<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 June 30, 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 August 1, 1994, 44,586,703 shares of common stock of Reliance Insurance
Company were outstanding.
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RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
I N D E X
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Page
No.
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Income for the Quarters and Six-Month
Periods Ended June 30, 1994 and 1993 (Unaudited)............. 2
Consolidated Balance Sheet at June 30, 1994 (Unaudited) and
December 31, 1993............................................ 3
Consolidated Statement of Changes in Common Shareholder's Equity
for the Six-Month Period Ended June 30, 1994 (Unaudited)..... 4
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 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........................... 15
SIGNATURES........................................................... 16
</TABLE>
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
- - --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned.............................. $734,588 $634,405 $1,420,473 $1,184,433
Net investment income........................ 64,603 63,922 127,253 129,256
Gain on sales of investments................. 1,672 35,049 5,309 70,631
Other........................................ 37,109 29,699 68,584 56,819
-------- -------- ---------- ----------
837,972 763,075 1,621,619 1,441,139
-------- -------- ---------- ----------
Claims and expenses:
Policy claims and settlement expenses........ 360,735 338,648 729,309 636,504
Policy acquisition costs..................... 98,043 85,288 201,216 166,692
Other insurance expenses..................... 286,419 231,870 542,050 445,988
Other........................................ 37,199 28,950 69,479 57,062
-------- -------- ---------- ----------
782,396 684,756 1,542,054 1,306,246
-------- -------- ---------- ----------
Income before income taxes and
equity in investee company.............. 55,576 78,319 79,565 134,893
Provision for income taxes................... (15,312) (31,364) (22,472) (51,731)
Equity in investee company................... 2,505 4,972 4,790 6,472
-------- -------- ---------- ----------
Income before cumulative effect of change in
accounting for income taxes........... 42,769 51,927 61,883 89,634
Cumulative effect of change in accounting for
income taxes............................. - - - 24,335
-------- -------- ---------- ----------
Net income................................... $ 42,769 $ 51,927 $ 61,883 $ 113,969
======== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 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 $1,019,492 and $973,113)...................... $1,102,654 $ 936,643
Fixed maturities available for sale - at quoted market
(cost $1,910,498 and $1,856,969)............................ 1,847,203 1,944,099
Equity securities - at quoted market (cost $465,202
and $458,217)................................................ 518,741 547,173
Short-term investments.......................................... 185,350 372,507
Cash................................................................. 48,808 61,897
Premiums receivable.................................................. 1,125,592 963,570
Other accounts and notes receivable.................................. 140,102 124,902
Reinsurance recoverables............................................. 2,798,512 2,573,688
Federal and foreign income taxes, principally deferred taxes......... 170,357 129,149
Investments in real estate - at cost, less accumulated depreciation.. 281,749 277,326
Investment in investee company....................................... 154,267 157,016
Deferred policy acquisition costs.................................... 184,294 178,129
Other assets......................................................... 294,857 302,298
---------- ----------
$8,852,486 $8,568,397
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------------------------------------
Unearned premiums.................................................... $1,299,990 $1,276,331
Unpaid claims and related expenses................................... 5,562,709 5,253,137
Accounts payable and accrued expenses................................ 593,184 613,816
Reinsurance ceded premiums payable................................... 304,020 206,373
Term loans and short-term debt....................................... 19,685 20,373
---------- ----------
7,779,588 7,370,030
---------- ----------
Contingencies and commitments
Preferred shareholders' equity:
Redeemable preferred stock, par value $1 per share, 4,000,000
shares authorized, 940,725 and 1,075,114 shares issued
and outstanding - at redemption value........................... 23,517 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...................................... 693,140 692,237
Retained earnings............................................... 340,114 335,374
Net unrealized gain (loss) on investments....................... (11,132) 115,023
Net unrealized loss on foreign currency translation............. (17,328) (15,731)
---------- ----------
1,049,381 1,171,490
---------- ----------
$8,852,486 $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 (Loss) 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
Capital contribution............. 1,589 1,589
Transactions of investee
company .................... (686) (2,863) (3,549)
Net income....................... 61,883 61,883
Dividends:
Preferred stock............. (1,410) (1,410)
Common stock................ (55,733) (55,733)
Depreciation after deferred
income taxes................ (123,292) (123,292)
Foreign currency translation..... (1,597) (1,597)
------- -------- -------- --------- -------- ----------
Balance, June 30, 1994........... $44,587 $693,140 $340,114 $ (11,132) $(17,328) $1,049,381
======= ======== ======== ========= ======== ==========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30 1994 1993
- - -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES................... $ 86,680 $ 18,508
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturities available for sale........... 211,368 216,223
Sales of fixed maturities held for investment.......... 15,111 -
Redemptions of fixed maturities available for sale..... 34,929 64,544
Redemptions of fixed maturities held for investment.... 12,870 88,476
Sales of equity securities............................. 138,735 394,659
Sales of short-term investments - net.................. 192,585 301,532
Purchases of fixed maturities available for sale....... (312,912) (378,975)
Purchases of fixed maturities held for investment...... (201,984) (283,316)
Purchases of equity securities......................... (107,576) (333,502)
Other - net............................................ (21,704) (26,652)
--------- ---------
(38,578) 42,989
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in term loans and short-term debt - net....... (688) (88)
Dividends.............................................. (57,143) (81,936)
Redemption of redeemable preferred stock............... (3,360) (3,360)
--------- ---------
(61,191) (85,384)
--------- ---------
Decrease in cash....................................... (13,089) (23,887)
Cash, beginning of period.............................. 61,897 58,937
--------- ---------
Cash, end of period.................................... $ 48,808 $ 35,050
========= =========
</TABLE>
See notes to consolidated financial statements
-5-
<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 only) considered necessary to present fairly the financial position
at June 30, 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) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1993.
2. REDEMPTION OF REDEEMABLE PREFERRED STOCK
In the second quarter of 1994, the Company redeemed 134,389 shares in
accordance with the mandatory redemption provisions.
3. EQUITY IN INVESTEE COMPANY
Equity income in Zenith National Insurance Corp. was $2.5 million and $4.8
million for the second quarter and first six months of 1994 compared to equity
income of $5.0 million and $6.5 million in the corresponding 1993 periods.
Summarized financial information for Zenith National Insurance Corp. is as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30 1994 1993
- - ----------------------------------------------------------------
(In thousands, except per-share amounts)
<S> <C> <C>
Revenues.................................. $289,577 $292,790
Income before income taxes................ 28,751 35,462
Net income................................ 19,100 27,700
Net income per share...................... 1.00 1.44
</TABLE>
-6-
<PAGE>
4. REINSURANCE
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------------------------------
1994 1993
---------------------------------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Direct.............. $1,360,423 $1,337,567 $1,286,035 $1,275,997
Assumed............. 178,592 180,076 157,926 154,570
Ceded............... (568,787) (579,413) (557,345) (654,667)
---------- ---------- ---------- ----------
Net Premiums........ $ 970,228 $ 938,230 $ 886,616 $ 775,900
========== ========== ========== ==========
</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>
Six Months Ended
June 30
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
Gross...................................... $1,104,732 $1,243,308
Reinsurance recoveries..................... (418,363) (642,991)
---------- ----------
Net policy claims and settlement expenses.. $ 686,369 $ 600,317
========== ==========
</TABLE>
5. 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 statements.
-7-
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
==============================================================================
OVERVIEW
Net income in the second quarter and first six months of 1994 was $42.8
million and $61.9 million compared to $51.9 million and $114.0 million in the
corresponding 1993 periods. Net income for the first six months of 1993
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, which were $1.7 million and $5.3 million in the
second quarter and first six months of 1994 compared to $35.0 million and
$70.6 million in the corresponding 1993 periods. The lower levels of realized
gains were partially offset by improved underwriting results in property and
casualty insurance.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written, net premiums earned and underwriting results were as
follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30
-------------------------------------------------------------------------
1994 1993
-------------------------------------------------------------------------
Net Net Net Net
Premiums Premiums Underwriting Premiums Premiums Underwriting
Written Earned Gain(Loss) Written Earned Gain(Loss)
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Standard Commercial $328,615 $321,374 $(18,450) $301,655 $290,815 $(40,202)
Specialty Commercial 145,255 156,202 1,800 124,419 121,578 5,687
------------------------------------- ----------------------------------
$473,870 $477,576 $(16,650) $426,074 $412,393 $(34,515)
===================================== ==================================
SIX MONTHS ENDED JUNE 30
-------------------------------------------------------------------------
1994 1993
-------------------------------------------------------------------------
Net Net Net Net
Premiums Premiums Underwriting Premiums Premiums Underwriting
Written Earned Gain(Loss) Written Earned Gain(Loss)
------------------------------------- ----------------------------------
Standard Commercial $682,334 $642,892 $(61,458) $630,215 $528,793 $(91,119)
Specialty Commercial 287,894 295,338 445 256,401 247,107 12,459
------------------------------------- ----------------------------------
$970,228 $938,230 $(61,013) $886,616 $775,900 $(78,660)
===================================== ==================================
</TABLE>
Net premiums written in the second quarter and first six months of 1993 were
reduced by $17.7 million and $57.5 million, and net premiums earned were
reduced by $63.0
-8-
<PAGE>
million and $148.5 million, for premiums ceded under quota share treaties
which were not renewed in 1993. These ceded premiums were primarily
classified in standard commercial lines. The increase in specialty
commercial net premiums written during 1994 resulted from higher general
liability premiums, including financial coverages, and growth in surety
premiums.
Underwriting results during 1994 for standard commercial lines have benefitted
from improved loss experience particularly in commercial automobile and
commercial multiple peril lines of business, partially offset by higher
catastrophe losses. The improved underwriting results also reflect continued
lower losses from involuntary pools which declined to $3.3 million and $9.2
million in the second quarter and first six months of 1994 compared to $7.4
million and $18.2 million in the corresponding 1993 periods. The underwriting
results in specialty commercial lines remain strong. The decline in specialty
commercial underwriting profits during 1994 reflects higher loss experience in
certain general liability lines and higher catastrophe losses in assumed
reinsurance, partially offset by improved results in surety lines. The cost
of catastrophes for both standard commercial and specialty commercial lines in
the second quarter and first six months of 1994 were $6.7 million and $35.4
million, arising primarily from the January 1994 California earthquake and
severe winter storms. Catastrophe losses in the corresponding 1993 periods
were $2.1 million and $19.6 million. Gross catastrophe losses, before
reinsurance, were $95.0 million during the first six months of 1994 compared
to $61.0 million in the corresponding 1993 period. The combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 103.0% and
106.1% for the second quarter and first six months of 1994 compared to 108.1%
and 110.0% in the corresponding 1993 periods. Excluding the effects of
catastrophes, the combined ratios were 101.6% and 102.3% in the second quarter
and first six months of 1994 compared to 107.6% and 107.5% in the
corresponding 1993 periods.
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. 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 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 consolidated
financial statements of the Company.
From time to time, other states have considered adopting legislation or
regulations
-9-
<PAGE>
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
$58.1 million and $114.1 million in the second quarter and first half of 1994
compared to $58.0 million and $117.5 million in the corresponding 1993
periods. Net investment income in 1994 benefitted from growth in the size of
the average fixed maturity investment portfolio reflecting the reinvestment of
proceeds from sales of equity securities. These benefits, however, have been
offset by lower yields in the fixed maturity investment portfolio.
Gains on sales of investments were $1.5 million and $4.7 million in the second
quarter and first six months of 1994 compared to $32.9 million and $67.2
million in the corresponding 1993 periods. Gains on sales of investments
during the 1993 periods primarily resulted from sales of convertible preferred
and common stocks.
TITLE INSURANCE OPERATIONS
Premiums and fees increased in the second quarter and first six months of 1994
to $257.0 million and $482.2 million from $222.0 million and $408.5 million in
the corresponding 1993 periods. The growth in premiums and fees resulted from
an increase in lower margin agency premiums. The growth in agency premiums
during 1994 was partially offset by a decline in premiums from direct
operations in the second quarter of 1994 reflecting lower levels of
residential refinancing activity. As a result of increased mortgage interest
rates, the Company does not foresee residential refinancing activity
increasing in the near future. Accordingly, the Company expects its premiums
from direct operations in 1994 to be lower than those of the prior year. The
increase in premiums from agency operations during the second quarter of 1994
resulted from the typical reporting lag of 60-90 days and reflect the strong
first quarter market conditions, prior to the increase in mortgage interest
rates.
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 $142.0 million
and $253.8 million in the second quarter and first six months of 1994 compared
to $102.7 million and $199.2 million in the corresponding 1993 periods.
Agency commissions increased during 1994 reflecting the higher level of
premiums from agency operations. 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
-10-
<PAGE>
policies, as well as costs associated with the maintenance of title plants.
Other expenses increased to $88.1 million and $180.0 million in the second
quarter and first six months of 1994 from $87.2 million and $161.7 million in
the corresponding 1993 periods. In order to reduce title insurance operating
expenses, the Company has instituted various cost control measures, including
staff reductions. The expense ratio of the title insurance operations (which
includes agency commissions) increased to 89.5% and 89.9% in the second
quarter and first six months of 1994 from 85.5% and 88.3% in the corresponding
1993 periods resulting from increased agency commissions and the decline in
premiums from direct operations. The provision for claim losses increased to
$22.7 million and $42.9 million in the second quarter and first six months of
1994 from $19.6 million and $36.2 million in the corresponding 1993 periods,
reflecting premium growth.
INVESTMENT PORTFOLIO
At June 30, 1994, the Company's investment portfolio aggregated $3.66 billion
(at cost), of which 13% was invested in equity securities. The Company seeks
to maintain a diversified and balanced fixed maturity portfolio representing a
broad spectrum of industries and types of securities. At June 30, 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 June 30, 1994, the carrying values of non-investment
grade securities and securities not rated by Standard & Poor's were $388.4
million (12% of the fixed income portfolio) and $136.0 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 $37.1 million and $68.6 million in the three-month and
six-month periods ended June 30, 1994, compared to $29.7 million and $56.8
million in the corresponding 1993 periods. The increase in revenues during
1994 reflects growth in the information technology business. Operating
expenses incurred by these operations
-11-
<PAGE>
were $35.4 million and $66.1 million in the three-month and six-month periods
ended June 30, 1994, compared to $28.4 million and $54.6 million in the
corresponding 1993 periods. Revenues and expenses of these operations are
included in other revenues and other expenses in the accompanying statement of
income.
At June 30, 1994, the Company's real estate holdings had a carrying value of
$281.7 million, which includes 11 shopping centers with an aggregate carrying
value of $135.2 million, office buildings and other commercial properties,
with an aggregate carrying value of $91.5 million, and undeveloped land with a
carrying value of $55.0 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.
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
-12-
<PAGE>
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.
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. Reliance
Insurance Company has also 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.
Total common and preferred stock dividends paid by Reliance Insurance Company
during the first six months of 1994 were $57.1 million ($55.7 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.
For the six months ended June 30, 1994, the Company generated $86.7 million of
cash flow from operating activities compared to $18.5 million in the
corresponding 1993 period. The improvement in operating cash flow reflects an
increase in reinsurance ceded premiums payable and $11.9 million of state and
local tax refunds received in the first six months of 1994. In the
corresponding 1993 period, the Company made state and local tax payments of
$30.0 million related to the sale of Frank B. Hall & Co. Inc. Cash flow from
operating activities is traditionally lower during the first half of the year,
reflecting payments of certain expenses, such as premium taxes and contingent
commissions, which are accrued in the previous year.
The Company utilized $38.6 million of cash flow from investing activities for
the six months ended June 30, 1994. For the six months ended June 30, 1993,
the Company generated $43.0 million of cash flow from investing activities.
Net purchases of marketable securities utilized cash flow of $16.9 million in
the six-month period ended June 30, 1994 while net sales of marketable
securities generated $69.6 million of cash flow in the corresponding 1993
period. During the first six months of 1994, the Company sold $15.1 million
of fixed maturity investments classified as held for investment. These sales
were in response to a significant deterioration in the issuers'
creditworthiness.
The Company utilized $61.2 million and $85.4 million of cash flow from
financing activities for the six months ended June 30, 1994 and 1993,
respectively. Cash was utilized principally 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
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<PAGE>
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 insurer's ratings.
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<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
On May 31, 1994, at the annual meeting of stockholders of the
Company, the stockholders elected the following fifteen directors:
Saul P. Steinberg, Robert M. Steinberg, George R. Baker, George E.
Bello, Carter Burden, Dennis A. Busti, Dean W. Case, Lowell C.
Freiberg, Thomas P. Gerrity, Jewell Jackson McCabe, Irving Schneider,
Bernard L. Schwartz, Richard E. Snyder, Thomas J. Stanton, Jr. and
James E. Yacobucci. The number of votes cast for each director was
44,586,703, with no votes withheld.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
None.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter ended June 30,
1994.
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<PAGE>
SIGNATURES
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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: August 12, 1994 /s/ Jerome H. Carr
--------------- ----------------------------
Jerome H. Carr
Senior Vice President
and Chief Financial Officer
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