technology operations. RCG's
revenues and expenses are included in other revenues and other expenses in the
accompanying consolidated statement of income.
At March 31, 1997, the Company's real estate operations had holdings with a
carrying value of $275.1 million, which includes nine shopping centers with an
aggregate carrying value of $127.7 million, office buildings and other
commercial properties, with an aggregate carrying value of $84.7 million, and
undeveloped land with a carrying value of $62.7 million.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $1.6 million in the first quarter of 1997
compared to $2.0 million in the corresponding 1996 period, from the Company's
investment in Zenith National Insurance Corp. ("Zenith"). The decline in
investee company income resulted from increased underwriting losses in Zenith's
workers' compensation business.
OTHER MATTERS
A subsidiary of Reliance Insurance Company, Saul P. Steinberg and other
executives of the Company are partners in a partnership which owns certain real
estate properties. At March 31, 1997, the partnership's total outstanding debt
was $174.6 million. As of March 31, 1997, the Company guaranteed $38 million of
the partnership's outstanding debt which matures on June 30, 1997. 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. The Company receives a fee of .5% per annum on the
average outstanding debt covered by the guarantee. Reliance Group Holdings, Inc.
has issued a line of credit to the partnership in the amount of $13 million.
Borrowings under the line of credit mature on June 30, 2005 and bear a fixed
interest rate of 10%. At March 31, 1997, borrowings of $12.4 million were
outstanding under the line of credit.
-10-
<PAGE>
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess of the minimum
required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
On May 9, 1997, the Company announced it would redeem all of its outstanding
7.866% senior reset notes, due December 1, 2000. The redemption price will be
100% of the principal amount of such notes plus interest from June 1, 1997 to
the July 8, 1997 redemption date. The outstanding principal amount of such notes
is $25 million, including $9.6 million held by Reliance Insurance Company.
-11-
<PAGE>
RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Amendment No. 1 , dated April 21, 1997, to the 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 Frank B. Hall & Co. Inc. (now known as
Prometheus Funding Corp.).
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended March 31, 1997.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE FINANCIAL SERVICES CORPORATION
---------------------------------------
(Registrant)
Date: May 13, 1997 /s/ George E. Bello
------------ ---------------------------------------
George E. Bello
Executive Vice President and Controller
(Chief Accounting Officer)
-13-
<PAGE>
AMENDMENT NO. 1 TO SETTLEMENT AGREEMENT
---------------------------------------
WHEREAS, a Settlement Agreement dated as of June 2, 1989, was entered
into by and between the parties listed below.
WHEREAS, the parties to that Settlement Agreement desire to amend the
Settlement Agreement as set forth herein.
ACCORDINGLY, the parties to that Settlement Agreement, through their
respective undersigned counsel, in accordance with paragraph 6.1 of the
Settlement Agreement, agree as follows:
1. Paragraph 1.1 set forth on page three of the Settlement Agreement
is hereby amended to read:
1.1 On or before the effective date of this Settlement
Agreement, as described in Article Three hereof (the "Effective
Date"), Hall will pay or cause to be paid to the Liquidator the sum of
TWENTY SIX MILLION, FOUR HUNDRED THOUSAND DOLLARS ($26,400,000.00)
plus interest as set forth below (the "Down Payment"). The interest
included in the Down Payment shall be eight percent (8%) per annum for
the period commencing with the last day to file a notice of appeal
from entry of the Trial Court's order with respect to the Settlement
Agreement, as described in paragraph 3.3(b) herein, and ending with
the day the Down Payment is received by the Liquidator. Said Down
Payment shall be made by wire transfer in accordance with the written
instructions to be provided by the Liquidator to Hall.
2. Paragraph 1.3 of the Settlement Agreement is hereby amended to
read:
1.3 The Annual Payments (but not the Down Payment) shall be
reduced to the extent that any of the Settling Defendants incurs any
liability for any judgment(s) or settlement(s) and related costs or
expenses ("Paid Loss") as a result of any claim, suit or action brought
at any time against any one or more of them by any person, partnership,
corporation or other legal or governmental
<PAGE>
entity on any claim, suit or action arising out of or relating to the
operations, business, insolvency or liquidation of Union as provided
below ("Accepted Claims"). Accepted Claims shall include: (i) any
claims asserted against the Settling Defendants which are based upon
any legitimate proof of claim in the Union liquidation proceeding,
(ii) any claims alleged against any of the Settling Defendants in the
Liquidator Action, and (iii) the claims set forth in the lawsuits
listed in Exhibit F hereto. The Settling Defendants represent and
warrant that as of the date of Amendment No. 1 to this Settlement
Agreement, (i) no Settling Defendant has received any notice of any
claim, suit, or action which constitutes an Accepted Claim other than
those claims which are listed in Exhibit F to the Settlement
Agreement, and (ii) no Paid Loss has occurred. Any suit or action
brought against any of the Settling Defendants prior to the date of
this Amendment No. 1 to this Settlement Agreement which is not listed
in Exhibit F shall not be deemed an Accepted Claim; any claim existing
prior to the date of Amendment No. 1 to this Settlement Agreement of
which the Settling Defendants are aware which is not listed in Exhibit
F shall not be deemed an Accepted Claim; and the Annual Payment shall
not be reduced by the amounts of any Paid Loss incurred prior to the
date of Amendment No. 1 to this Settlement Agreement. Subject to the
foregoing, any Paid Loss incurred in connection with Accepted Claims
shall be subtracted from the next scheduled Annual Payment (but not
any Annual Payments previously paid to the Liquidator); if the Paid
Loss is greater than the next scheduled Annual Payment, the remaining
balance shall be subtracted from the scheduled Annual Payment
immediately following the next scheduled Annual Payment and so on (if
necessary) to continue until the entire Paid Loss is set-off. For
example, if a $1 million Paid Loss is incurred in the first year after
the Effective Date in connection with an Accepted Claim, this Amount
shall be subtracted from the $1.5 million Annual Payment due on the
first anniversary of the Effective Date and Hall shall pay only $.5
million on the first anniversary date of the Effective Date. If a $10
million Paid Loss is incurred in
2
<PAGE>
the first year after the Effective Date in connection with an Accepted
Claim, then the $29 million Annual Payments owed by Hall shall be
reduced to $19 million, and Hall shall not make any payments until Year
5, when it shall pay $2 million.
3. Paragraph 5.4 of the Settlement Agreement is hereby amended to
read:
5.4 Each Settling Defendant shall individually indemnify and hold
harmless the Liquidator from and against any and all claims, debts,
damages, liabilities, demands, obligations, costs, expenses (including
reasonable attorneys' fees), disputes, actions and causes of action of
every nature in connection with, arising from, or relating to any
breach of warranty or representations made by such Settling Defendant
in, or failure to fulfill his obligations under, this Settlement
Agreement. The Settling Defendants and the Liquidator agree that as of
the date of Amendment No. 1 to this Settlement Agreement, neither the
Liquidator nor any individual Settling Defendant has breached any
representation or warranty or failed to fulfill obligations under this
Settlement Agreement, and that no claims for indemnification or breach
shall be asserted on account of any alleged action or failure to act
prior to the date of Amendment No. 1 to this Settlement Agreement.
4. Paragraph 6.6 of the Settlement Agreement is hereby amended to
read:
6.6 Communications with respect to this Settlement Agreement
shall be in writing and shall be sent certified mail, return receipt
requested, or by Federal Express to:
To the Superintendent:
Joseph Termini, Esq.
General Counsel
New York Superintendent of Insurance
Liquidation Bureau
123 William Street
New York, New York 10038
(212) 341-6395
3
<PAGE>
To Hall on behalf of all Settling Defendants,
care of:
Joseph S. Allerhand, Esq.
WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
(212) 310-8211
5. Except as provided herein, this Amendment shall not constitute a waiver
to or modification of any provision, term, condition, representation or warranty
of the Settlement Agreement.
6. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
Dated: April 21, 1997
ANDERSON KILL & OLICK, P.C. WEIL, GOTSHAL & MANGES LLP
By /s/ R. Mark Keenan By /s/ Joseph S. Allerhand
------------------------ ---------------------------
R. Mark Keenan Joseph S. Allerhand
1251 Avenue of the Americas 767 Fifth Avenue
New York, NY 10020-1182 New York, NY 10153
(212) 278-1888 (212) 310-8000
Counsel for the Superintendent Counsel for Defendants Prometheus
of Insurance of the State of Funding Corp. (formerly known as
New York Frank B. Hall & Co. Inc.), Frank B.
Hall & Co. Brokerage, Inc., Frank
DANIEL P. LEVITT, ESQ. B. Hall Ltd. (Bermuda), FBH
Underwriting Managers Ltd., Parker
By /s/ Daniel P. Levitt & Co., Interocean Ltd., Frank B.
------------------------ Hall Re of New York, Inc., R.J.
Daniel P. Levitt Saey Insurance Agency, Inc., Union
Group, Inc., Union Treaty and
551 Fifth Avenue Excess Co., Inc., Intercontinental
Suite 1922 Re, Inc., Frank B. Hall & Co. of
New York, NY 10176 Alaska, Frank B. Hall & Co. of
(212) 687-3455 Connecticut, Inc., Frank B. Hall &
Co. of Michigan, Frank B. Hall &
Counsel for Defendants Michael Co. of Florida,
J. Cloherty, Melvin A. Holmes
and Joseph R. Wiedemann
4
<PAGE>
SKADDEN, ARPS, SLATE, MEAGHER & FLOM Frank B. Hall & Co. of Louisiana,
Frank B. Hall & Co. of Illinois,
By /s/ Irene A. Sullivan Frank B. Hall & Co. of
----------------------- Massachusetts, Associated Insurance
Irene A. Sullivan Agencies Inc., Frank B. Hall & Co.
of Pennsylvania, Inc., I.I.U.
919 Third Avenue Management Inc., Frank B. Hall &
New York, NY 10022 Co. of Wisconsin, Inc., Frank B.
(212) 735-2091 Hall & Co. of Colorado, Great
Plains Insurance Co., Inc., Frank
Counsel for Defendant Marvin J. Cashion B. Hall & Co. of Missouri, Frank B.
Hall & Co. of Texas, Inc., Frank B.
Hall & Co. of New York, Inc., Frank
KAPLAN, THOMASHOWER & LANDAU B. Hall & Co. of California,
Sherwood Insurance Services, Inc.,
By /s/ Mark S. Landau Frank B. Hall & Co. of Rhode
----------------------- Island, Inc., Frank B. Hall & Co.
Mark S. Landau of Washington, Inc., Frank B.
Hall & Co. of Ohio, Inc., Frank B.
747 Third Avenue Hall & Co. of Southern Nevada,
New York, NY 10017 Inc., Global Surplus
(212) 593-1700 Insurance Services, Inc., Leslie &
Godwin Holdings Co. (P.L.C.),
Counsel for Defendant Sixty-Seven Brokerage
John J. Tickner Corporation, Hall Companies 1-30,
John Addeo, George Corde, Robert K.
BAER, MARKS & UPHAM LLP Conroy, Clarke deWaters, William R.
Dolan, Archibald M. Foster, Jr.,
By /s/ Neal S. Barila Henry E. Froebel, John P. Iacono,
----------------------- Douglas L. King, Thomas G. O'Brien,
Neal S. Barila III, Albert J. Tahmoush and Robert
A. Wilson.
805 Third Avenue
New York, NY 10022
(212) 702-5917
Counsel for Defendants Francis T. Barley,
Monroe Birnberg, Richard L. Boyle,
George L. Casler, Simeon P. Crandall,
Joseph J. Jaworski, Winifred Mohr, Carol
J. Popp, Morris Rafkin, and William G.
Sigismondo.
5
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 2,508,622
<DEBT-CARRYING-VALUE> 803,852
<DEBT-MARKET-VALUE> 800,493
<EQUITIES> 708,575
<MORTGAGE> 0
<REAL-ESTATE> 275,060
<TOTAL-INVEST> 4,499,768
<CASH> 42,079
<RECOVER-REINSURE> 3,824,298
<DEFERRED-ACQUISITION> 221,814
<TOTAL-ASSETS> 10,721,356
<POLICY-LOSSES> 6,639,520
<UNEARNED-PREMIUMS> 1,640,272
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 237,869
0
0
<COMMON> 0
<OTHER-SE> 1,343,226
<TOTAL-LIABILITY-AND-EQUITY> 10,721,356
642,195
<INVESTMENT-INCOME> 74,279
<INVESTMENT-GAINS> 15,304
<OTHER-INCOME> 54,288
<BENEFITS> 319,226
<UNDERWRITING-AMORTIZATION> 106,400
<UNDERWRITING-OTHER> 223,062
<INCOME-PRETAX> 83,306
<INCOME-TAX> 26,400
<INCOME-CONTINUING> 58,460
<DISCONTINUED> 7,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,960
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
