<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, 1994
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 1-7577
RELIANCE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0580680
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 Penn Center Plaza
Philadelphia, Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 864-4000
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 2, 1994, 44,586,703 shares of common stock of Reliance Insurance
Company were outstanding.
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
I N D E X
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<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters Ended
March 31, 1994 and 1993 (Unaudited)............................. 2
Consolidated Balance Sheet at March 31, 1994 (Unaudited) and
December 31, 1993............................................... 3
Consolidated Statement of Changes in Common Shareholder's Equity
for the Quarter Ended March 31, 1994 (Unaudited)................ 4
Consolidated Condensed Statement of Cash Flows for the Quarters
Ended March 31, 1994 and 1993 (Unaudited)....................... 5
Notes to Consolidated Financial Statements (Unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 8
PART II. OTHER INFORMATION, AS APPLICABLE........................... 14
SIGNATURES........................................................... 15
</TABLE>
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1994 1993
-------- --------
<S> <C> <C>
(In thousands)
Revenues:
Premiums earned........................................................... $685,885 $550,028
Net investment income..................................................... 62,650 65,334
Gain on sales of investments.............................................. 3,637 35,582
Other..................................................................... 31,475 27,120
-------- --------
783,647 678,064
-------- --------
Claims and expenses:
Policy claims and settlement expenses..................................... 368,574 297,856
Policy acquisition costs.................................................. 103,173 81,404
Other insurance expenses.................................................. 255,631 214,118
Other..................................................................... 32,280 28,112
-------- --------
759,658 621,490
-------- --------
Income before income taxes and equity in investee company................. 23,989 56,574
Provision for income taxes................................................ (7,160) (20,367)
Equity in investee company................................................ 2,285 1,500
-------- --------
Income before cumulative effect of change in accounting
for income taxes......................................................... 19,114 37,707
Cumulative effect of change in accounting for income taxes................ - 24,335
-------- --------
Net income................................................................ $ 19,114 $ 62,042
======== ========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1994 1993
- - ------ ---------- ----------
(Dollars in thousands, except per-share amounts)
<S> <C> <C>
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $1,130,603 and $973,113)................................... $1,167,246 $ 936,643
Fixed maturities available for sale - at quoted market
(cost $1,913,130 and $1,856,969).......................................... 1,927,367 1,944,099
Equity securities - at quoted market (cost $422,617
and $458,217)............................................................. 475,538 547,173
Short-term investments..................................................... 183,315 372,507
Cash......................................................................... 52,904 61,897
Premiums receivable.......................................................... 1,072,543 963,570
Other accounts and notes receivable.......................................... 129,387 124,902
Reinsurance recoverables..................................................... 2,709,905 2,573,688
Federal and foreign income taxes, including deferred taxes................... 145,255 129,149
Investments in real estate - at cost, less accumulated
depreciation............................................................... 279,099 277,326
Investment in investee company............................................... 161,079 157,016
Deferred policy acquisition costs............................................ 183,373 178,129
Other assets................................................................. 301,099 302,298
---------- ----------
$8,788,110 $8,568,397
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
<S> <C> <C>
Unearned premiums............................................................ $1,320,753 $1,276,331
Unpaid claims and related expenses........................................... 5,459,645 5,253,137
Accounts payable and accrued expenses........................................ 564,180 613,816
Reinsurance ceded premiums payable........................................... 296,674 206,373
Term loans and short-term debt............................................... 21,459 20,373
---------- ----------
7,662,711 7,370,030
---------- ----------
Contingencies and commitments
Preferred shareholders' equity:
Redeemable preferred stock, par value $1 per share,
4,000,000 shares authorized, 1,075,114 shares issued
and outstanding - at redemption value..................................... 26,877 26,877
---------- ----------
Common shareholder's equity:
Common stock, par value $1 per share, 60,000,000 shares
authorized, 44,586,703 shares issued and outstanding...................... 44,587 44,587
Additional paid-in capital................................................. 691,878 692,237
Retained earnings.......................................................... 333,704 335,374
Net unrealized gain on investments......................................... 44,911 115,023
Net unrealized loss on foreign currency translation........................ (16,558) (15,731)
---------- ----------
1,098,522 1,171,490
---------- ----------
$8,788,110 $8,568,397
========== ==========
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDER'S EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Net Loss on
Additional Unrealized Foreign Common
Common Paid-In Retained Gain on Currency Shareholder's
Stock Capital Earnings Investments Translation Equity
------- ---------- -------- ----------- ----------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......... $44,587 $692,237 $335,374 $115,023 $(15,731) $1,171,490
Transactions of investee
company ........................... (359) 2,229 1,870
Net income.......................... 19,114 19,114
Dividends:
Preferred stock................... (720) (720)
Common stock...................... (20,064) (20,064)
Depreciation after deferred
income taxes....................... (72,341) (72,341)
Foreign currency translation........ (827) (827)
------- -------- -------- -------- -------- ----------
BALANCE, MARCH 31, 1994............. $44,587 $691,878 $333,704 $ 44,911 $(16,558) $1,098,522
======= ======== ======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 1994 1993
-------- --------
<S> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES...................... $84,788 $(4,432)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturities available for sale.............. 58,028 37,587
Sales of fixed maturities held for investment............. 4,791 -
Redemptions of fixed maturities available for sale........ 6,678 46,925
Redemptions of fixed maturities held for investment....... 8,643 25,833
Sales of equity securities................................ 117,344 259,138
Sales of short-term investments - net..................... 193,366 210,830
Purchases of fixed maturities available for sale.......... (141,732) (217,884)
Purchases of fixed maturities held for investment......... (229,619) (218,554)
Purchases of equity securities............................ (80,335) (95,680)
Other - net............................................... (11,247) (11,240)
-------- --------
(74,083) 36,955
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends................................................. (20,784) (40,938)
Increase in term loans and short-term debt - net.......... 1,086 1,570
-------- --------
(19,698) (39,368)
-------- --------
Decrease in cash.......................................... (8,993) (6,845)
Cash, beginning of period................................. 61,897 58,937
-------- --------
Cash, end of period....................................... $ 52,904 $ 52,092
======== ========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
RELIANCE INSURANCE COMPANY 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, except in 1994 for the effect of the adoption of Statement of
Financial Accounting Standards No. 112 as described in note 4 herein)
considered necessary to present fairly the financial position at March 31,
1994, and the results of operations, changes in common 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, 1993, except as described in note 4 herein) and additional
financial information, see the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
2. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.3 million for the
quarter ended March 31, 1994 compared to $1.5 million in the corresponding
1993 period.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
<TABLE>
<CAPTION>
Quarter Ended March 31 1994 1993
- - ---------------------- -------- --------
(In thousands, except per-share amounts)
<S> <C> <C>
Revenues.................................. $138,252 $143,256
Net income................................ 8,200 12,600
Net income per share...................... 0.43 0.66
</TABLE>
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<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
------------------------------------------
1994 1993
-------------------- --------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Direct......... $ 711,679 $ 678,463 $ 666,678 $ 628,397
Assumed........ 89,931 79,306 79,500 70,287
Ceded.......... (305,252) (297,115) (285,636) (335,177)
--------- --------- --------- ---------
Net Premiums... $ 496,358 $ 460,654 $ 460,542 $ 363,507
========= ========= ========= =========
</TABLE>
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>
<CAPTION>
Quarter Ended March 31
----------------------
1994 1993
-------- --------
<S> <C> <C>
Gross........................................ $589,730 $480,267
Reinsurance recoveries....................... (241,350) (199,003)
-------- --------
Net policy claims and settlement expenses.... $348,380 $281,264
======== ========
</TABLE>
4. ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". The adoption of this Statement had no material effect on the
Company's consolidated financial position or results of operations.
-7-
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net income was $19.1 million in the first quarter of 1994 compared to $62.0
million in the corresponding 1993 period, which included income of $24.3
million resulting from the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The decline in net income
in 1994 also reflects substantially lower realized gains from sales of
investments.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written and net premiums earned were $496.4 million and $460.7
million in the first three months of 1994 compared to $460.5 million and
$363.5 million in the corresponding prior-year period. Net premiums written
and net premiums earned in the first quarter of 1993 were reduced by $40.3
million and $85.9 million, respectively, for premiums ceded under certain
quota share treaties which were not renewed.
Underwriting losses for the three-month period ended March 31, 1994, were
$44.4 million compared to $44.1 million in the corresponding 1993 period.
Underwriting losses in standard commercial lines (which includes personal
lines) and specialty commercial lines were $43.0 million and $1.4 million,
respectively, in the first quarter of 1994. In the corresponding 1993 period,
standard commercial lines had an underwriting loss of $50.9 million and
specialty commercial lines had an underwriting profit of $6.8 million.
Underwriting results for both standard commercial and specialty commercial
lines in 1994 reflect a higher level of costs resulting from catastrophes.
The cost of catastrophes in the first quarter of 1994 was $28.7 million ($89.5
million before reinsurance), arising primarily from the January 1994
California earthquake and severe winter storms in the eastern and midwestern
regions of the country. Catastrophe losses in the first quarter of 1993 were
$17.5 million ($56.1 million before reinsurance). The effects of higher
catastrophe losses in 1994 were offset by improved loss experience in standard
commercial lines, as well as lower underwriting losses from involuntary pools
which declined to $5.8 million in the first three months of 1994 from $10.8
million in the corresponding 1993 period. The combined ratio (calculated on a
GAAP basis), after policyholders' dividends, was 109.1% in the first quarter
of 1994 compared to 112.2% in the corresponding 1993 period. Excluding the
effects of catastrophes, the combined ratio was 102.9% in the first quarter of
1994 compared to 107.4% in the corresponding 1993 period.
In 1989, the California Department of Insurance notified United Pacific
Insurance Company, one of the Company's California subsidiaries, which writes
business in California, that under Proposition 103, profits generated by
current rates exceeded the Department's rates for a fair and reasonable return
by approximately $10.0 million.
-8-
<PAGE>
Since then, there have been several administrative hearings on rate rollback
and several different regulations issued. In February 1993, a Los Angeles
Superior Court declared several sections of the regulations invalid and
enjoined the enforcement of the regulations. In June 1993, the California
Supreme Court agreed to hear the appeal from this decision. The regulations,
if ultimately adopted and upheld, could result in the Company having to make a
refund to policyholders possibly in excess of the amount specified in the
Department's 1989 notice. The Company's property and casualty insurance
subsidiaries have not earned underwriting profits in California in the past
five years. The Company believes that even after considering investment
income, total returns in California have been less than what would be
considered "fair." The Company will contest vigorously any unreasonable
premium rollback determination by the California Insurance Department.
Accordingly, the Company believes that it is probable that its premium
revenues will not be subject to a refund which would have a material effect on
the results of operations or financial condition of the Company.
From time to time, other states have considered adopting legislation or
regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal
lines. No assurance can be given as to what effect the adoption of any such
legislation or regulation would have on the ability of the Company to raise
its rates. However, since the Company is transferring or running off its
personal lines business and, as a result, has substantially withdrawn from
personal lines, the Company believes that these initiatives will not have a
material effect on its on-going business.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations was
$56.0 million in the first quarter of 1994 compared to $59.5 million in the
corresponding 1993 period. The decline in net investment income resulted from
lower yields in the fixed maturity investment portfolio, the effects of which
were partially offset by growth in the size of the average fixed maturity
investment portfolio. The growth in the size of the average fixed maturity
investment portfolio reflects the reinvestment of proceeds from the sales of
equity securities.
Gains on sales of investments were $3.2 million in the first three months of
1994 compared to $34.3 million in the first three months of 1993. Gains on
sales of investments during the 1993 period primarily resulted from sales of
convertible preferred and common stocks.
-9-
<PAGE>
TITLE INSURANCE OPERATIONS
Premiums and fees increased in the first quarter of 1994 to $225.2 million
from $186.5 million in the corresponding 1993 period. The increase in
premiums and fees resulted from increased residential refinancing activity,
which began in March 1993, as well as increased new and existing home sales.
As a result of recent increases in mortgage interest rates, it is not expected
that the increase in residential refinancing activity will continue.
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are the title insurance
operations' single largest expense. Agency commissions were $110.0 million in
the first quarter of 1994 compared to $94.8 million in the first quarter of
1993. Agency commissions as a percentage of agency premiums declined in the
first quarter of 1994 when compared to the corresponding 1993 period,
principally reflecting a shift in premiums to those regions where agency
commissions are generally lower. 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 increased to $93.6 million in the first three months
of 1994 from $76.1 million in the corresponding 1993 period, reflecting
greater activity in the title insurance operations. The expense ratio of the
title insurance operations (which includes agency commissions) declined to
89.8% in the first quarter of 1994 from 91.5% in the first quarter of 1993.
This decline results principally from the lower percentage of agency
commissions to agency premiums. The provision for claim losses increased to
$20.2 million in the first quarter of 1994 from $16.6 million in the first
quarter of 1993 reflecting premium growth.
INVESTMENT PORTFOLIO
At March 31, 1994, the Company's investment portfolio aggregated $3.69 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. At March 31, 1994, no
one issuer comprised more than 2.5% of the fixed maturity and short-term
investment portfolio. Furthermore, the Company holds virtually no investments
in commercial real estate mortgages in its investment portfolio. Purchases of
fixed maturity securities are researched individually based on in-depth
analysis and objective predetermined investment criteria and the portfolio is
managed to achieve a proper balance of safety, liquidity and investment
yields.
The Company invests primarily in 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,
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<PAGE>
1994, the carrying values of non-investment grade securities and securities
not rated by Standard & Poor's were $448.5 million (13% of the fixed income
portfolio) and $126.2 million (4% of the fixed income portfolio),
respectively. Substantially all of the Company's non-investment grade
securities are classified as "available for sale" and, accordingly, are
carried at quoted market value.
OTHER OPERATIONS
The Company's consulting and technical services operations provide services in
the information technology and energy and environmental fields. Revenues for
these operations were $31.5 million in the first three months of 1994 compared
to $27.1 million in the corresponding 1993 period. Operating expenses
incurred by these operations were $30.7 million in the first three months of
1994 compared to $26.3 million in the corresponding 1993 period. Revenues and
expenses of these operations are included in other revenues and other expenses
in the accompanying statement of income.
At March 31, 1994, the Company's real estate holdings had a carrying value of
$279.1 million, which includes 11 shopping centers with an aggregate carrying
value of $132.3 million, office buildings and other commercial properties,
with an aggregate carrying value of $91.6 million, and undeveloped land with a
carrying value of $55.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Insurance Law of Pennsylvania, where Reliance Insurance Company (the
Company's principal property and casualty insurance subsidiary) is domiciled,
was amended in February 1994 (effective immediately) to establish a new test
limiting the maximum amount of dividends which may be paid without approval by
the Pennsylvania Insurance Department. Under such test, 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.
-11-
<PAGE>
In the first quarter of 1994, Reliance Insurance Company determined that it
has become subject to the dividend payment laws of California because it has
become a "commercially domiciled" California insurer. California law provides
that an insurer is commercially domiciled if during the three preceding years
(taken together) the insurer has written more premium in California than it
has written in its state of domicile and the amount of premium written in
California is in excess of 20% of the insurer's countrywide written premium.
For the three preceding years, Reliance Insurance Company's written premium in
California represents 20.4% of its countrywide written premium. By writing
California business in its California domestic subsidiary, the Company
anticipates the percentage of Reliance Insurance Company's countrywide premium
written in California will decrease in the future. 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 the
dividend is reasonable in relation to an insurance company's outstanding
liabilities and financial needs are substantially the same as the laws of
Pennsylvania. As in Pennsylvania, the California Insurance Department has
broad discretion to limit the payment of dividends by insurance companies.
Total common and preferred stock dividends paid by Reliance Insurance Company
during the first three months of 1994, were $20.8 million ($20.1 million for
common stock). During 1994, $126.8 million would be available for dividend
payments by Reliance Insurance Company based upon the new dividend test under
Pennsylvania Law.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania or California law for the payment
of dividends without prior Insurance Department approvals or that any
requested approvals will be obtained. However, Reliance Insurance Company has
been advised by the California Insurance Department that any required prior
approval will be based on the financial stability of the Company, and by the
Pennsylvania Insurance Department that any required prior approval will be
based upon a solvency standard and will not be unreasonably withheld.
For the three months ended March 31, 1994, the Company generated $84.8 million
of cash flow from operating activities compared to an operating cash flow
deficiency of $4.4 million in the corresponding 1993 period. The improvement
in operating cash flow reflects an increase in reinsurance ceded premiums
payable and $11.5 million of state and local tax refunds received in the first
quarter of 1994. In the corresponding 1993 period, the Company made state and
local tax payments of $30.0 million related to the 1992 sale of Frank B. Hall
& Co. Inc.
The Company utilized $74.1 million of cash flow from investing activities for
the three months ended March 31, 1994. For the three months ended March 31,
1993, the Company generated $37.0 million of cash flow from investing
activities. Net purchases of marketable securities utilized cash flow of
$62.8 million in 1994 while net sales of
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<PAGE>
marketable securities generated $48.2 million of cash flow in the
corresponding 1993 period. In the first quarter of 1994, the Company sold
$4.8 million of a fixed maturity investment classified as held for investment.
This sale was in response to a deterioration in the issuer's creditworthiness.
The Company utilized $19.7 million and $39.4 million of cash flow from
financing activities for the three months ended March 31, 1994 and 1993,
respectively. Cash was utilized primarily to pay common and preferred stock
dividends.
The National Association of Insurance Commissioners has adopted a risk-based
capital requirement for the property and casualty insurance industry which
becomes effective in 1995 (based on 1994 financial results). 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 would be 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. Although the regulations governing risk-based capital are not
effective until 1995 (based on 1994 financial results), the Company has
calculated that its capital exceeds the risk-based capital that would be
required if the formula was currently in effect (based on 1993 financial
results). Management cannot predict the ultimate impact of risk-based capital
requirements on the Company's competitive position and its resulting capital
requirements.
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 insurers' ratings.
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<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
10.1 Second Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1992, between Reliance
Insurance Company and Saul P. Steinberg.
10.2 First Amendment, dated as of March 31, 1994, to Employment
Agreement, dated as of January 1, 1994, between Reliance
Insurance Company and Robert M. Steinberg.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter
ended March 31, 1994.
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE INSURANCE COMPANY
--------------------------
(Registrant)
Date: May 13, 1994 /s/ Jerome H. Carr
------------ --------------------------
Jerome H. Carr
Senior Vice President
and Chief Financial Officer
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<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment, dated as of March 31, 1994, amends to the extent set
forth below, the Agreement, dated as of the 1st day of January 1992 (as amended
by the First Amendment dated as of January 1, 1994, the "Agreement"), between
RELIANCE INSURANCE COMPANY, a Pennsylvania corporation with its principal office
located at 4 Penn Center Plaza, Philadelphia, Pennsylvania and Saul P. Steinberg
("Steinberg").
1. Paragraph 4 is hereby amended to read in its entirety as follows:
"4. Bonus
-----
In addition to the salary provided in paragraph 3 hereof, Steinberg
shall be eligible for a bonus for each calendar year of the term
hereof, to be payable pursuant to the terms and conditions of the
executive bonus plan of Reliance Group Holdings, Inc. applicable to
Steinberg for such calendar year and meeting the requirements of
performance-based compensation under Section 162(m) of the Internal
Revenue Code of 1986, as amended."
2. In each and every other respect, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
hereinabove written.
RELIANCE INSURANCE COMPANY
By: /s/ Paul W. Zeller
--------------------------
Name: Paul W. Zeller
Title: Vice President
/s/ Saul P. Steinberg
-----------------------------
Saul P. Steinberg
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment, dated as of March 31, 1994, amends to the extent set forth
below, the Agreement, dated as of the 1st day of January 1994 (the "Agreement"),
between RELIANCE INSURANCE COMPANY, a Pennsylvania corporation with its
principal office located at 4 Penn Center Plaza, Philadelphia, Pennsylvania and
Robert M. Steinberg ("Steinberg").
1. Paragraph 4 is hereby amended to read in its entirety as follows:
"4. Bonus
-----
In addition to the salary provided in paragraph 3 hereof, Steinberg
shall be eligible for a bonus for each calendar year of the term
hereof, to be payable pursuant to the terms and conditions of the
executive bonus plan of Reliance Group Holdings, Inc. applicable to
Steinberg for such calendar year and meeting the requirements of
performance-based compensation under Section 162(m) of the Internal
Revenue Code of 1986, as amended."
2. In each and every other respect, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
hereinabove written.
RELIANCE INSURANCE COMPANY
By: /s/ Paul W. Zeller
--------------------------
Name: Paul W. Zeller
Title: Vice President
/s/ Robert M. Steinberg
-----------------------------
Robert M. Steinberg
