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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD ..................... 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, PA 19103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 864-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------------------------- ----------------------------
$2.68 Series A Cumulative Preferred Stock,
$1.00 Par Value Philadelphia Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 1995, 44,586,703 shares of the common stock of Reliance
Insurance Company were outstanding, none of which was held by nonaffiliates.
As of March 15, 1995, 934,943 shares of Preferred Stock of Reliance
Insurance Company having a market value of $24,191,650 were held by
nonaffiliates of Reliance Insurance Company.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Insurance Company 1994 Annual Report--Parts I, II
and IV.
(2) Definitive Information Statement of Reliance Insurance
Company for the Annual Meeting of Stockholders to be held
May 31, 1995--Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Insurance Company ('Reliance Insurance Company' or 'Registrant')
and its property and casualty insurance subsidiaries (such subsidiaries,
together with Reliance Insurance Company, the 'Reliance Property and Casualty
Companies') and its title insurance subsidiaries (collectively, the 'Reliance
Insurance Group') underwrite a broad range of commercial lines of property and
casualty insurance, as well as title insurance. Reliance Insurance Company has
conducted business since 1817, making it one of the oldest property and casualty
insurance companies in the United States.
The Reliance Property and Casualty Companies consist of four principal
operations: Reliance National, Reliance Insurance, Reliance Reinsurance and
Reliance Surety. Established in 1987, Reliance National offers, through national
and regional brokers, a broad range of commercial property and casualty
insurance products and services for large companies and specialty line
customers. Reliance National selects market segments where it can provide
specialized coverages and services, and it conducts business nationwide and in
certain international markets. In 1994, Reliance National accounted for 50% of
the net premiums written by the Reliance Property and Casualty Companies.
Reliance Insurance offers commercial property and casualty insurance coverages
for mid-sized companies throughout the United States. Reliance Insurance also
offers traditional and specialized coverages for more complex risks as well as
insurance programs for groups with common insurance needs. Reliance Reinsurance
primarily provides property and casualty treaty reinsurance for small to medium
sized regional and specialty insurance companies located in the United States.
Reliance Surety is a leading writer of surety bonds and fidelity bonds in the
United States. The Reliance Property and Casualty Companies accounted for
$1,777.3 million (67%) of the Reliance Insurance Group's 1994 net premiums
earned.
The Reliance Insurance Group's title insurance business consists of
Commonwealth Land Title Insurance Company ('Commonwealth') and Transamerica
Title Insurance Company ('Transamerica Title', together with Commonwealth and
their respective subsidiaries, 'Commonwealth/Transamerica Title').
Commonwealth/Transamerica Title is the third largest title insurance operation
in the United States, in terms of 1993 total premiums and fees.
Commonwealth/Transamerica Title accounted for $856.8 million (33%) of the
Reliance Insurance Group's 1994 net premiums earned.
Business segment information for the years ended December 31, 1994, 1993
and 1992 is set forth in Note 17 to the Company's consolidated financial
statements (the 'Consolidated Financial Statements'), which segment information
is included in the Company's 1994 Annual Report and incorporated herein by
reference. All financial information in this Annual Report on Form 10-K is
presented in accordance with generally accepted accounting principles ('GAAP')
unless otherwise specified.
Reliance Financial Services Corporation ('Reliance Financial') owns all of
the common stock of Reliance Insurance Company. The common stock of Reliance
Insurance Company, which represents approximately 98% of the combined voting
power of all Reliance Insurance Company stockholders, is pledged to secure
certain indebtedness. Reliance Financial is a wholly-owned subsidiary of
Reliance Group Holdings, Inc. ('Reliance Group Holdings'). Approximately 47% of
the common stock of Reliance Group Holdings, the only class of voting security
outstanding, is owned by Saul P. Steinberg, members of his family and affiliated
trusts.
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OPERATING UNITS
Property and Casualty Insurance. The Reliance Property and Casualty
Companies consist of four principal operations: Reliance National, Reliance
Insurance, Reliance Reinsurance and Reliance Surety. The following table sets
forth the amount of net premiums written in each line of business by Reliance
National, Reliance Insurance, Reliance Reinsurance and Reliance Surety for the
years ended December 31, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------------- -------------------------------------------- --------
RELIANCE RELIANCE
RELIANCE RELIANCE REINSURANCE/ RELIANCE RELIANCE REINSURANCE/ RELIANCE
NATIONAL INSURANCE SURETY TOTAL NATIONAL INSURANCE SURETY TOTAL NATIONAL
-------- --------- ------------ ------ -------- --------- ------------ ------ --------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability........ $347 $ 76 $ -- $ 423 $288 $ 82 $ -- $ 370 $291
Workers' Compensation.... 179 134 -- 313 232 146 -- 378 251
Automobile............... 109 135 -- 244 119 141 -- 260 151
Multiple Peril........... 32 148 -- 180 33 154 -- 187 12
Reinsurance.............. -- -- 125 125 -- -- 124 124 --
Surety................... -- -- 118 118 -- -- 107 107 --
Involuntary.............. 82 32 -- 114 87 27 -- 114 82
Ocean and Inland
Marine................. 44 60 -- 104 54 51 -- 105 10
Accident and Health...... 52 -- -- 52 36 -- -- 36 8
Other.................... 45 46 -- 91 23 67 -- 90 24
-------- --------- ----- ------ -------- --------- ----- ------ --------
Total................ $890 $ 631 $243 $1,764 $872 $ 668 $231 $1,771 $829
-------- --------- ----- ------ -------- --------- ----- ------ --------
-------- --------- ----- ------ -------- --------- ----- ------ --------
Percent of Total......... 50% 36% 14% 100% 49% 38% 13% 100% 54%
-------- --------- ----- ------ -------- --------- ----- ------ --------
-------- --------- ----- ------ -------- --------- ----- ------ --------
<CAPTION>
RELIANCE
RELIANCE REINSURANCE/
INSURANCE SURETY TOTAL
--------- ------------ ------
<S> <C> <C> <C>
General Liability........ $ 59 $ -- $ 350
Workers' Compensation.... 168 -- 419
Automobile............... 111 -- 262
Multiple Peril........... 114 -- 126
Reinsurance.............. -- 108 108
Surety................... -- 94 94
Involuntary.............. 28 -- 110
Ocean and Inland
Marine................. 39 -- 49
Accident and Health...... -- -- 8
Other.................... (8) -- 16
------- ----- ------
Total................ $ 511 $202 $1,542
------- ----- ------
------- ----- ------
Percent of Total......... 33% 13% 100%
------- ----- ------
------- ----- ------
</TABLE>
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The following table sets forth underwriting results for the Reliance
Property and Casualty Companies for the years ended December 31, 1994, 1993 and
1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net premiums written....................................... $1,764.3 $1,770.6 $1,541.6
Underwriting loss(1)....................................... (97.3) (175.6) (219.3)
Combined ratio............................................. 104.4% 110.8% 114.1%
</TABLE>
------------------
(1) Includes catastrophe losses for the years ended December 31, 1994, 1993 and
1992 of $50.1 million, $39.3 million and $61.1 million, respectively.
The following table sets forth certain financial information of the
Reliance Property and Casualty Companies based upon statutory accounting
practices and common shareholder's equity of Reliance Insurance Company based
upon GAAP, in thousands:
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING GAAP
------------------------------------------------------------------------ -------------
TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS' SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS* EQUITY
------------------------ ---------- -------- ---------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994.................... $1,773,196 $833,643 $3,033,020 $5,296,931 $ 4,388,393 $908,538 $ 1,076,840
1993.................... 1,810,070 834,855 2,846,073 4,968,714 4,066,424 902,290 1,171,490
1992.................... 1,548,819 648,705 2,617,040 4,521,153 3,663,542 857,611 1,060,774
</TABLE>
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* Includes Reliance Insurance Company's investment in title insurance operations
of $180.8 million at December 31, 1994.
The Reliance Property and Casualty Companies write insurance in every state
of the United States, the District of Columbia, Puerto Rico, Guam and The Virgin
Islands. The Reliance Property and Casualty Companies also write insurance in
the European Community through offices in the United Kingdom, the Netherlands
and Spain, and in the Americas through offices in Canada, Mexico and Argentina.
In 1994, California, New York, Texas, Pennsylvania and Florida accounted for
approximately 18%, 9%, 7%, 6% and 5%, respectively, of direct premiums written.
No other state accounted for more than 5% of direct premiums written by the
Reliance Property and Casualty Companies. The Reliance Property and Casualty
Companies write insurance through independent agents, program agents and
brokers. No single insurance agent or broker accounts for 10% or more of the
direct premiums written by the Reliance Property and Casualty Companies.
The Reliance Property and Casualty Companies ranked 32nd among property and
casualty insurance companies and groups in terms of net premiums written during
1993, according to Best's Insurance Management Reports. A. M. Best & Company,
Inc. ('Best'), publisher of Best's Insurance Reports, Property-Casualty, has
assigned an A- (Excellent) rating to the Reliance Property and Casualty
Companies. Best's ratings are based on an analysis of the financial condition
and operations of an insurance company as they relate to the industry in
general. An A- (Excellent) rating is assigned to those companies which have
demonstrated excellent overall performance when compared to the norms of the
property and casualty industry. Standard & Poor's ('S&P') rates the
claims-paying ability of the Reliance Property and Casualty Companies A. S&P's
ratings are based on quantitative and qualitative analysis including
consideration of ownership and support factors, if applicable. An A rating is
assigned to those companies which have good financial security, but capacity to
meet policyholder obligations is somewhat susceptible to adverse economic and
underwriting conditions. Best's ratings are not designed for the protection of
investors and do not constitute recommendations to buy, sell or hold any
security. Although the Best and S&P ratings of the Reliance Property and
Casualty Companies are lower than those of many of the insurance companies with
which the Reliance Property and Casualty Companies compete, management believes
that the current ratings are adequate to enable the Reliance Property and
Casualty Companies to compete successfully.
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Reliance National. Established in 1987, Reliance National offers a broad
range of commercial insurance products and services to selected segments of the
property and casualty market which do not lend themselves to traditional
insurance products and services. Reliance National selects market segments where
it can provide specialized coverages and services. In 1994, Reliance National
accounted for 50% of the net premiums written by the Reliance Property and
Casualty Companies. Reliance National, which conducts business nationwide, is
headquartered in New York City and has regional offices in seven states.
Reliance National also conducts business in the European Community through
offices located in the United Kingdom, the Netherlands and Spain and in the
Americas through offices in Canada, Mexico and Argentina. In 1994, Reliance
National completed its acquisition of a Mexican insurance company and purchased
an Argentinean insurance company. Reliance National distributes its products
primarily through national insurance brokers. Reliance National maintains an
underwriting staff in the United States, the United Kingdom, Canada and Mexico,
an actuarial staff in the United States and makes extensive use of third party
administrators and technical consultants for certain claims and loss control
services. Net premiums written by Reliance National were $889.7 million, $872.2
million and $828.6 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of individual departments, each focusing on a particular type of
business, program or market segment. Each department makes use of underwriters,
actuaries and other professionals to market, structure and price its products.
Reliance National's eight major divisions are:
o Risk Management Services, Reliance National's largest division, targets
Fortune 1,000 companies and multinationals with a broad array of
coverages and services. Its use of risk financing techniques such as
retrospectively rated policies, self-insured retentions, deductibles,
captives, alternative risk funding and fronting arrangements all help
clients to reduce costs and/or manage cash flow more efficiently. It
provides workers' compensation, commercial automobile, general liability
and pollution coverages. In 1994, this division had net premiums written
of $290.8 million.
o Special Operations provides coverages for construction, transportation
and ocean marine risks and offers non-standard personal automobile
insurance for drivers unable to obtain insurance in the standard market.
In 1994, this division had net premiums written of $181.4 million.
o Excess and Surplus Lines provides professional liability insurance to
architects and engineers, lawyers, healthcare providers and other
professions, and markets excess and umbrella coverages. It also provides
employment practices liability insurance and develops and provides
insurance products to certain markets requiring specialized underwriting,
such as the entertainment industry market. In 1994, this division had net
premiums written of $121.6 million.
o International writes predominantly commercial property and casualty
insurance products, including specialized coverages such as excess
casualty, directors and officers liability, and fidelity insurance, in
the European Community, Canada, Mexico and Argentina. It also provides
certain risk management services for foreign subsidiaries of United
States multinational corporations. In 1994, this division had net
premiums written of $86.4 million.
o Financial Products provides directors and officers liability insurance
and, for financial institutions, errors and omissions insurance. In 1994,
this division had net premiums written of $70.7 million.
o Financial Specialty Coverages provides aviation and space satellite risk
coverages on an assumed and direct basis, and also underwrites complex
non-traditional insurance and reinsurance products, including finite risk
transactions. In 1994, this division had net written premiums of $53.9
million.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs. In 1994, this
division had net premiums written of $48.1 million.
o Property provides commercial property coverage focusing on excess and
specialty commercial property. In 1994, this division had net premiums
written of $23.0 million.
Reliance National attempts to limit its exposure to losses through the use
of certain methods such as claims-made policies, retrospectively rated policies,
high deductible policies and reinsurance. Approximately 23% of Reliance
National's net premiums written during 1994 were written on a 'claims-made'
basis which provides
4
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coverage only for claims reported during the policy period or within an
established reporting period, as opposed to 'occurrence' basis policies which
provide coverage for events during the policy period without regard for when the
claim is reported. Claims-made policies mitigate the 'long tail' nature of the
risks insured.
Approximately 13% of Reliance National's net premiums written during 1994
were written on a retrospectively rated or loss sensitive basis, whereby the
insured effectively pays for a large portion or, in many cases, all of its
losses. Approximately 6% of Reliance National's net premiums written during
1994 were written on a high deductible basis, whereby the insured pays for all
of its losses up to the deductible amount. The use of high deductible policies
results in lower premiums and losses for Reliance National as loss payments made
by an insured under a high deductible policy are not considered premium or
losses to an insurer. With retrospectively rated and high deductible policies
Reliance National provides insurance and loss control management services, while
reducing its underwriting risk. Reliance National assumes a credit risk in
connection with retrospectively rated and high deductible policies and,
therefore, accounts with such policies undergo extensive credit analysis by a
centralized credit department. Collateral in the form of bank letters of credit,
trust accounts or cash collateral is generally provided by the insured to cover
a significant portion of Reliance National's credit exposure.
To further limit exposures, approximately 91% of Reliance National's net
premiums written during 1994 were for policies with net retentions equal to or
lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses on each line
of business it writes. Its largest single exposure, net of reinsurance, at
December 31, 1994, was $2.3 million per occurrence.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance distributes its products
through approximately 2,800 independent agents, program agents and brokers.
Reliance Insurance's customers are primarily closely held companies with 25 to
1,000 employees and annual sales of $5 million to $300 million. Reliance
Insurance underwrites a variety of commercial insurance coverages, including
property, general liability, commercial automobile and workers' compensation
(the majority of which is written on a loss sensitive or retrospectively rated
basis). Reliance Insurance is headquartered in Philadelphia and operates in 50
states and the District of Columbia. Net written premiums by Reliance Insurance
were $631.0 million (including $20.7 million of personal lines premiums), $668.2
million (including $45.4 million of personal lines premiums) and $510.8 million
(including $8.8 million of personal lines premiums) for the years ended
December 31, 1994, 1993 and 1992, respectively.
Reliance Insurance is organized into the Commercial Insurance Division,
comprised of the Standard Commercial department and the Large Accounts
department, and the Custom Underwriting Facility, comprised of the Special Risk
department and the Program department. The Commercial Insurance Division
provides its products and services through a decentralized network of regional
and branch offices. This organization allows it to place major responsibility
and accountability for underwriting, sales, claims, and customer service close
to the insured. The Custom Underwriting Facility's Special Risk department has
three regional offices and the Program department has one central office.
The Commercial Insurance Division's Standard Commercial department focuses
on accounts with annual premiums of up to $1 million. This department offers a
broad range of traditional commercial coverages, primarily written on a
guaranteed cost basis. The Standard Commercial department had net written
premiums of $312.8 million in 1994. The Commercial Insurance Division's Large
Accounts department focuses on casualty exposures of accounts with annual
premiums in excess of $1 million, where it is able to offer more flexible
coverages through the use of retrospectively rated and high deductible policies.
The Large Accounts department primarily provides workers' compensation insurance
and approximately 85% of its business was written on a loss sensitive basis.
Accounts with retrospectively rated and high deductible policies undergo
extensive credit analysis by a centralized credit department and collateral is
generally provided by the insured to cover a significant portion of Reliance
Insurance's credit exposure. The Large Accounts department wrote $115.7 million
of net premiums in 1994.
The Custom Underwriting Facility's Special Risk department provides
underwriting of excess and surplus coverages (generally with lower net
retentions than for other commercial lines written by Reliance Insurance) for
risks with unique exposures. The Special Risk department had net written
premiums of $109.5 million in 1994.
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The Custom Underwriting Facility's Program department provides property and
liability insurance programs, targeting homogeneous groups of insureds with
particular insurance needs, such as auto rental companies, day care centers and
municipalities. These programs are administered by independent program agents,
with Reliance Insurance retaining authority for all underwriting and pricing
decisions. Program agents market the programs, gather the initial underwriting
data and, if authorized by Reliance Insurance, issue the policies. All claims
and other services are handled by Reliance Insurance. The Program department had
net written premiums of $73.4 million in 1994.
Reliance Insurance has substantially withdrawn from personal lines, where
it has had unfavorable experience and does not perceive a potential for
long-term profitability. The Reliance Property and Casualty Companies derived
1.2% of their net premiums written from personal lines in 1994, compared with
2.6% in 1993.
Reliance Reinsurance. Reliance Reinsurance provides property reinsurance
on a treaty basis and casualty reinsurance on a treaty and facultative basis.
All treaty business is marketed through reinsurance brokers who negotiate
contracts of reinsurance on behalf of the primary insurer or ceding reinsurer,
while facultative business is produced both directly and through reinsurance
brokers. While Reliance Reinsurance's treaty clients include all types and sizes
of insurers, Reliance Reinsurance typically targets treaty reinsurance for small
to medium sized regional and specialty insurance companies, as well as captives,
risk retention groups and other alternative markets, providing both pro rata and
excess of loss coverage. Reliance Reinsurance believes that this market is
subject to less competition and provides Reliance Reinsurance an opportunity to
develop and market innovative programs where pricing is not the key competitive
factor. Reliance Reinsurance typically avoids participating in large capacity
reinsurance treaties where price is the predominant competitive factor. It
generally writes reinsurance in the 'lower layers,' the first $1 million of
primary coverage, where losses are more predictable and quantifiable. The
assumed reinsurance business of the Reliance Property and Casualty Companies is
conducted nationwide and is headquartered in Philadelphia. Net written premiums
by Reliance Reinsurance were $125.6 million, $123.6 million and $107.9 million
for the years ended December 31, 1994, 1993 and 1992, respectively.
Reliance Surety. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes financial
institution and commercial fidelity bonds. Reliance Surety performs extensive
credit analysis on its clients, and actively manages the claims function to
minimize losses and maximize recoveries. Reliance Surety has enjoyed long
relationships with the major contractors it has insured. Reliance Surety has
established an operation targeting smaller contractors, an area traditionally
less fully serviced by national surety companies and one providing potential
growth for Reliance Surety. Reliance Surety is headquartered in Philadelphia and
conducts business nationwide through 43 branch offices and approximately 3,200
independent agents and brokers. Net written premiums by Reliance Surety were
$118.0 million, $106.7 million and $94.3 million for the years 1994, 1993 and
1992, respectively.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Insurance
Company) to discharge the payment or performance obligations of the principal
pursuant to the underlying contract between the obligee and the principal.
Fidelity bonds insure against losses arising from employee dishonesty. Financial
institution fidelity bonds insure against losses arising from employee
dishonesty and other specifically named theft and fraud perils.
Title Insurance. Through Commonwealth/Transamerica Title, the Company
writes title insurance for residential and commercial real estate nationwide and
provides escrow and settlement services in connection with real estate closings.
The National Title Services division of Commonwealth/Transamerica Title provides
title services for large and multi-state commercial transactions. Through the
Commonwealth OneStop(Trademark) program, Commonwealth/Transamerica Title
provides national lenders with a full range of residential closing services,
including title insurance through its National Residential Title Services
division, appraisal management through its CLT Appraisal Services, Inc.
subsidiary, and other real estate related services. Commonwealth/Transamerica
Title is the third largest title insurance operation in the United States, based
on 1993 total premiums and fees. Commonwealth/Transamerica Title had premiums
and fees (excluding Commonwealth Mortgage Assurance
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Corporation, its mortgage insurance subsidiary which was sold in the fourth
quarter of 1992) of $856.8 million, $893.4 million and $770.5 million for the
years 1994, 1993 and 1992, respectively.
Commonwealth/Transamerica Title is organized into six regions with more
than 325 offices covering all 50 states, as well as Puerto Rico and the Virgin
Islands. In 1994, Texas, California, Florida, Pennsylvania, New York, Washington
and Michigan accounted for approximately 11%, 10%, 10%, 8%, 7%, 6% and 6%,
respectively, of revenues for premiums and services related to title insurance.
No other state accounted for more than 5% of such revenues.
Commonwealth/Transamerica Title is committed to increasing its market share
through a carefully developed plan of expanding its direct and agency
operations, including selective acquisitions.
A title insurance policy protects the insured party and certain successors
in interest against losses resulting from title defects, liens and encumbrances
existing as of the date of the policy and not specifically excepted from the
policy's provisions. Generally, a title policy is obtained by the buyer, the
mortgage lender or both at the time real property is transferred or refinanced.
The policy is written for an indefinite term for a single premium which is due
in full upon issuance of the policy. The face amount of the policy is usually
either the purchase price of the property or the amount of the loan secured by
the property. Title policies issued to lenders insure the priority position of
the lender's lien. Many lenders require title insurance as a condition to making
loans secured by real estate. Title insurers, unlike other types of insurers,
seek to eliminate future losses through the title examination process and the
closing process, and a substantial portion of the expenses of a title insurer
relate to those functions.
Consulting and Technical Services. RCG International, Inc. ('RCG'), a
subsidiary of the Reliance Insurance Group, and its subsidiaries provide
consulting and technical services to industry, government and nonprofit
organizations, principally in the United States and Europe, and also in Canada,
Asia, South America, Africa and Australia. The services provided by RCG include
consulting in two principal areas: information technology, which provides
computer-related professional services to large corporate clients, and
energy/environmental services. RCG and its subsidiaries had revenues of $141.6
million, $116.8 million and $109.1 million for 1994, 1993 and 1992,
respectively.
SALE OF NON-CORE OPERATIONS
The Company has realigned its operations to emphasize commercial property
and casualty insurance, particularly specialized insurance products and complex
risks of larger accounts, and title insurance. In July 1993, the Company
completed the sale of its life insurance subsidiary, United Pacific Life
Insurance Company ('UPL'). In the fourth quarter of 1992, the Company sold
substantially all of the operating assets and insurance brokerage, employee
benefits consulting and related services businesses of its insurance brokerage
subsidiary, Frank B. Hall & Co. Inc. ('Hall'). Also in the fourth quarter of
1992, the Company sold its mortgage insurance subsidiary, Commonwealth Mortgage
Assurance Corporation ('CMAC'), through a public offering of 100% of the common
stock of CMAC Investment Corporation ('CMAC Investment'). For a further
description of the above referenced transactions, see Notes 12 and 15 to the
Consolidated Financial Statements.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase
reinsurance to limit the Company's exposure to losses. Although the ceding of
insurance does not discharge an insurer from its primary legal liability to a
policyholder, the reinsuring company assumes a related liability and,
accordingly, it is the practice of the industry, as permitted by statutory
regulations, to treat properly reinsured exposures as if they were not exposures
for which the primary insurer is liable. The Reliance Insurance Group enters
into reinsurance arrangements that are both facultative (individual risks) and
treaty (blocks of risk). Limits and retentions are based on a number of factors,
including the previous loss history of the operating unit, policy limits and
exposure data, industry studies as to potential severity, and market terms,
conditions and capacity, and may change over time. Reliance National and
Reliance Insurance limit their exposure to individual risks by purchasing excess
of loss and quota share reinsurance, with treaty structures and net retentions
varying with the specific requirements of the line of business or program being
reinsured. In many cases, Reliance National and Reliance Insurance purchase
additional facultative reinsurance to further reduce their retentions below the
treaty levels.
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During 1994, the highest net retention per occurrence for casualty risk was
$2.2 million for Reliance National and $3.0 million for Reliance Insurance. In
addition, both Reliance National and Reliance Insurance purchase 'casualty
clash' coverage to provide protection in the event of losses incurred by
multiple coverages on one occurrence.
During 1994, the highest net retention per occurrence for property risk was
$2.3 million for Reliance National and $3.2 million for Reliance Insurance. In
addition, during 1994, Reliance National and Reliance Insurance together had
reinsurance for 95% of net retained property catastrophe losses in excess of $15
million and up to $107 million. Thus, for all net retained losses attributable
to a single catastrophe of $107 million, Reliance National and Reliance
Insurance together retained a maximum exposure of $19.6 million. Any net
retained loss from a single catastrophe beyond $107 million is not reinsured and
is retained by Reliance National and Reliance Insurance together. Renewal of
catastrophe coverage during the term of the treaty is provided by a provision
for one automatic reinstatement of the original coverage at a contractually
determined premium. The Company believes that the limit of $107 million of net
retained losses per occurrence is sufficient to cover its probable maximum loss
in the event of a catastrophe.
Catastrophe losses, including losses incurred by Reliance Reinsurance on
insurance assumed, were $50.1 million in 1994 ($134.0 million before insurance
ceded), which included $44.9 million ($127.0 million before insurance ceded)
arising from the January 1994 California earthquake, compared to $39.3 million
in 1993 ($88.5 million before insurance ceded). Catastrophe losses, including
losses incurred by Reliance Reinsurance on insurance assumed, were $61.1 million
in 1992 ($119.2 million before insurance ceded), which included $45.6 million
($94.1 million before insurance ceded) arising from Hurricane Andrew.
A catastrophic event can cause losses in lines of insurance other than
property. Both Reliance National and Reliance Insurance purchase workers'
compensation reinsurance coverage up to $200 million to provide protection
against losses under workers' compensation policies which might be caused by
catastrophes. Such workers' compensation reinsurance applies after retentions by
Reliance National of up to $500,000 and Reliance Insurance of up to $1 million.
For Reliance Insurance, any such losses over $200 million would be covered by
the property catastrophe treaty to the extent of available capacity. For
Reliance National, any such losses over $200 million and up to $255 million
would be covered by Reliance National's casualty clash coverage.
Reliance National and Reliance Insurance have also purchased reinsurance to
cover aggregate retained catastrophe losses in the event of multiple
catastrophes in any one year. This reinsurance agreement provides coverage for
up to 93% of aggregate catastrophe losses between $12.5 million and $31.0
million, after applying a deductible of $3.8 million per catastrophe.
Reliance Surety retains 100% of surety bond limits up to $2 million. For
surety bonds in excess of $2 million, up to $40 million, Reliance Surety obtains
50% quota share reinsurance. For surety bonds between $40 million and $50
million, Reliance Surety obtains 60% quota share reinsurance. In addition,
Reliance Surety has excess of loss protection, with a net retention of up to
$4.3 million, for losses up to $30 million on any one principal insured. For
fidelity business, Reliance Surety retains 100% of each loss up to $1.5 million.
Reliance Surety has obtained reinsurance above that retention up to a maximum of
$8.5 million on each loss.
Reliance Reinsurance writes treaty property and casualty reinsurance and
facultative casualty reinsurance with limits of $1.5 million per program.
Facultative property reinsurance, which was discontinued in February 1994, was
written with limits of $10 million per risk, of which the Company retained
$500,000 after the purchase of reinsurance. Reliance Reinsurance purchases
catastrophe protection for its property treaty and facultative insurance assumed
of $5.0 million in excess of a $2.5 million per occurrence retention, with a
contractual provision for a reinstatement. In 1994, Reliance Reinsurance also
wrote a specific catastrophe book of business with an aggregate limit of $17.7
million for any one event, not subject to the above protection. In 1994, losses
and expenses of $12.5 million incurred under this specific catastrophe program
were offset by premiums of $11.0 million. As of December 31, 1994, Reliance
Reinsurance no longer writes a specific catastrophe book of business.
Commonwealth/Transamerica Title generally retains no more than $60 million
on any one risk, although it often retains significantly less than this amount,
with reinsurance placed with other title companies. Commonwealth/Transamerica
Title also purchases reinsurance from Lloyd's of London which provides coverage
8
<PAGE>
for 80% of losses between $20 million and $60 million, on any one risk. The
largest net loss paid by Commonwealth or, since its acquisition, Transamerica
Title on any one risk was approximately $5 million.
Premiums ceded by the Reliance Insurance Group to reinsurers were $1.2
billion and $1.1 billion in 1994 and 1993, respectively. The Reliance Insurance
Group is subject to credit risk with respect to its reinsurers, as the ceding of
risk to reinsurers does not relieve the Reliance Insurance Group of its
liability to insureds. At December 31, 1994, the Reliance Insurance Group had
reinsurance recoverables of $2.9 billion, representing estimated amounts
recoverable from reinsurers pertaining to paid claims, unpaid claims, claims
incurred but not reported and unearned premiums. In order to minimize losses
from uncollectible reinsurance, the Reliance Insurance Group places its
reinsurance with a number of different reinsurers, and utilizes a security
committee or a credit department to approve in advance the reinsurers which meet
its standards of financial strength and are acceptable for use by Reliance
Insurance Group. The Reliance Insurance Group holds substantial amounts of
collateral, consisting of letters of credit, trust accounts and cash collateral,
to secure recoverables from unauthorized reinsurers. The Company had $8.2
million reserved for potentially unrecoverable reinsurance at December 31, 1994.
The Company is not aware of any impairment of the creditworthiness of any of the
Reliance Insurance Group's significant reinsurers. While the Company is aware of
financial difficulties experienced by certain Lloyd's of London syndicates, the
Company has not experienced deterioration of payments from the Lloyd's of London
syndicates from which it has reinsurance. The Company has no reason to believe
that the Lloyd's of London syndicates from which it has reinsurance will be
unable to satisfy claims that may arise with respect to ceded losses.
In 1994, the Reliance Property and Casualty Companies did not cede more
than 5.1% of direct premiums to any one reinsurer and no one reinsurer accounted
for more than 10.9% of total ceded premiums. The Reliance Insurance Group's ten
largest reinsurers, based on 1994 ceded premiums, are as follows:
<TABLE>
<CAPTION>
1994
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
<S> <C> <C>
American Re-Insurance Company............................................. $ 132.8 A+
North American Reinsurance Corp........................................... 98.8 A
Lloyd's of London......................................................... 93.5 (1)
Hertz International Reinsurance Ltd....................................... 67.3 (2)
Commercial Risk Re-Insurance Co........................................... 45.8 (3)
GIO Insurance Ltd......................................................... 35.9 (4)
TRN Insurance Company..................................................... 34.7 (2)
Employers Reinsurance Corp................................................ 34.5 A++
TIG Reinsurance Company................................................... 29.6 A
Transatlantic Reinsurance Company......................................... 26.7 A+
</TABLE>
------------------
(1) Individual Lloyd's of London syndicates are not rated by Best.
(2) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
(3) Assigned a Best's Rating of NA-3 (Insufficient Operating Experience) as the
reinsurer has not accumulated five years of representative operating
experience.
(4) Reinsurer is not rated by Best. The S&P Rating for such reinsurer is A.
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance
agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively
rated reinsurance agreements which may not meet relevant accounting standards
for risk transfer and under which the reinsured must pay additional premiums in
subsequent years if losses in the current year exceed levels specified in the
reinsurance agreement.
PROPERTY AND CASUALTY LOSS RESERVES
As of March 15, 1995, the Reliance Insurance Group maintains a staff of 101
actuaries, of whom 17 are fellows of the Casualty Actuarial Society and one is a
fellow of the Society of Actuaries. This staff regularly performs comprehensive
analyses of reserves and reviews the pricing and reserving methodologies of the
Reliance Insurance Group. Although the Company believes, in light of present
facts and current legal interpretations, that the Reliance Insurance Group's
overall property and casualty reserve levels are adequate
9
<PAGE>
to meet its obligations under existing policies, due to the inherent uncertainty
and complexity of the reserving process, the ultimate liability may be more or
less than such reserves.
The following tables present information relating to the liability for
unpaid claims and related expenses ('loss reserves') for the Reliance Property
and Casualty Companies. The table below provides a reconciliation of beginning
and ending liability balances for the years ended December 31, 1994, 1993 and
1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid claims and related expenses (loss reserves),
beginning of year..................................................... $5,048,442 $4,571,792 $3,685,049
Less reinsurance recoverables......................................... 2,116,914 1,868,800 1,309,814
---------- ---------- ----------
Net liability for unpaid claims and related expenses (loss reserves),
beginning of year..................................................... 2,931,528 2,702,992 2,375,235
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year...................... 1,274,649 1,195,425 1,258,111
Increase in provision for insured events of prior years............... 22,444 40,169 31,487
---------- ---------- ----------
Total provision.................................................... 1,297,093 1,235,594 1,289,598
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year.................... 321,538 229,778 271,878
Attributable to insured events of prior years......................... 780,961 776,881 689,181
---------- ---------- ----------
Total payments..................................................... 1,102,499 1,006,659 961,059
---------- ---------- ----------
Foreign currency translation............................................ 1,659 (399) (782)
---------- ---------- ----------
Net liability for unpaid claims and related expenses (loss reserves),
end of year........................................................... 3,127,781 2,931,528 2,702,992
Plus reinsurance recoverables......................................... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Liability for unpaid claims and related expenses (loss reserves), end of
year*................................................................. $5,581,483 $5,048,442 $4,571,792
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
------------------
* Loss reserves exclude the loss reserves of title operations of $228.1 million,
$204.7 million and $173.3 million at December 31, 1994, 1993 and 1992,
respectively.
Policy claims and settlement expenses includes a provision for insured
events of prior years of $22.4 million, $40.2 million and $31.5 million for the
years 1994, 1993 and 1992, respectively. The 1994 provision includes $17.0
million of adverse development related to prior year asbestos-related and
environmental pollution claims. Development in asbestos-related and
environmental pollution claims primarily affects general liability and multiple
peril lines of business. The 1994 provision also includes $14.7 million of
adverse development from other general liability lines. This development was
partially offset by $13.3 million of favorable development in workers'
compensation. The 1993 provision includes $21.1 million of adverse development
from workers' compensation reinsurance pools and $35.2 million of adverse
development related to prior-year asbestos-related and environmental pollution
claims. This development was partially offset by favorable development in other
lines of business, including other general liability lines. The 1992 provision
includes $55.6 million of adverse development from workers' compensation and
automobile reinsurance pools. This development was partially offset by favorable
development of $11.9 million from two general liability claims and favorable
development of $10.7 million related to unallocated loss adjustment expenses.
10
<PAGE>
The table below summarizes the development of the estimated liability for
loss reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at the particular balance sheet date, including losses
that had been incurred but not reported to the Reliance Property and Casualty
Companies. The upper portion of the table indicates the loss reserves as they
are reestimated in subsequent periods as a percentage of the originally recorded
reserves. These estimates change as losses are paid and more accurate
information becomes available about remaining loss reserves. A redundancy exists
when the original loss reserve estimate is greater, and a deficiency exists when
the original loss reserve estimate is less, than the reestimated loss reserve at
December 31, 1994. A redundancy or deficiency indicates the cumulative
percentage change, as of December 31, 1994, of originally recorded loss
reserves. The lower portion of the table indicates the cumulative amounts paid
as of successive periods as a percentage of the original loss reserve liability.
In calculating the percentage of cumulative paid losses to the loss reserve
liability in each year, unpaid losses of General Casualty Company of Wisconsin,
a former wholly-owned subsidiary, and its subsidiaries ('General Casualty') at
April 30, 1990 (the date of sale of General Casualty), relating to 1984 to 1989,
were deducted from the original liability in each year. Each amount in the
following table includes the effects of all changes in amounts for prior
periods. The table does not present accident or policy year development data.
For the years 1984 through 1993, the Company has experienced deficiencies in its
estimated liability for loss reserves. Included in these deficiencies were
provisions of $156.0 million in 1991 and $100.0 million in 1986 specifically
made to strengthen prior-years' loss reserves. The Company's loss reserves
during this period have been adversely affected by a number of factors beyond
the Company's control as follows: (i) significant increases in claim settlements
reflecting, among other things, inflation in medical costs; (ii) increases in
the costs of settling claims, particularly legal expenses; (iii) more frequent
resort to litigation in connection with claims; and (iv) a widening
interpretation of what constitutes a covered claim.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid claims and
related expenses
(loss
reserves)(1)........ $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421 $1,962,822 $1,644,057 $1,494,227 $1,425,942
Net liability
reestimated as of:
One year later...... -- 100.8% 101.5% 101.3% 114.4% 104.8% 104.8% 107.8% 106.6%
Two years later..... -- -- 103.1% 104.4% 115.2% 117.0% 113.5% 112.0% 115.6%
Three years later... -- -- -- 105.7% 119.6% 118.2% 121.8% 118.5% 121.6%
Four years later.... -- -- -- -- 120.7% 120.9% 123.2% 125.0% 127.2%
Five years later.... -- -- -- -- -- 122.2% 127.8% 126.7% 132.3%
Six years later..... -- -- -- -- -- -- 128.7% 131.8% 135.1%
Seven years later... -- -- -- -- -- -- -- 133.1% 140.0%
Eight years later... -- -- -- -- -- -- -- -- 141.4%
Nine years later.... -- -- -- -- -- -- -- -- --
Ten years later..... -- -- -- -- -- -- -- -- --
Redundancy
(Deficiency)........ -- (0.8%) (3.1%) (5.7%) (20.7%) (22.2%) (28.7%) (33.1%) (41.4%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as
of:
One year later...... -- 26.6% 28.7% 29.0% 36.6% 40.7% 41.6% 38.6% 42.0%
Two years later..... -- -- 48.0% 48.6% 57.9% 65.4% 71.6% 65.8% 68.4%
Three years later... -- -- -- 62.1% 72.8% 82.2% 86.4% 88.2% 88.1%
Four years later.... -- -- -- -- 83.0% 91.3% 97.2% 99.5% 103.9%
Five years later.... -- -- -- -- -- 97.8% 103.0% 106.2% 112.1%
Six years later..... -- -- -- -- -- -- 107.3% 110.7% 117.1%
Seven years later... -- -- -- -- -- -- -- 113.9% 120.8%
Eight years later... -- -- -- -- -- -- -- -- 123.7%
Nine years later.... -- -- -- -- -- -- -- -- --
Ten years later..... -- -- -- -- -- -- -- -- --
<CAPTION>
1985 1984
---------- ----------
<S> <C> <C>
Net liability for
unpaid claims and
related expenses
(loss
reserves)(1)........ $1,154,755 $1,162,200
Net liability
reestimated as of:
One year later...... 123.9% 109.3%
Two years later..... 137.3% 126.3%
Three years later... 146.0% 135.7%
Four years later.... 154.6% 142.3%
Five years later.... 167.7% 149.2%
Six years later..... 174.3% 152.4%
Seven years later... 176.8% 157.8%
Eight years later... 182.2% 159.6%
Nine years later.... 183.1% 165.1%
Ten years later..... -- 165.7%
---------- ----------
Redundancy
(Deficiency)........ (83.1%) (65.7%)
Paid (cumulative) as
of:
One year later...... 52.0% 47.2%
Two years later..... 85.5% 76.2%
Three years later... 106.9% 98.5%
Four years later.... 123.7% 111.0%
Five years later.... 138.2% 121.2%
Six years later..... 145.9% 130.1%
Seven years later... 150.3% 135.8%
Eight years later... 153.9% 138.6%
Nine years later.... 156.4% 142.2%
Ten years later..... -- 144.2%
</TABLE>
------------------
(1) The gross liability for unpaid claims and related expenses was $5.6 billion
at December 31, 1994. The gross liability for unpaid claims and related
expenses for years 1993 and prior was redundant by $144.4 million at
December 31, 1994.
11
<PAGE>
The difference between the property and casualty liability for loss
reserves at December 31, 1994 and 1993 reported in the Company's consolidated
financial statements (net of reinsurance recoverables) and the liability which
would be reported in accordance with statutory accounting practices is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net Liability reported under statutory accounting practices........................... $3,033,016 $2,846,073
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (9,858) (9,360)
Additional discount of workers' compensation reserves................................. 104,145 95,996
Foreign currency translation.......................................................... 478 (1,181)
---------- ----------
Net Liability reported................................................................ $3,127,781 $2,931,528
---------- ----------
---------- ----------
</TABLE>
The difference between the property and casualty liability for loss
reserves at December 31, 1994 and 1993 reported in the Company's consolidated
financial statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liability reported under statutory accounting practices............................... $5,395,846 $4,878,016
Adjustment for GAAP basis accrual of estimated salvage and subrogation recoveries..... (11,984) (11,484)
Additional discount of workers' compensation reserves................................. 198,808 186,556
Foreign currency translation.......................................................... (1,187) (4,646)
---------- ----------
Liability reported.................................................................... $5,581,483 $5,048,442
---------- ----------
---------- ----------
</TABLE>
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Property and Casualty
Companies apply a variety of generally accepted actuarial techniques to
determine the estimates of ultimate liability. The techniques recognize, among
other factors, the Reliance Insurance Group's and the industry's experience with
similar business, historical trends in reserving patterns and loss payments,
pending level of unpaid claims, the cost of claim settlements, the Reliance
Insurance Group's product mix, the economic environment in which property and
casualty companies operate and the trend toward increasing claims and awards.
Estimates are continually reviewed and adjustments of the probable ultimate
liability based on subsequent developments and new data are included in
operating results for the periods in which they are made. In general, reserves
are initially established based upon the actuarial and underwriting data
utilized to set pricing levels, and are reviewed as additional information,
including claims experience, becomes available. The Reliance Property and
Casualty Companies regularly analyze their reserves and review their pricing and
reserving methodologies, using Reliance Insurance Group actuaries, so that
future adjustments to prior year reserves can be minimized. From time to time,
the Reliance Property and Casualty Companies consult with independent actuarial
firms concerning reserving practices and levels. The Reliance Property and
Casualty Companies are required by state insurance regulators to file, along
with their statutory reports, a statement of actuarial reserve opinion setting
forth an actuary's assessment of their reserve status and, in 1994, the Reliance
Property and Casualty Companies used an independent actuarial firm to meet such
requirements. However, given the complexity of this process, reserves require
continual updates. The process of estimating claims is a complex task and the
ultimate liability may be more or less than such estimates indicate.
12
<PAGE>
Since 1989, the Reliance Property and Casualty Companies have increased their
premium writings in long tail lines of business. Estimation of loss reserves for
these lines of business is more difficult than for short tail lines because
claims may not become apparent for a number of years, and a relatively higher
proportion of ultimate losses are considered incurred but not reported. As a
result, variations in loss development are more likely in these lines of
business. The Reliance Property and Casualty Companies attempt to reduce these
variations in certain of its long tail lines, primarily directors and officers
liability, professional liability and general liability, by writing policies on
a claims-made basis, which mitigates the long tail nature of the risks. The
Reliance Property and Casualty Companies also seek to limit the loss from a
single event through the use of reinsurance.
In calculating the liability for loss reserves, the Reliance Property and
Casualty Companies discount workers' compensation pension claims which are
expected to have regular, periodic payment patterns. These claims are discounted
for mortality and for interest using statutory annual rates ranging from 3.5% to
6%. In addition, the reserves for claims assumed through the participation of
the Reliance Property and Casualty Companies in workers' compensation
reinsurance pools are discounted. The discounting of all claims (net of
reinsurance recoverables) resulted in a decrease in the liability for loss
reserves of $245.7 million, $284.7 million and $289.5 million at December 31,
1994, 1993 and 1992, respectively. The discount in 1994 was reduced by $27.3
million plus discount amortization of $11.7 million, resulting in a reduction in
pre-tax income of $39.0 million. The discount in 1993 was increased by $7.9
million, which was more than offset by discount amortization resulting in a
decrease in pre-tax income of $4.8 million. The discount in 1992 was increased
by $54.1 million which was partially offset by discount amortization, resulting
in an increase in pre-tax income of $45.7 million.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1994 are $182.2
million ($130.1 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims. The following
table presents information relating to the liability for unpaid claims and
related expenses pertaining to asbestos-related and environmental pollution
claims (such information is for the years 1994 and 1993 only as certain 1992
information is not available):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net liability for unpaid claims and related expenses, beginning of year................... $122,034 $ 94,253
Provision for policy claims and related expenses.......................................... 28,279 52,630
Payments for policy claims and related expenses........................................... (20,170) (24,849)
-------- --------
Net liability for unpaid claims and related expenses, end of year......................... $130,143 $122,034
-------- --------
-------- --------
</TABLE>
Included in the December 31, 1994 net liability for unpaid claims and
related expenses for asbestos-related and environmental pollution claims are
$36.5 million of loss costs for claims incurred but not reported, $49.4 million
of loss costs for reported claims and $44.2 million of related expenses. The
Company continues to receive claims asserting injuries from hazardous materials
and alleged damages to cover various clean-up costs. Asbestos-related and
environmental pollution claims primarily result from the Company's general
liability and multiple peril lines of business. Loss and loss expense reserves
for asbestos-related and environmental pollution claims are established using
standard actuarial techniques as well as management's judgment. Coverage and
claim settlement issues, related to policies written in prior years, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business.
13
<PAGE>
The Company's net paid losses and related expenses for asbestos-related and
environmental pollution claims have not been material in relation to the
Company's total net paid losses and related expenses. Net paid losses and
related expenses relating to these claims were $20.2 million (including $7.9
million of related expenses), $24.8 million (including $8.1 million of related
expenses) and $16.1 million (including $6.2 million of related expenses) for the
years ended December 31, 1994, 1993 and 1992, respectively. Related expenses
consist primarily of legal costs. Total payments for all property and casualty
insurance policy claims and related expenses were $1.1 billion, $1.0 billion and
$961.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The following table presents information related to the number of
insureds with asbestos-related and environmental pollution claims outstanding:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993
---- ----
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year..................................... 661 807
Additional insureds with claims during the year................................................... 307 369
Insureds with closed or settled claims during the year............................................ (302) (515)
---- ----
Number of insureds with outstanding claims, end of year........................................... 666 661
---- ----
---- ----
</TABLE>
The average net paid loss per insured for asbestos-related and
environmental pollution claims was $34,200 and $28,200 for the years 1994 and
1993, respectively. As of December 31, 1994, the Company was involved in
approximately 45 coverage disputes (where a motion for declaratory judgment had
been filed, the resolution of which will require a judicial interpretation of an
insurance policy) related to asbestos or environmental pollution claims. The
Company is not aware of any pending litigation or pending claim which will
result in significant contingent liabilities in these areas. The Company
believes it has made reasonable provisions for these claims, although the
ultimate liability may be more or less than such reserves. The Company believes
that future losses associated with these claims will not have a material adverse
effect on its financial position, although there is no assurance that such
losses will not materially affect the Company's results of operations for any
period.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Property and
Casualty Companies are adequate to meet their obligations under existing
policies, due to the inherent uncertainty and complexity of the reserving
process, the ultimate liability may be more or less than such reserves.
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking the best available return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to 'Financial Review--Investment Portfolio' on
page 30 of the Company's 1994 Annual Report, which section is incorporated
herein by reference, and Note 2 to the Consolidated Financial Statements.
14
<PAGE>
At December 31, 1994, the Company's investment portfolio was $3.8 billion
(at cost) with 87.4% in fixed maturities and short-term securities (including
redeemable preferred stock) and 12.6% in equity securities, approximately half
of which were convertible preferred stock. The following table details the
distribution of the Company's investments at December 31, 1994:
<TABLE>
<CAPTION>
AMORTIZED MARKET CARRYING
COST VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States Government and government agencies
and authorities............................................. $ 528,297 $ 495,007 $ 495,007
Foreign government............................................ 66,677 63,512 63,512
Foreign-other................................................. 103,263 99,032 99,032
Public utilities.............................................. 96,631 88,602 88,602
Convertibles and bonds with warrants.......................... 88,230 113,398 113,398
All other corporate bonds and notes........................... 713,460 638,962 638,962
Redeemable preferred stock......................................... 349,361 340,799 340,799
---------- ---------- ----------
1,945,919 1,839,312 1,839,312
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions............. 11,835 10,980 11,835
Foreign government............................................ 123,306 115,647 123,306
Foreign-other................................................. 20,630 20,501 20,630
Public utilities.............................................. 536,746 477,942 536,746
All other corporate bonds and notes........................... 341,916 304,952 341,916
Redeemable preferred stock......................................... 150,753 142,960 150,753
---------- ---------- ----------
1,185,186 1,072,982 1,185,186
---------- ---------- ----------
Total fixed maturities................................... 3,131,105 2,912,294 3,024,498
---------- ---------- ----------
Equity securities(1):
Common stocks:
Public utilities.............................................. 56,403 55,439 55,439
Industrial and other.......................................... 117,076 221,231 221,231
Nonredeemable preferred stock...................................... 309,050 287,966 287,966
---------- ---------- ----------
482,529 564,636 564,636
---------- ---------- ----------
Short-term investments.................................................. 229,906 229,906 229,906
---------- ---------- ----------
Total investment portfolio............................... $3,843,540 $3,706,836 $3,819,040
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
COST AND
CARRYING
VALUE
----------
(IN THOUSANDS)
<S> <C>
Mortgage Loans(2)....................................................... $ 15,680
Investments in real estate.............................................. 283,955
</TABLE>
------------------
(1) Does not include investment in Zenith National Insurance Corp. which is
accounted for by the equity method and which, as of December 31, 1994, had a
carrying value of $147.5 million and a market value of $149.6 million. See
'--Investee Company.'
(2) In the Company's Consolidated Financial Statements, mortgage loans are
included in other accounts and notes receivable.
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
15
<PAGE>
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The Reliance Insurance Group primarily invests
in investment grade securities (those rated 'BBB' or better by S&P), and, to a
lesser extent, non-investment grade and non-rated securities.
At December 31, 1994, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
<TABLE>
<CAPTION>
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
AAA to A.................................... $1,565,849 $1,494,459 51%
BBB......................................... 963,319 923,261 32
---------- ---------- ---
Total investment grade................. 2,529,168 2,417,720 83
BB to B..................................... 326,657 326,034 11
CCC to C.................................... 23,526 23,526 1
Non-rated................................... 145,147 145,014 5
---------- ---------- ---
Total.................................. $3,024,498 $2,912,294 100%
---------- ---------- ---
---------- ---------- ---
</TABLE>
Substantially all of the non-investment grade fixed maturities are
classified as 'available for sale' and, accordingly, are carried at quoted
market value. All publicly traded investment grade securities are priced using
the Merrill Lynch Matrix Pricing model, which model is one of the standard
methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after in-depth analysis of individual
companies' fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of large capitalization companies
with strong growth prospects and equities that appear to be undervalued relative
to the issuer's business fundamentals, such as earnings, cash flows, balance
sheet and future prospects. Subsequent to purchase, the business fundamentals of
each equity investment are carefully monitored.
As of March 15, 1995, the Reliance Insurance Group owned 3,568,634 shares
of common stock of Symbol Technologies, Inc. ('Symbol'), representing 13.9% of
the then outstanding common stock of Symbol. Symbol is the nation's largest
manufacturer of bar code-based data capture systems. As of March 15, 1995, the
market value of the Reliance Insurance Group's investment in Symbol was
$105,274,703 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $26,890,000.
At December 31, 1994, the Company's real estate holdings had a carrying
value of $284.0 million, which includes 11 shopping centers with an aggregate
carrying value of $138.0 million, office buildings and other commercial
properties with an aggregate carrying value of $90.7 million, and undeveloped
land with a carrying value of $55.3 million.
16
<PAGE>
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio for each of the years ended December 31,
1994, 1993, and 1992:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Fixed Maturities:
Average investments(1)............................................ $3,217,443 $3,050,018 $2,667,220
Net investment income............................................. 221,782 210,916 196,021
Realized gains.................................................... 16,556 59,252 30,508
Increase (decrease) in unrealized gains........................... (342,411) 51,787 55,937
Average annual yield:
Net investment income........................................ 6.90% 6.92% 7.35%
Realized gains............................................... 0.51 1.94 1.14
Increase (decrease) in unrealized gains...................... (10.64) 1.70 2.10
---------- ---------- ----------
Return on fixed maturities........................................ (3.23)% 10.56% 10.59%
---------- ---------- ----------
Equity Securities(2):
Average investments(1)............................................ $ 540,139 $ 622,435 $ 510,986
Net investment income............................................. 26,251 28,259 20,995
Realized gains.................................................... 1,611 98,944 19,628
Increase (decrease) in unrealized gains...................... (6,849) (9,670) 31,619
Average annual yield:
Net investment income........................................ 4.86% 4.54% 4.11%
Realized gains............................................... 0.30 15.89 3.84
Increase (decrease) in unrealized gains...................... (1.27) (1.55) 6.19
---------- ---------- ----------
Return on equity securities....................................... 3.89% 18.88% 14.14%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed maturities and equity
securities(3)................................................... (2.21)% 11.97% 11.16%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1994, 1993 and 1992.
(2) Does not include investment in Zenith National Insurance Corp. See
'--Investee Company.'
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1994 fixed maturity portfolio market value
would be approximately 0.78%.
The carrying value and market value at December 31, 1994 of fixed
maturities for which interest is payable on a deferred basis was $114.0 million.
INVESTEE COMPANY
As of March 15, 1995, the Reliance Insurance Group owned 6,574,445 shares
of common stock of Zenith National Insurance Corp. ('Zenith'), representing
34.7% of the outstanding common stock of Zenith, a California-based insurance
company with significant workers' compensation and standard commercial and
personal lines business. As of March 15, 1995 the market value of the Reliance
Insurance Group's investment in Zenith was $129,023,483 (based upon the closing
price on such date as reported by the NYSE), with a carrying value of
$147,513,000.
The board of directors of Zenith includes certain executive officers of the
Company. The Company's investment in Zenith is accounted for by the equity
method. See Note 3 to the Consolidated Financial Statements.
17
<PAGE>
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates (particularly for
property and casualty companies), the forms of policies offered to customers,
financial statements, periodic reporting, permissible investments and adherence
to financial standards relating to surplus, dividends and other criteria of
solvency intended to assure the satisfaction of obligations to policyholders.
Other legislation obliges the Reliance Property and Casualty Companies to offer
policies or assume risks in various markets which they would not seek if they
were acting solely in their own interest. While such regulation and legislation
is sometimes burdensome, inasmuch as all insurance companies similarly situated
are subject to such controls, the Company does not believe that the competitive
position of the Reliance Insurance Group is adversely affected.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
'control' is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that 'control' in fact does or does not exist where a person owns or
controls either a lesser or a greater amount of securities. The holding company
acts also impose standards on certain transactions with related companies, which
generally include, among other requirements, that all transactions be fair and
reasonable and that certain types of transactions receive prior regulatory
approval either in all instances or when certain regulatory thresholds have been
exceeded.
Other states, in addition to an insurance company's state of domicile, may
regulate affiliated transactions and the acquisition of control of licensed
insurers. The State of California, for example, presently treats certain
insurance subsidiaries of the Company which are not domiciled in California as
though they were domestic insurers for insurance holding company purposes and
such subsidiaries are required to comply with the holding company provisions of
the California Insurance Code, certain of which provisions are more restrictive
than the comparable laws of the states of domicile of such subsidiaries.
The Insurance Law of Pennsylvania, where Reliance Insurance Company is
domiciled, limits the maximum amount of dividends which may be paid without
approval by the Pennsylvania Insurance Department. Under such law, Reliance
Insurance Company may pay dividends during the year equal to the greater of (a)
10% of the preceding year-end policyholders' surplus or (b) the preceding year's
statutory net income, but in no event to exceed the amount of unassigned funds,
which are defined as 'undistributed, accumulated surplus including net income
and unrealized gains since the organization of the insurer.' In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the company's reinsurance, and the adequacy of the
company's reserves. The maximum dividend permitted by law is not indicative of
an insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations, such as the impact of dividends on
surplus, which could affect an insurer's ratings, competitive position, the
amount of premiums that can be written and the ability to pay future dividends.
Furthermore, the Pennsylvania Insurance Department has broad discretion to limit
the payment of dividends by insurance companies.
In addition, under California Insurance law, Reliance Insurance Company is
deemed to be a 'commercially domiciled' California insurer and therefore subject
to the dividend payment laws of California. The California
18
<PAGE>
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 1994, 1993 and 1992 were, $114.1 million ($111.5 million for
common stock), $133.7 million ($130.6 million for common stock) and $143.7
million ($140.4 million for common stock), respectively. During 1995, $124.5
million would be available for dividend payments by Reliance Insurance Company
under Pennsylvania and California 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. 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.
The National Association of Insurance Commissioners (the 'NAIC') has
adopted a 'risk-based capital' requirement for the property and casualty
insurance industry which became effective in 1995 based on annual statements as
of December 31, 1994. 'Risk-based capital' refers to the determination of the
amount of statutory capital required for an insurer based on the risks assumed
by the insurer (including, for example, investment risks, credit risks relating
to reinsurance recoverables and underwriting risks) rather than just the amount
of net premiums written by the insurer. A formula that applies prescribed
factors to the various risk elements in an insurer's business is used to
determine the minimum statutory capital requirement for the insurer. An insurer
having less statutory capital than the formula calculates would be subject to
varying degrees of regulatory intervention, depending on the level of capital
inadequacy. All of the Company's statutory insurance companies have
policyholders' surplus in excess of the minimum required risk-based capital.
Management cannot predict the ultimate impact of risk-based capital requirements
on the Company's competitive position.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities, and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
The Company's principal property and casualty insurance subsidiary,
Reliance Insurance Company, has operated outside of the NAIC financial ratio
range concerning liabilities to liquid assets (the 'NAIC liquidity test'). This
ratio is intended only as a guideline for an insurance company to follow. The
Company believes that it has sufficient marketable assets on hand to make timely
payment of claims and other operating requirements.
On November 8, 1988, voters in California approved Proposition 103, which
requires a rollback of rates for property and casualty insurance policies issued
or renewed after November 8, 1988 of 20% from November 1987 levels and freezes
rates at such lower levels until November 1989. Proposition 103 also requires
that subsequent rate changes be justified to, and approved by, an elected
insurance commissioner.
In 1989, the California Department of Insurance directed to United Pacific
Insurance Company, one of the Company's California subsidiaries which writes
business in California, a notice to reduce its current rates and make refunds to
its policyholders by approximately $10.0 million. In January 1991, the
regulations which formed the basis of the notice were repealed by the newly
elected Insurance Commissioner. Subsequently, there were several administrative
hearings on rate rollback and several different sets of regulations were issued.
The regulations were subject to ongoing administrative and legal challenges. In
February 1993, a Los Angeles Superior Court issued a decision declaring several
sections of the regulations invalid and enjoined the enforcement of the
regulations. On August 18, 1994, the California Supreme Court issued a decision
reversing the Superior Court and upholding the validity of the regulations
issued by the Insurance Commissioner. A petition filed with the United States
Supreme Court seeking review of the California Supreme Court decision was denied
on February 21, 1995. On November 28, 1994, Reliance Insurance Company and
several of its affiliates received an order from the outgoing Insurance
Commissioner ordering refunds totaling $44.8 million plus interest of $27.5
million. The Company believes that the refund order is based on incomplete and
erroneous data.
19
<PAGE>
Furthermore, the Company believes that it did not earn a fair rate of return on
its California business during the year at issue, 1989. Consequently, it intends
to contest the order vigorously. The Company is entitled to a hearing to present
evidence to establish what it believes to be an appropriate rollback or refund
amount, if any. In the fourth quarter of 1994, the Company recorded a pre-tax
charge of $11.6 million related to Proposition 103. While this charge reflects
the Company's assessment of the impact of potential refunds to policyholders
under Proposition 103, the Company nevertheless intends to contest the
imposition of any refund on the basis of the matters set forth above. The
Company does not believe that it is probable that it will be subject to a refund
in an amount which will have a material adverse effect on the Consolidated
Financial Statements.
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 adverse effect
on its on-going business.
COMPETITION
All of the Company's businesses are highly competitive. The property and
casualty insurance business is fragmented and no single company dominates any of
the markets in which the Company operates. The Reliance Property and Casualty
Companies compete with individual companies and with groups of affiliated
companies with greater financial resources, larger sales forces and more
widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Property and Casualty Companies sell
policies through independent agents and insurance brokers who are not obligated
to choose the policies of the Reliance Property and Casualty Companies over
those of another insurer, the Reliance Property and Casualty Companies must
compete for agents and brokers and for the business they control. Such
competition is based upon price, product design, policyholder service,
commissions and service to agents and brokers.
Commonwealth/Transamerica Title compete with large national title insurance
companies and with smaller, locally established businesses which may possess
distinct competitive advantages. Competition in the title insurance business is
based primarily on the quality and timeliness of service. In some market areas,
abstracts and title opinions issued by attorneys are used as an alternative to
title insurance and other services provided by title companies. In addition,
certain jurisdictions have title registration systems which can lessen the
demand for title insurance.
ITEM 2. PROPERTIES.
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1994, the Company and its
consolidated subsidiaries employed approximately 9,075 persons in approximately
440 offices.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action and believes, based on current knowledge and after consultation
with counsel, that the resolution of these matters will not have a material
adverse effect on the Consolidated Financial Statements. In addition, the
Company is subject to the litigation set forth below.
In June 1989, Hall, the predecessor corporation of Prometheus Funding
Corp., a subsidiary of the Company ('Prometheus'), entered into a settlement
agreement, which is subject to court approval, with the Superintendent of
Insurance of the State of New York (the 'Superintendent'), arising out of the
insolvency of Union Indemnity Insurance Company of New York, Inc. ('Union
Indemnity'). The settlement agreement was submitted to the court for approval in
October 1989 and objections were filed by various parties. In March 1994, the
Superintendent informed Prometheus that he did not intend to pursue court
approval of the settlement until the resolution of appellate proceedings in a
pending litigation between the Superintendent and certain of Union
20
<PAGE>
Indemnity's reinsurers. Prometheus has advised the Superintendent that this
position is in breach of the settlement agreement's requirement that the parties
diligently make every effort to obtain court approval of the settlement, and
Prometheus has reserved all of its rights with respect thereto. There is no
assurance that such approval will be obtained. The settlement agreement will not
become effective until final approval by the court.
Thirty-one employers doing business in Texas have brought two actions in
the District Court of Dallas County, Texas, against, among others, approximately
200 individual insurance companies, including Reliance Insurance Company and
several of its subsidiaries. The plaintiffs in the actions, which were commenced
against the Reliance parties in April 1992 and February 1995 respectively (and
the second of which has been stayed in light of the pendency of the first),
assert that they were overcharged for workers' compensation insurance and
multiple line retrospectively rated casualty insurance between 1987 and 1992. In
August 1994, the plaintiffs in the first action moved for certification of a
purported plaintiff class consisting of all employers who purchased Texas
workers' compensation insurance from the insurance company defendants during the
years in question. Plaintiffs seek monetary damages, with interest and
attorneys' fees, against all defendants jointly and severally, together with a
release of all purported class members from liability for payment of unlawful
premiums, and injunctive relief. The Company has filed answers denying the
allegations and is contesting the actions vigorously. The Company does not
believe that it is probable that its liability, if any, in excess of what the
Company has provided for in respect of this matter will have a material adverse
effect on the Consolidated Financial Statements.
See Note 16 to the Consolidated Financial Statements for additional
information concerning the above referenced legal proceedings affecting the
Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
-------------------------------------------------------- --------------------------------------------------------
<S> <C>
Robert M. Steinberg (52)................................ Chairman of the Board and Chief Executive Officer
Saul P. Steinberg (55).................................. Chairman of the Executive and Finance Committee
Dean W. Case (58)....................................... Vice Chairman of the Board
Robert C. Olsman (49)................................... President and Chief Operating Officer of Reliance
Insurance and President and Chief Executive Officer of
United Pacific Insurance Company
Dennis A. Busti (52).................................... Chairman of the Board, President and Chief Executive
Officer of Reliance National
Jerome H. Carr (60)..................................... Corporate Senior Vice President and Chief Financial
Officer
Kenneth R. Frohlich (49)................................ Corporate Senior Vice President and Chief Actuarial
Officer
Dennis C. Costello (48)................................. Senior Vice President--Claims
Wesley D. Dingman (51).................................. Senior Vice President--Marketing and Agency Relations
Bruce Farbman (40)...................................... Senior Vice President--Human Resources and
Administration
Lowell C. Freiberg (55)................................. Senior Vice President
George T. Holbrook (63)................................. Senior Vice President
Robert J. Joyce (46).................................... Senior Vice President
Robert Krisowaty (47)................................... Senior Vice President and Controller
Richard B. Root (50).................................... Senior Vice President
James E. Yacobucci (43)................................. Senior Vice President--Investments
</TABLE>
21
<PAGE>
Each director of the Company is also a director of Reliance Group Holdings
and Reliance Financial.
Mr. Robert M. Steinberg has been a Director of Reliance Insurance Company
since 1978, served as Vice Chairman of the Board from March 1984 until October
1984, and became Chairman of the Board and Chief Executive Officer in October
1984. Mr. Steinberg has been President and Chief Operating Officer of Reliance
Group Holdings since 1982. He has held various positions with predecessors of
Reliance Group Holdings since 1965. He is a Director of Zenith National
Insurance Corp. He is the brother of Saul P. Steinberg.
Mr. Saul P. Steinberg has been a Director of Reliance Insurance Company
since 1968 and Chairman of its Executive and Finance Committee since October
1976. Mr. Steinberg founded and has been the Chief Executive Officer and a
Director of Reliance Group Holdings and predecessors of Reliance Group Holdings
since 1961. Mr. Steinberg is a Director of Symbol Technologies, Inc. and Zenith
National Insurance Corp. He is the brother of Robert M. Steinberg.
Mr. Dean W. Case became the Vice Chairman of the Board of Reliance
Insurance Company in October 1994 and a Director of Reliance Insurance Company
and Reliance Group Holdings in January 1986. From July 1988 until October 1994,
he was President and Chief Operating Officer of Reliance Insurance Company and
from July 1988 until March 1995 he was President and Chief Executive Officer of
United Pacific Insurance Company, a subsidiary of Reliance Insurance Company.
From June 1981 until April 1990, Mr. Case was Chief Executive Officer of General
Casualty Company of Wisconsin, a subsidiary of Reliance Insurance Company until
April 1990. Prior thereto he held various offices with Reliance Insurance
Company since 1973. Mr. Case is a member of the Board of Governors of the
National Association of Independent Insurers.
Mr. Robert C. Olsman was elected President and Chief Operating Officer of
Reliance Insurance Company and President and Chief Executive Officer of United
Pacific Insurance Company, a subsidiary of Reliance Insurance Company, in March
1995. He was Senior Vice President of Reliance Insurance Company from January
1986 to March 1995. Prior thereto, he held various positions with Travelers
Insurance Company, including Regional Vice President from 1983 to 1984 and
Second Vice President from 1984 to 1985.
Mr. Dennis A. Busti became a Director of Reliance Insurance Company and
Reliance Group Holdings in August 1991. He has been Chairman of the Board of
Reliance National since October 1993 and President and Chief Executive Officer
of Reliance National since June 1987. From January 1987 to June 1987 he was
President of Columbia Insurance Company. From 1983 to January 1987 he was
President of American Home Insurance Company.
Mr. Jerome H. Carr joined Reliance Insurance Company as Corporate Senior
Vice President and Chief Financial Officer in May 1981. For over ten years prior
thereto, he was Vice President of Finance and Chief Financial Officer of
Alexander & Alexander Services, Inc., an international insurance broker.
Mr. Kenneth R. Frohlich has been Corporate Senior Vice President and Chief
Actuarial Officer of Reliance Insurance Company since March 1988 and Corporate
Senior Vice President and Chief Actuarial Officer of Reliance Insurance Group,
Inc., an affiliate of Reliance Insurance Company, since June 1987. From June
1982 to June 1987 he was a Senior Vice President of CIGNA P/C Companies, a group
of insurance companies.
Mr. Dennis C. Costello has been Senior Vice President--Claims of Reliance
Insurance Company since June 1988. From 1973 to June 1988 he was Vice President
of Chubb & Son, Inc., an insurance management company.
Mr. Wesley D. Dingman became Senior Vice President--Marketing and Agency
Relations of Reliance Insurance Company in January 1990. From July 1986 to
December 1989 he was a Regional Vice President of Reliance Insurance Company.
Prior thereto he was a Regional Vice President of Crum & Forster Insurance
Companies from 1983 to June 1986.
Mr. Bruce Farbman has been Senior Vice President--Human Resources and
Administration of Reliance Insurance Company since April 1989. From April 1988
to April 1989 he was Senior Vice President--Human Resources of Reliance
Insurance Company and from July 1987 to April 1988 he was Vice President--Human
Resources of Reliance Insurance Company.
Mr. Lowell C. Freiberg has been Senior Vice President of Reliance Insurance
Company since December 1985. He has been Senior Vice President and a Director of
Reliance Group Holdings since 1982 and Chief Financial Officer of Reliance Group
Holdings since 1985. He also served as Treasurer of Reliance Group
22
<PAGE>
Holdings from 1982 until March 1994 and has held various positions with
predecessors of Reliance Group Holdings since 1969. He is a Director of
Symbol Technologies, Inc.
Mr. George T. Holbrook has been Senior Vice President of Reliance Insurance
Company since December 1979.
Mr. Robert J. Joyce has been Senior Vice President of Reliance Insurance
Company since September 1991. Prior thereto he was Senior Vice
President--Personal Division of Reliance Insurance Company since October 1987
and Senior Vice President--Finance and Administration of United Pacific
Insurance Company, a subsidiary of Reliance Insurance Company, from January 1985
until October 1987. From March 1984 to January 1985 he was Senior Vice President
of United Pacific Life Insurance Company, a subsidiary of Reliance Insurance
Company until July 1993.
Mr. Robert Krisowaty has been Senior Vice President and Controller of
Reliance Insurance Company since October 1988. Prior thereto he was Senior Vice
President and General Claims Manager of Reliance Insurance Company since March
1985. From March 1982 to March 1985 he was General Auditor of Reliance Insurance
Company.
Mr. Richard B. Root has been Senior Vice President of Reliance Insurance
Company since September 1991. From March 1989 to September 1991, he was Vice
President--Commercial Division of Reliance Insurance Company. He was Vice
President of United Pacific Insurance Company, a subsidiary of Reliance
Insurance Company, from December 1986 to March 1989. Prior thereto, he was
Executive Vice President of United Pacific Special Risk, Inc., a subsidiary of
United Pacific Insurance Company, from January 1980.
Mr. James E. Yacobucci became a Director and Senior Vice
President--Investments of Reliance Insurance Company in May 1989 and Senior Vice
President--Investments of Reliance Group Holdings in December 1990. From January
1982 through April 1989, he was a general partner of Cumberland Associates, a
private investment manager.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of March 15, 1995, all outstanding shares of common stock of Reliance
Insurance Company are held of record by Reliance Financial and are not publicly
traded. A discussion of dividends paid by Reliance Insurance Company is included
in Item 1 of this report under the caption 'Regulation.'
ITEM 6. SELECTED FINANCIAL DATA.
See the information in 'Reliance Insurance Company and Subsidiaries
Selected Financial Data' on pages 23 and 24 of the Reliance Insurance Group's
1994 Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in 'Reliance Insurance Company and Subsidiaries
Financial Review' on pages 26 through 32 of the Reliance Insurance Group's 1994
Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 1 through 22 of the Reliance Insurance Group's 1994 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption 'Executive Officers of the Registrant.'
Information regarding the directors of the Company is incorporated herein
by reference from its Definitive Information Statement for the Annual Meeting of
Stockholders to be held May 31, 1995, under the caption 'Nominees for Election
as Directors.'
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Definitive Information Statement for the Annual
Meeting of Stockholders to be held May 31, 1995, under the captions 'Nominees
for Election as Directors--Compensation of Directors' and 'Executive
Compensation,' which information (other than the information under the caption
'Executive Compensation--Report of Compensation Committees of the Board') is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Definitive Information Statement for the Annual
Meeting of Stockholders to be held May 31, 1995 under the captions 'Voting
Securities and Principal Holders' and 'Security Ownership of Management,' which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Definitive Information Statement for the Annual
Meeting of Stockholders to be held May 31, 1995, under the captions 'Executive
Compensation--Compensation Committee Interlocks and Insider Participation' and
'Related Party Transactions,' which information is incorporated herein by
reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Insurance Company and
Subsidiaries, which appear on pages 1 through 22 of the Reliance Insurance
Group's 1994 Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE REFERENCE
---------------------
1994
ANNUAL
FORM 10-K REPORT
--------- ------
<S> <C> <C>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES:
Independent Auditors' Report........................................................... A-1
Consolidated Financial Statements at December 31, 1994 and 1993 and for the three years
ended December 31, 1994:
Statement of Income............................................................... 1
Balance Sheet..................................................................... 2
Statement of Changes in Common Shareholder's Equity............................... 3
Statement of Cash Flows........................................................... 4
Notes to Financial Statements (1-18).............................................. 5-22
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
I --Summary of Investments--Other Than Investments in Related Parties.................... A-2
II --Condensed Financial Information of the Registrant at December 31, 1994 and
1993 and for the three years ended December 31, 1994:
Statement of Income.......................................................... A-3
Balance Sheet................................................................ A-4
Statement of Cash Flows...................................................... A-5
III--Supplementary Insurance Information................................................. A-6
IV--Reinsurance.......................................................................... A-7
VI--Supplemental Information Concerning Property and
Casualty Insurance Operations..................................................... A-8
</TABLE>
Pursuant to Rule 1-02(v) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. meets the definition of a
'significant subsidiary.' Zenith National Insurance Corp. files financial
statements with the Securities and Exchange Commission which should be referred
to for additional information.
25
<PAGE>
3. EXHIBITS
<TABLE>
<S> <C>
3.1 Charter of Reliance Insurance Company, as amended (incorporated by reference to Exhibit 3.1 to
Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1988).
3.2 Reliance Insurance Company By-Laws, as amended (incorporated by reference to Exhibit 3.2 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1990).
3.3 Amendment to Reliance Insurance Company By-Laws (incorporated by reference to Exhibit 3.3 to Reliance
Insurance Company 's Annual Report on Form 10-K for the year ended December 31, 1991).
*4.
+10.1 1990 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.2 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1990).
+10.2 1991 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.3 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1991).
+10.3 1992 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1992).
+10.4 1993 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1993).
+10.5 1994 Management Incentive Plan of Reliance Insurance Company.
+10.6 Employment Agreement between Reliance Insurance Company and Saul P. Steinberg, dated as of January 1,
1992 (incorporated by reference to Exhibit 10.7 to Reliance Group Holdings' Annual Report on Form 10-K
for the year ended December 31, 1991).
+10.7 First Amendment, dated as of January 1, 1994, to Employment Agreement between Reliance Insurance
Company and Saul P. Steinberg, dated as of January 1, 1992 (incorporated by reference to Exhibit 10.6
to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1993).
+10.8 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 (incorporated by reference to Exhibit 10.1
to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.9 Employment Agreement Between Reliance Insurance Company and Robert M. Steinberg, dated as of January
1, 1994 (incorporated by reference to Exhibit 10.7 to Reliance Insurance Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
</TABLE>
------------------
* Neither Reliance Insurance Company nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Insurance Company and
its subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
26
<PAGE>
<TABLE>
<S> <C>
+10.10 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 (incorporated by reference to Exhibit 10.2
to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994).
+10.11 Reliance National Risk Specialists 1988 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1988).
+10.12 Reliance National Risk Specialists 1992 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1993).
+10.13 Reliance National Risk Specialists 1993 Key Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December
31, 1993).
+10.14 Reliance National Risk Specialists 1994 Key Management Incentive Plan.
+10.15 Memorandum, dated February 8, 1989, summarizing employment arrangements between Reliance Insurance
Company and Dennis Busti (incorporated by reference to Exhibit 10.8 to Reliance Insurance Company's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.16 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ('Hall') and Aon
Corporation ('Aon') (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1992).
10.17 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings, Hall and
Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1992).
10.18 Parent Undertaking Agreement, dated July 24, 1992, among Reliance Group Holdings, Inc., Reliance
Insurance Company and Aon (incorporated by reference to Exhibit 28.1 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1992).
10.19 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon (incorporated
by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the Quarter
ended June 30, 1992).
10.20 Amendment, dated November 2, 1992, to Exhibit 10.16 (incorporated by reference to Exhibit 2.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the Quarter ended September 30, 1992).
10.21 Underwriting Agreement, dated October 30, 1992, among Shearson Lehman Brothers Inc., Salomon Brothers,
Inc., Commonwealth Land Title Insurance Company ('Commonwealth'), Commonwealth Mortgage Assurance
Company ('CMAC') and CMAC Investment Corporation ('CIC') (incorporated by reference to Exhibit 10.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the Quarter ended September 30, 1992).
10.22 International Underwriting Agreement, dated October 30, 1992, among Lehman Brothers International
Limited, Salomon Brothers International Limited, Commonwealth, CMAC and CIC (incorporated by reference
to Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1992).
10.23 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran, Superintendent of
Insurance of the State of New York, as Liquidator of Union Indemnity Insurance Company of New York,
Inc. and Hall (now known as Prometheus Funding Corp.) (incorporated herein by reference to Exhibit
10.01 to Frank B. Hall & Co. Inc.'s report on Form 10-Q for the Quarter ended June 30, 1989).
</TABLE>
------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
27
<PAGE>
<TABLE>
<S> <C>
10.24 Stock Purchase Agreement, dated April 3, 1993, by and among Reliance Group Holdings, Inc., Reliance
Insurance Company and General Electric Capital Corporation (incorporated by reference to Exhibit 10.22
to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1992).
10.25 First Amendment, dated as of May 31, 1993, to Exhibit 10.24 (incorporated by reference to Exhibit 2.2
to Reliance Insurance Company's Current Report on Form 8-K dated (date of earliest event reported)
July 14, 1993).
10.26 Amendment, dated July 14, 1993, to Exhibit 10.24 (incorporated by reference to Exhibit 2.3 to Reliance
Insurance Company's Current Report on Form 8-K dated (date of earliest event reported) July 14, 1993).
13.1 Reliance Insurance Group 1994 Annual Report.
21.1 List of Subsidiaries of Reliance Insurance Company.
27.1 Financial Data Schedule.
**++28.1 Schedule P from the statutory reports of the Reliance Property and Casualty Companies.
</TABLE>
------------------
++ Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.7% of the outstanding common stock of which is owned by the Company, is
omitted herefrom as such Schedule P is filed directly with the Securities and
Exchange Commission.
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K
During the last quarter of the period for which this report is filed, the
Company filed a Report on Form 8-K, dated (date of earliest event reported)
November 28, 1994, reporting an Item 5 matter regarding an order of the
insurance commissioner of California.
28
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF
MARCH, 1995.
RELIANCE INSURANCE COMPANY
By: ROBERT M. STEINBERG
----------------------------------
ROBERT M. STEINBERG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------- --------------------------------------------- ---------------
<S> <C> <C>
ROBERT M. STEINBERG Chairman of the Board,
----------------------------- Principal Executive Officer
ROBERT M. STEINBERG and Director March 30, 1995
SAUL P. STEINBERG Director
----------------------------
SAUL P. STEINBERG March 30, 1995
GEORGE E. BELLO Director
---------------------------
GEORGE E. BELLO March 30, 1995
LOWELL C. FREIBERG Director
---------------------------
LOWELL C. FREIBERG March 30, 1995
GEORGE R. BAKER Director
---------------------------
GEORGE R. BAKER March 30, 1995
CARTER BURDEN Director
---------------------------
CARTER BURDEN March 30, 1995
DENNIS A. BUSTI Director
---------------------------
DENNIS A. BUSTI March 30, 1995
DEAN W. CASE Director
---------------------------
DEAN W. CASE March 30, 1995
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------- --------------------------------------------- ---------------
<S> <C> <C>
THOMAS P. GERRITY Director
---------------------------
THOMAS P. GERRITY March 30, 1995
JEWELL J. MCCABE Director
---------------------------
JEWELL J. MCCABE March 30, 1995
IRVING SCHNEIDER Director
---------------------------
IRVING SCHNEIDER March 30, 1995
--------------------------- Director
BERNARD L. SCHWARTZ
RICHARD E. SNYDER Director
---------------------------
RICHARD E. SNYDER March 30, 1995
THOMAS J. STANTON, JR. Director
---------------------------
THOMAS J. STANTON, JR. March 30, 1995
JAMES E. YACOBUCCI Director
---------------------------
JAMES E. YACOBUCCI March 30, 1995
JEROME H. CARR Principal Accounting and Principal Financial
--------------------------- Officer
JEROME H. CARR March 30, 1995
</TABLE>
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Reliance Insurance Company
Philadelphia, Pennsylvania
We have audited the consolidated financial statements of Reliance Insurance
Company (a subsidiary of Reliance Group Holdings, Inc.) and subsidiaries as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, and have issued our report thereon dated February 22, 1995
(which report includes an explanatory paragraph concerning the adoption of
Statement of Financial Accounting Standards No. 109); such financial statements
and report are included in your 1994 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of Reliance Insurance Company, listed in Item 14. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 22, 1995
A-1
<PAGE>
SCHEDULE I
ITEM 14(A)2
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
------------------------------------------------------------------------------------------------------------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies
and authorities.............................................. $ 528,297 $ 495,007 $ 495,007
States, municipalities and political subdivisions.............. 36,982 37,306 37,306
Foreign--government............................................ 66,677 63,512 63,512
Foreign--other................................................. 103,263 99,032 99,032
Public utilities............................................... 96,631 88,602 88,602
Convertibles and bonds with warrants attached.................. 88,230 113,398 113,398
All other corporate bonds and notes............................ 676,478 601,656 601,656
Redeemable preferred stocks....................................... 349,361 340,799 340,799
---------- ---------- ---------------
1,945,919 1,839,312 1,839,312
---------- ---------- ---------------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions.............. 11,835 10,980 11,835
Foreign--government............................................ 123,306 115,647 123,306
Foreign--other................................................. 20,630 20,501 20,630
Public utilities............................................... 536,746 477,942 536,746
All other corporate bonds and notes............................ 341,916 304,952 341,916
Redeemable preferred stocks....................................... 150,753 142,960 150,753
---------- ---------- ---------------
1,185,186 1,072,982 1,185,186
---------- ---------- ---------------
Equity securities:
Common stocks:
Public utilities............................................... 56,403 55,439 55,439
Industrial and other........................................... 117,076 221,231 221,231
Nonredeemable preferred stocks.................................... 309,050 287,966 287,966
---------- ---------- ---------------
482,529 564,636 564,636
---------- ---------- ---------------
Short-term investments.............................................. 229,906 229,906 229,906
---------- ---------- ---------------
$3,706,836
----------
----------
Mortgage loans(1)................................................... 15,680 15,680
Investments in real estate.......................................... 283,955 283,955
---------- ---------------
$4,143,175 $ 4,118,675
---------- ---------------
---------- ---------------
</TABLE>
(1) In the consolidated financial statements, mortgage loans are included in
other accounts and notes receivable.
A-2
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE INSURANCE COMPANY
(PARENT COMPANY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned......................................................... $1,438,356 $1,392,527 $1,408,082
Net investment income................................................... 162,427 171,097 101,975
Dividends from subsidiaries............................................. 60,221 35,898 41,874
Gain on sales of investments............................................ 14,236 145,622 39,054
---------- ---------- ----------
1,675,240 1,745,144 1,590,985
---------- ---------- ----------
CLAIMS AND EXPENSES:
Policy claims and settlement expenses................................... 1,096,394 1,099,894 1,171,586
Policy acquisition costs................................................ 313,537 308,587 262,346
Other operating expenses................................................ 157,169 157,118 141,004
Dividends to policyholders.............................................. 2,464 5,932 10,128
---------- ---------- ----------
1,569,564 1,571,531 1,585,064
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EQUITY IN SUBSIDIARIES AND INVESTEE COMPANY........................... 105,676 173,613 5,921
Income tax (provision) benefit.......................................... 1,510 (54,487) 16,296
Equity in subsidiaries (net income less dividends received)............. 25,920 57,074 50,246
Equity in investee company.............................................. 9,478 12,441 5,206
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS....................................... 142,584 188,641 77,669
Income from discontinued operations..................................... -- -- 61,729
Loss on disposal on discontinued operations............................. -- -- (47,300)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE................................................................ 142,584 188,641 92,098
Cumulative effect of change in accounting for income taxes.............. -- (12,212) --
Cumulative effect of change in accounting for subsidiaries'
income taxes.......................................................... -- 36,547 --
---------- ---------- ----------
NET INCOME.............................................................. $ 142,584 $ 212,976 $ 92,098
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A-3
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE INSURANCE COMPANY
(PARENT COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per-share amounts)
Marketable securities:
Fixed maturities held for investments--at amortized cost (quoted market $640,226
and $539,125)................................................................... $ 688,468 $ 519,489
Fixed maturities available for sale--at quoted market (cost $1,288,114
and $1,223,152)................................................................ 1,216,297 1,283,953
Equity securities--at quoted market (cost $478,765 and $447,872)................. 530,923 527,498
Short-term investments........................................................... 121,678 227,599
Cash.................................................................................. 7,189 9,483
Premiums receivable................................................................... 985,585 904,899
Other accounts and notes receivable................................................... 94,976 52,966
Reinsurance recoverables.............................................................. 2,638,519 2,285,340
Federal and foreign income taxes, including deferred taxes............................ 152,098 74,216
Deferred policy acquisition costs..................................................... 138,359 154,532
Investments:
Property and casualty insurance subsidiaries..................................... 426,493 411,978
Title insurance subsidiaries..................................................... 188,742 197,820
Other subsidiaries............................................................... 221,124 165,450
Investee company................................................................. 147,513 157,016
Investments in real estate--at cost................................................... 217,470 210,336
Due from subsidiaries................................................................. 28,303 68,289
Other assets.......................................................................... 189,276 226,819
---------- ----------
$7,993,013 $7,477,683
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums..................................................................... $1,107,982 $1,115,591
Unpaid claims and related expenses.................................................... 4,735,267 4,472,388
Accounts payable and accrued expenses................................................. 793,356 479,789
Reinsurance ceded premiums payable.................................................... 207,461 153,049
Term loans............................................................................ 16,259 7,927
Due to subsidiaries................................................................... 32,331 50,572
---------- ----------
6,892,656 6,279,316
---------- ----------
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....................................................... 717,533 692,237
Retained earnings (including undistributed net income of subsidiaries and
investee company of $654,849 and $611,858)...................................... 363,819 335,374
Net unrealized gain (loss) on investments (including equity in net unrealized
gain (loss) of subsidiaries of $(15,103) and $23,745)........................... (27,881) 115,023
Net unrealized loss on foreign currency translation.............................. (21,218) (15,731)
---------- ----------
1,076,840 1,171,490
---------- ----------
$7,993,013 $7,477,683
---------- ----------
---------- ----------
</TABLE>
A-4
<PAGE>
SCHEDULE II
ITEM 14(A)2
RELIANCE INSURANCE COMPANY
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 142,584 $ 212,976 $ 92,098
Adjustments to reconcile net income to net cash provided
from operating activities:
Discontinued operations.............................................. -- -- (61,729)
Cumulative effect of change in accounting for income taxes........... -- 12,212 --
Gain on sales of investments......................................... (14,236) (145,622) (39,054)
Equity in undistributed net income of subsidiaries................... (25,920) (93,621) (50,246)
Equity in undistributed net (income) loss of investee company........ (2,904) (5,867) 1,368
Deferred policy acquisition costs.................................... 16,173 (36,171) (25,423)
Premiums and other receivables and reinsurance recoverables.......... (510,110) (223,821) (952,989)
Unearned premiums, unpaid claims and related expenses................ 255,270 440,395 1,239,454
Accounts payable, accrued expenses and other......................... 404,651 85,489 (96,321)
--------- --------- ----------
265,508 245,970 107,158
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale................ 499,409 554,297 305,862
Proceeds from sales of fixed maturities held for investment............... 2,159 -- 145,649
Proceeds from redemptions of fixed maturities available for sale.......... 42,759 118,549 43,694
Proceeds from redemptions of fixed maturities held for investment......... 36,049 114,871 233,038
Proceeds from sales of equity securities.................................. 218,972 948,224 515,392
(Increase) decrease in short-term investments--net........................ 105,921 12,430 28,860
Purchases of fixed maturities available for sale.......................... (595,132) (721,577) (383,253)
Purchases of fixed maturities held for investment......................... (218,186) (230,041) (432,179)
Purchases of equity securities............................................ (220,179) (971,711) (316,425)
Increase (decrease) in investments in subsidiaries........................ (37,126) 92,052 (123,013)
Discontinued operations................................................... -- -- (11,839)
Other--net................................................................ (6,969) (20,303) (23,655)
--------- --------- ----------
(172,323) (103,209) (17,869)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amounts due to/from subsidiaries--net.............. 21,745 (45,071) 67,498
Redemption of preferred stock............................................. (3,360) (3,360) (3,360)
Dividends................................................................. (114,139) (133,671) (143,729)
Other--net................................................................ 275 20,001 (6,946)
--------- --------- ----------
(95,479) (162,101) (86,537)
--------- --------- ----------
Increase (decrease) in cash............................................... (2,294) (19,340) 2,752
Cash, beginning of year................................................... 9,483 28,823 26,071
--------- --------- ----------
Cash, end of year......................................................... $ 7,189 $ 9,483 $ 28,823
--------- --------- ----------
--------- --------- ----------
</TABLE>
A-5
<PAGE>
SCHEDULE III
ITEM 14(A)2
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
DEFERRED UNPAID POLICY OF DEFERRED
POLICY CLAIMS AND NET CLAIMS AND POLICY
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES COSTS
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1994:
Property and casualty.................. $ 181,938 $5,581,483 $1,288,454 $1,777,318 $232,310 $1,297,093 $387,924
Title.................................. -- 228,063 -- 856,774 26,613 75,867 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 181,938 $5,809,546 $1,288,454 $2,634,092 $258,923 $1,372,960 $387,924
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
Year Ended December 31, 1993:
Property and casualty.................. $ 178,129 $5,048,442 $1,276,331 $1,571,539 $226,517 $1,235,594 $327,437
Title.................................. -- 204,695 -- 893,364 24,282 81,803 --
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 178,129 $5,253,137 $1,276,331 $2,464,903 $250,799 $1,317,397 $327,437
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
Year Ended December 31, 1992:
Property and casualty.................. $ 123,350 $4,571,792 $1,203,207 $1,535,740 $199,556 $1,289,598 $276,154
Title and mortgage..................... -- 173,328 -- 826,493 26,224 100,562 13,437
----------- ---------- ---------- ---------- ---------- ---------- ------------
$ 123,350 $4,745,120 $1,203,207 $2,362,233 $225,780 $1,390,160 $289,591
----------- ---------- ---------- ---------- ---------- ---------- ------------
----------- ---------- ---------- ---------- ---------- ---------- ------------
<CAPTION>
--------------------------------------------------------------
--------------------------------------------------------------
COLUMN A COLUMN I COLUMN J
--------------------------------------------------------------
OTHER
INSURANCE PREMIUMS
SEGMENT EXPENSES WRITTEN
--------------------------------------------------------------
<S> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1994:
Property and casualty.................. $183,755 $1,764,290
----------
----------
Title.................................. 776,149
--------
$959,904
--------
--------
Year Ended December 31, 1993:
Property and casualty.................. $174,609 $1,770,597
----------
----------
Title.................................. 780,138
--------
$954,747
--------
--------
Year Ended December 31, 1992:
Property and casualty.................. $188,826 $1,541,560
----------
----------
Title and mortgage..................... 691,048
--------
$879,874
--------
--------
</TABLE>
A-6
<PAGE>
SCHEDULE IV
ITEM 14(A)2
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------------------------------------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Premiums:
Property and casualty........................ $2,630,549 $1,198,629 $ 345,398 $1,777,318 19.43%
Title........................................ 854,679 1,370 3,465 856,774 .40
---------- ---------- --------- ----------
$3,485,228 $1,199,999 $ 348,863 $2,634,092 13.24
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Year Ended December 31, 1993:
Premiums:
Property and casualty........................ $2,531,478 $1,264,361 $ 304,422 $1,571,539 19.37
Title........................................ 891,843 1,411 2,932 893,364 .33
---------- ---------- --------- ----------
$3,423,321 $1,265,772 $ 307,354 $2,464,903 12.47
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Year Ended December 31, 1992:
Premiums:
Property and casualty........................ $2,350,216 $1,127,206 $ 312,730 $1,535,740 20.36
Title and mortgage........................... 828,886 6,080 3,687 826,493 .45
---------- ---------- --------- ----------
$3,179,102 $1,133,286 $ 316,417 $2,362,233 13.39
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
A-7
<PAGE>
SCHEDULE VI
ITEM 14(A)2
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS INCURRED RELATED TO
AFFILIATION POLICY AND DISCOUNT NET --------------------
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C (A) PREMIUMS PREMIUMS INCOME YEAR YEARS
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1994..... $ 181,938 $5,581,483 $245,737 $1,288,454 $1,777,318 $ 232,310 $1,274,649 $22,444
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
Year Ended
December 31, 1993..... $ 178,129 $5,048,442 $284,681 $1,276,331 $1,571,539 $ 226,517 $1,195,425 $40,169
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
Year Ended
December 31, 1992..... $ 123,350 $4,571,792 $289,500 $1,203,207 $1,535,740 $ 199,556 $1,258,111 $31,487
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
----------- ---------- ------------ ---------- ---------- ---------- ---------- -------
<CAPTION>
COLUMN A COLUMN I COLUMN J COLUMN K
---------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COST EXPENSES WRITTEN
---------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1994..... $387,924 $1,102,499 $1,764,290
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1993..... $327,437 $1,006,659 $1,770,597
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1992..... $276,154 $ 961,059 $1,541,560
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6% in 1994 and 3% to 6% in 1993 and 1992.
A-8
<PAGE>
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1994 1-7577
RELIANCE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
RELIANCE INSURANCE COMPANY
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
3.1 Charter of Reliance Insurance Company, as amended (incorporated by reference to Exhibit 3.1 to
Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1988).
3.2 Reliance Insurance Company By-Laws, as amended (incorporated by reference to Exhibit 3.2 to
Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1990).
3.3 Amendment to Reliance Insurance Company By-Laws (incorporated by reference to Exhibit 3.3 to
Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31, 1991).
*4.
+10.1 1990 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.2 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1990).
+10.2 1991 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.3 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1991).
+10.3 1992 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1992).
+10.4 1993 Management Incentive Plan of Reliance Insurance Company (incorporated by reference to Exhibit
10.4 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1993).
+10.5 1994 Management Incentive Plan of Reliance Insurance Company.
+10.6 Employment Agreement between Reliance Insurance Company and Saul P. Steinberg, dated as of January
1, 1992 (incorporated by reference to Exhibit 10.7 to Reliance Group Holdings' Annual Report on
Form 10-K for the year ended December 31, 1991).
+10.7 First Amendment, dated as of January 1, 1994, to Employment Agreement between Reliance Insurance
Company and Saul P. Steinberg, dated as of January 1, 1992 (incorporated by reference to Exhibit
10.6 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended December 31,
1993).
+10.8 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 (incorporated by reference to Exhibit
10.1 to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994).
+10.9 Employment Agreement Between Reliance Insurance Company and Robert M. Steinberg, dated as of
January 1, 1994 (incorporated by reference to Exhibit 10.7 to Reliance Insurance Company's Annual
Report on Form 10-K for the year ended December 31, 1993).
</TABLE>
------------------
* Neither Reliance Insurance Company nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Insurance Company and
its subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
+10.10 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 (incorporated by reference to Exhibit
10.2 to Reliance Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994).
+10.11 Reliance National Risk Specialists 1988 Key Management Incentive Plan (incorporated by reference
to Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.12 Reliance National Risk Specialists 1992 Key Management Incentive Plan (incorporated by reference
to Exhibit 10.9 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.13 Reliance National Risk Specialists 1993 Key Management Incentive Plan (incorporated by reference
to Exhibit 10.10 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.14 Reliance National Risk Specialists 1994 Key Management Incentive Plan.
+10.15 Memorandum, dated February 8, 1989, summarizing employment arrangements between Reliance Insurance
Company and Dennis Busti (incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31, 1988).
10.16 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ('Hall') and Aon
Corporation ('Aon') (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1992).
10.17 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings, Hall and
Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1992).
10.18 Parent Undertaking Agreement, dated July 24, 1992, among Reliance Group Holdings, Inc., Reliance
Insurance Company and Aon (incorporated by reference to Exhibit 28.1 to Reliance Group Holdings'
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1992).
10.19 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon
(incorporated by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the Quarter ended June 30, 1992).
10.20 Amendment, dated November 2, 1992, to Exhibit 10.16 (incorporated by reference to Exhibit 2.1 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the Quarter ended September 30, 1992).
10.21 Underwriting Agreement, dated October 30, 1992, among Shearson Lehman Brothers Inc., Salomon
Brothers, Inc., Commonwealth Land Title Insurance Company ('Commonwealth'), Commonwealth Mortgage
Assurance Company ('CMAC') and CMAC Investment Corporation ('CIC') (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1992).
10.22 International Underwriting Agreement, dated October 30, 1992, among Lehman Brothers International
Limited, Salomon Brothers International Limited, Commonwealth, CMAC and CIC (incorporated by
reference to Exhibit 10.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1992).
</TABLE>
------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
10.23 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran, Superintendent of
Insurance of the State of New York, as Liquidator of Union Indemnity Insurance Company of New
York, Inc. and Hall (now known as Prometheus Funding Corp.) (incorporated herein by reference to
Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report on Form 10-Q for the Quarter ended June 30,
1989).
10.24 Stock Purchase Agreement, dated April 3, 1993, by and among Reliance Group Holdings, Inc.,
Reliance Insurance Company and General Electric Capital Corporation (incorporated by reference to
Exhibit 10.22 to Reliance Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
10.25 First Amendment, dated as of May 31, 1993, to Exhibit 10.24 (incorporated by reference to Exhibit
2.2 to Reliance Insurance Company's Current Report on Form 8-K dated (date of earliest event
reported) July 14, 1993).
10.26 Amendment, dated July 14, 1993, to Exhibit 10.24 (incorporated by reference to Exhibit 2.3 to
Reliance Insurance Company's Current Report on Form 8-K dated (date of earliest event reported)
July 14, 1993).
13.1 Reliance Insurance Group 1994 Annual Report.
21.1 List of Subsidiaries of Reliance Insurance Company.
27.1 Financial Data Schedule.
++**28.1 Schedule P from the statutory reports of the Reliance Property and Casualty Companies.
</TABLE>
------------------
++ Schedule P from the statutory reports of Zenith National Insurance Corp.,
34.7% of the outstanding common stock of which is owned by the Company, is
omitted herefrom as such Schedule P is filed directly with the Securities and
Exchange Commission.
** To be filed by Amendment.
Exhibit 10.5
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
------------------------------
I. OBJECTIVES
A. To motivate key executives to achieve:
1) Operating goals and objectives for the profit center, each
division and staff unit, and underlying individual objectives.
2) Profit center financial objectives as set forth in the unit's
annual budget.
3) Maximum pretax operating profit.
B. To reward key executives for achievement of such goals through the
payment of cash bonuses for each plan year in which goals are
achieved.
II. ELIGIBILITY FOR PARTICIPATION
A. Participants in this plan will be limited to key line and staff profit
center personnel whose performance can significantly impact attainment
of profit center objectives.
B. The profit center COO will recommend plan participants to the CEO of
Reliance Insurance Group, along with related participation percentages
in accordance with the guidelines provided by the Reliance Insurance
Group Salary Administration Program. The minimum salary grade for
participation in the plan is Grade 32. The profit center COO has the
discretion to exclude otherwise eligible employees.
C. The CEO of Reliance Insurance Group must approve the recommended list
of participants and percentages and submit a summary of targeted
awards by profit center to the Compensation Committee of the Board of
Directors for final approval.
D. The Compensation Committee will submit to the Executive and Finance
Committee, a summary of the maximum potential awards targeted for each
plan year.
III. PARTICIPATION PERCENTAGES
A. Each participant shall be assigned a participation percentage
expressed as a percentage of base salary which determines the
participation amount in accordance with the guidelines set forth in
Part B below. For example, an individual with a base salary of
$60,000 and a participation percentage of 15% would be entitled to a
participation amount of $9,000.
B. The profit center COO has the discretion to assign a lower
participation percentage than provided by the guidelines.
C. Base salary is defined as compensation paid in the plan year which is
included in the individual's W-2 (this excludes taxable income added
for company paid group insurance, company cars, etc.).
IV. PAYMENT OF AWARDS
A. To qualify for an award, an individual must be a full-time employee of
Reliance Insurance Group or one of its subsidiaries on the date
payment of the award is made. Payments will be made as soon as
possible after the end of the plan year and each succeeding year to
allow necessary compilation of results, but no later than May 15 of
the year in which payment is made. This provision is inapplicable in
the event the employee is terminated due to death, disability or
retirement. In such instances, the employee, or his or her estate,
will be entitled to the payment of all awards applicable to the plan
year or the prorated portion of the plan year in which the individual
was a full-time employee.
B. Incentive award payments will not be considered as part of base salary
for the purpose of determining a participant's group insurance
benefits, pension benefits, or amount of contribution to the Savings
Incentive Plan.
C. All awards must be approved by the CEO of Reliance Insurance Group
after consideration of all relevant factors, and a summary submitted
to the Compensation Committee of the Board of Directors for final
approval.
D. The Compensation Committee shall report annually to the Executive &
Finance Committee of the Board of Directors on the aggregate,
cumulative amount of incentive compensation earned and paid to all
participants for all open plan years.
V. AWARD FORMULA
A. Conceptual Overview
The Management Incentive Plan is comprised of three parts as described
below. Part I is based on performance of each staff unit and division
against specific measurable written objectives and has a potential
award of 20% of participation amount. Part II is oriented towards
meeting operating goals established based on profit center performance
relative to prior year and the industry, and has a potential award of
60% of the participation amount. Part III generates awards based on
pretax operating profit produced, and has a potential award of 30% of
the participation amount. Formulas for each part are contained in the
attached Appendices.
An example of the above follows:
A Base salary $60,000
B Participation percentage 15%
C Participation amount (A x B) $ 9,000
=========
D E = C x D
Target Potential
Part Award % Award
---- ------- ---------
I 20% $ 1,800
II 60% $ 5,400
III 30% $ 2,700
------- ---------
110% $ 9,900
======= =========
B. PART I
1) Twenty percent (20%) of the participation amount will be based on
performance against specified measurable written objectives of
each staff unit and division. The Reliance Insurance Company COO
will recommend awards under this section to the CEO of Reliance
Insurance Group for approval. Twenty percent (20%) of the
participation amount earned under this section will be paid as
soon as possible after the end of the plan year.
2) Awards will be generated by the performance of each staff unit
and division. Each senior officer will recommend to the Reliance
Insurance Company COO allocation of the award fund of his staff
unit/division to participants within his unit/division based on
each individual's performance against personal objectives. (See
illustration in Appendix 2.)
C. PART II
1) Sixty percent (60%) of participation amount will be based on
accident year combined ratio under the formula contained in
Appendix 3.
(a) Thirty percent (30%) of participation amount earned will
be generated by each division's performance against
respective accident year combined ratio goals.
(b) Thirty percent (30%) of participation amount earned will be
generated by the performance of the consolidated profit
center against accident year combined ratio goals (See
Appendix 3). Consolidated awards will be allocated ratably
among all plan participants.
(c) Profit center management and Home Office staff units will be
based entirely on consolidated profit center results.
2) Ten percent (10%) of participation amount earned under this
section will be paid after the end of the plan year; 25% at the
end of the first succeeding year, and 25% at the end of the
second succeeding year. Payment is deferred under this section
in order to allow time for reserve development to determine more
accurate accident year results. Each award calculation will be
made on a cumulative basis.
3) Awards under this section to individual participants may be
allocated as described in Part V, B(2) above.
D. PART III
1) Thirty percent (30%) of participation amount will be based on
calendar year pretax operating profit per the Profit Center
Operating Statement under the formula contained in Appendix 4.
(a) Fifteen percent (15%) of the participation amount earned
under this part will be allocated pro rata.
(b) Fifteen percent (15%) of the participation amount earned
under this part may be allocated by Reliance Insurance
Company COO based on each division's results or other
criteria as determined by the Reliance Insurance Company
COO.
2) Thirty percent (30%) of the participation amount earned under
this section will be paid as soon as possible after the end of
the plan year.
3) Awards under this section to individual participants may be
allocated as described in Part V, B (2) above.
<PAGE>
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
APPENDICES
-------------------------------
APPENDIX
1 Summary of Payout Formula
2 Example of Application of Part I
3 Part II Accident Year Combined Ratio
4 Pretax Operating Profit
5 Part I Objectives
<PAGE>
APPENDIX 1.
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
SUMMARY OF PAYOUT FORMULA
-------------------------------
% of End of Year
Participation -------------------------
Amount One Two Three
------------- ---- ---- -----
PART I 20% 20%
PART II 60% 10% 25% 25%
PART III 30% 30%
---- ---- ---- ----
110% 60% 25% 25%
==== ==== ==== ====
<PAGE>
APPENDIX 2.
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
------------------------------
EXAMPLE OF APPLICATION OF PART I
Awards will be generated at each staff and division level and allocated to
individual participants within each staff and division unit:
Example:
Participation Perform-
Amount ance Award %
------------- ------- -------- -----
Staff Unit A $25,000 100% $25,000
Staff Unit B $25,000 0% 0
Staff Unit C $20,000 50% $10,000
Division A $100,000 80% $80,000
Division B $75,000 40% $30,000
Division C $75,000 90% $67,500
Division D $80,000 100% $80,000
-------- -------- -----
Total $400,000 $292,500 73.1%
======== ======== =====
Awards would be allocated to individual participants within each staff
unit/division.
Example:
Staff Unit C: Preliminary
Participation Perform- Award Allocated
Employee Amount ance Amount Award (1)
---------- ------------- ------- ------------ -----------
1 $ 5,000 100% $ 5,000 $ 5,556
2 7,000 0% 0 0
3 4,000 50% 2,000 2,222
4 4,000 50% 2,000 2,222
------------- ------------ -----------
$ 20,000 $ 10,000
============= ===========
(1) Preliminary individual awards to total preliminary awards multiplied
by unit award.
<PAGE>
APPENDIX 3.
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
CONSOLIDATED
------------------------------
PART II - ACCIDENT YEAR COMBINED RATIO
Combined
Ratio (1) Award
--------- -----
112.0 0
111.3 5
110.6 10
109.9 15
109.2 20
108.5 25
107.8 30
107.1 35
106.4 * 40
105.7 45
105.0 50
104.3 55
103.6 60
Awards by division based on the following:
Profit Center Division
Results Results
------------- --------
CEO and Staff Units 60%
Commercial/Large Accounts 30 30%
Risk Underwriting 30 30
Program Department 30 30
-----------------------------------------------------------
(1) After policyholder dividends
* Budgeted accident year combined ratio after policyholder
dividends
In the event that the consolidated Profit Center accident year combined
ratio exceeds 113.0, then any payment under the MIP is at the direction of
the Chief Executive Officer of Reliance Insurance Group.
<PAGE>
APPENDIX 3.
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
COMMERCIAL/LARGE ACCOUNTS DIVISION
----------------------------------
Commercial/Large Accounts
Division Consolidated
------------------------- ------------
Combined Combined
Ratio (1) Award Ratio (1) Award
--------- ----- --------- -----
111.7 0 112.0 0
111.0 2.5 111.3 2.5
110.3 5.0 110.6 5.0
109.6 7.5 119.9 7.5
108.9 10.0 109.2 10.0
108.2 12.5 108.5 12.5
107.5 15.0 107.8 15.0
106.8 17.5 107.1 17.5
106.1 * 20.0 106.4 * 20.0
105.4 22.5 105.7 22.5
104.7 25.0 105.0 25.0
104.0 27.5 104.3 27.5
103.3 30.0 103.6 30.0
Awards by division based on the following:
Consolidated profit center results 30%
Commercial/Large Accounts Division results 30%
(1) After policyholder dividends
* Budgeted accident year combined ratio after policyholder
dividends
In the event that the consolidated Profit Center accident year combined ratio
exceeds 113.0, then any payment under the MIP is at the direction of the Chief
Executive Officer of Reliance Insurance Group.
<PAGE>
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
RELIANCE CUSTOM UNDERWRITING FACILITY
-------------------------------------
Risk Underwriting Dept. Consolidated
---------------------- ------------
Combined Combined
Ratio (1) Award Ratio (1) Award
--------- ----- --------- -----
112.1 0 112.0 0
111.4 2.5 111.3 2.5
110.7 5.0 110.6 5.0
110.0 7.5 109.9 7.5
109.3 10.0 109.2 10.0
108.6 12.5 108.5 12.5
107.9 15.0 107.8 15.0
107.2 17.5 107.1 17.5
106.5 * 20.0 106.4 * 20.0
105.8 22.5 105.7 22.5
105.1 25.0 105.0 25.0
104.4 27.5 104.3 27.5
103.7 30.0 103.6 30.0
Awards by division based on the following:
Consolidated profit center results 30%
Risk Underwriting Department results 30%
(1) After policyholder dividends
* Budgeted accident year combined ratio after policyholder
dividends
In the event that the consolidated Profit Center accident year combined ratio
exceeds 113.0, then any payment under the MIP is at the direction of the Chief
Executive Officer of Reliance Insurance Group.
<PAGE>
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
PROGRAM DEPARTMENT
------------------
PART II - ACCIDENT YEAR COMBINED RATIO
Program Department Consolidated
-------------------- ------------
Combined Combined
Ratio (1) Award Ratio (1) Award
--------- ----- --------- -----
112.0 0 112.0 0
111.3 2.5 111.3 2.5
110.6 5.0 110.6 5.0
109.6 7.5 109.9 7.5
109.2 10.0 109.2 10.0
108.5 12.5 108.5 12.5
107.8 15.0 107.8 15.0
107.1 17.5 107.1 17.5
106.4 * 20.0 106.4 * 20.0
105.7 22.5 105.7 22.5
105.0 25.0 105.0 25.0
104.3 27.5 104.3 27.5
103.6 30.0 103.6 30.0
Awards by division based on the following:
Consolidated profit center results 30%
Program Department results 30%
(1) After policyholder dividends
* Budgeted accident year combined ratio after policyholder
dividends
In the event that the consolidated Profit Center accident year combined ratio
exceeds 113.0, then any payment under the MIP is at the direction of the Chief
Executive Officer of Reliance Insurance Group.
<PAGE>
APPENDIX 4.
RELIANCE PROFIT CENTER
1994 MANAGEMENT INCENTIVE PLAN
------------------------------
PART III - PRETAX OPERATING PROFIT
A bonus pool will be created from calendar year pretax operating profit which
exceeds the 1994 adjusted budgeted pretax operating profit of $61 million. The
distribution of the pool to the profit center is as follows:
Pretax Operating Bonus Points
Profit Awarded
---------------- ------------
51,000,000 -0-
56,000,000 10.0
61,000,000 20.0
66,000,000 25.0
71,000,000 or above 30.0
<PAGE>
APPENDIX 5.
RELIANCE INSURANCE COMPANY
1994 MANAGEMENT INCENTIVE PLAN
------------------------------
STAFF DEPARTMENTS
(CLAIMS, HUMAN RESOURCES, H.O. ADMINISTRATION, I.S., CONTROLLER'S AREA)
1994 PART I OBJECTIVES
----------------------
% Custom Program
Award Commercial Under Depart.
----- ---------- ----- -------
3 1. Calendar Year Combined Ratio,
Ratio, after PHD, not
exceed 106.1 106.2 106.4
3 2. Net Written Premium no less
than $480.9m $114.8m $88.2m
3 3. Underwriting Expense not to
exceed 35.1 26.0 34.7
5 4. Actual Direct Expenses not to
exceed approved 1994
Budget
6 5. Discretionary as per Senior
Department Officer and/or
Chief Operating Officer,
Reliance Insurance Company
SOURCE DOCUMENTS: OPERATING STATEMENTS AND BUDGET VARIANCE REPORTS
<PAGE>
APPENDIX 5.
RELIANCE INSURANCE COMPANY
1994 MANAGEMENT INCENTIVE PLAN
COMMERCIAL/LARGE ACCOUNTS
----------------------
1994 PART I OBJECTIVES
% of Award
----------
4 1) Calendar Year Combined Ratio after
policyholder dividends not to
exceed 106.1
4 2) Net Written Premium no less than 480.9 M
4 3) Underwriting Expense Ratio not to
exceed 35.1
4 4) Actual Direct Expenses not to exceed Approved '94
Budget
4 5) Discretionary by President and/or Chief
Operating Officer, Reliance Insurance
Company
----------
20
SOURCE DOCUMENTS: OPERATING STATEMENTS
BUDGET VARIANCE REPORTS
<PAGE>
RELIANCE INSURANCE COMPANY
1994 MANAGEMENT INCENTIVE PLAN
RELIANCE CUSTOM UNDERWRITING FACILITY
-------------------------------------
1994 PART I OBJECTIVES
% of Award
----------
4 1) Calendar Year Combined Ratio after
policyholder dividends not to
exceed 106.5
4 2) Net Written Premium no less than 203.0 M
4 3) Underwriting Expense Ratio not to
exceed 29.8
4 4) Actual Direct Expenses not to exceed Approved '94
Budget
4 5) Discretionary by President and/or Chief
Operating Officer, Reliance Insurance
Company
----------
20
SOURCE DOCUMENTS: OPERATING STATEMENTS
BUDGET VARIANCE REPORTS
<PAGE>
APPENDIX 5.
RELIANCE INSURANCE COMPANY
1994 MANAGEMENT INCENTIVE PLAN
PROGRAM DEPARTMENT
------------------
1994 PART I OBJECTIVES
% of Award
----------
4 1) Calendar Year Combined Ratio after
policyholder dividends not to
exceed 106.4
4 2) Net Written Premium no less than 88.2 M
4 3) Underwriting Expense Ratio not to
exceed 34.7
4 4) Actual Direct Expenses not to exceed Approved '94
Budget
4 5) Produce Two (2) New Programs
----------
20
SOURCE DOCUMENTS: OPERATING STATEMENTS
BUDGET VARIANCE REPORTS
<PAGE>
RELIANCE NATIONAL (RN)
1994 KEY MANAGEMENT INCENTIVE PLAN (KMIP)
-----------------------------------------
Participation
Participation for the plan year is represented by units assigned to each
participant. Each plan year will contain 1,300 units in total.
Units may be granted only to officers and key employees of RN selected by the
Committee (as hereinafter defined).
Two types of units will be assigned under the Plan, Fixed and Variable. All of
the units assigned to the CEO of Reliance National will be designated as Fixed.
Twenty-five percent of the total number of all units, less those assigned to the
CEO of Reliance National, will be designated as Fixed. At the beginning of each
plan year, the CEO of Reliance National will recommend to the CEO of Reliance
Insurance Group, the number of Fixed units that will be assigned to each
participant for the applicable plan year. Once approved by the CEO of Reliance
Insurance Insurance Group, the number of Fixed units assigned to a participant
may not be altered except for reallocation of forteited units to other
participants as described under "Vesting." Prior to the end of the second year
following completion of the plan year, the CEO of Reliance National will
recommend to the CEO of Reliance Insurance Group, the number, if any, of
Variable units to be assigned to a participant. The basis for this second
assignment will be the relative performance of the participant, and his division
or department. Once approved by the CEO of Reliance Insurance Group, the number
of variable units assigned to a participant may not be altered except for
reallocation of forfeited units to other participants as described under
"Vesting." An illustration of the operation of Fixed and Variable units is
contained in Exhibit 1.
Nothing in this Plan, nor in the instrument evidencing the grant of units, shall
in any manner be construed to limit in any way the right of RN to terminate a
participant's employment at any time, without regard to the effect of such
termination on any rights such participant would otherwise have under this Plan,
or give any right to such participant to remain employed by RN in any particular
position, or at any particular rate of compensation, or to receive a grant of
units for any other plan year.
<PAGE>
- page 2 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
Administration
This Plan shall be administered by the Compensation Committee of the Board of
Directors of Reliance Insurance Company or such body as may be designated by the
Board of Directors of Reliance Insurance Company (the "Committee"). A majority
of the Committee shall constitute a quorum thereof and the actions of a majority
of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. The Committee shall have full and final authority to
interpret this Plan and the instruments granting units hereunder (which
instruments need not be identical), to prescribe, amend and rescind rules and
regulations, if any, relating to this Plan and to make all determinations
necessary or advisable for the administration of this Plan (including, without
limitation, determinations of pretax operating profits, policy year investment
income, and all other financial calculations called for by this Plan). The
Committee's determination in all matters referred to herein shall be conclusive
and binding for all purposes and upon all persons including, but without
limitation, participants under the Plan.
No member of the Committee shall be liable for anything done or omitted to be
done by such member or by any other member of the Committee in connection with
the Plan, except for the willful misconduct or gross negligence of such member.
The Committee shall have power to engage outside consultants, auditors or other
professional help to assist in the fulfillment of the Committee's duties under
the Plan at RN's expense.
In making its determinations concerning the officers and key employees who shall
receive grants under the Plan, as well as the number of units to be covered
thereby and time or times at which they shall be granted, the Committee shall
take into account the nature of the services rendered by the respective officers
and key employees, their past, present and potential contribution to RN's
success and such other factors as the Committee may deem relevant. The Committee
shall also determine the form of instrument granting units hereunder and the
terms and conditions to be included therein, provided such terms and conditions
are not inconsistent with the terms of this Plan. The Committee may, in its
discretion, waive any provisions of any grant, provided such waiver is not
inconsistent with the terms of the Plan as then in effect.
The Plan may be terminated or amended at any time and from time to time
by the Board of Directors of Reliance Insurance Company. No termination
or amendment of this Plan, without the consent of the holder of any
units then granted, may terminate such holder's units or materially and
adversely affect such holder's rights thereunder.
<PAGE>
- page 3 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
KMIP Bonus Pool
The maximum bonus pool expressed as a percentage of pretax operating
profit (as defined) 1994 is 14% (13% in 1995), subject to the limitation
described in the following section.
For the plan year 1994, the total of bonuses earned under all incentive plans of
RN including KMIP, Regular MIP, and "MiniMIP" may not exceed 14% of pretax
profits before bonuses. For example:
1994 policy year pretax profit (before
incentive bonuses) = $70,000,000
-----------
Limitation 14% = 9,800,000
Bonus earned under all other incentive plans = 6,000,000
-----------
Maximum KMIP bonus pool $ 3,800,000
===========
The KMIP bonus earned per unit for the plan year is equal to the KMIP bonus pool
for the year divided by 1,300 units. In the above example, the amount earned per
unit is equal to $2,923.07 ($3,800,000 / 1,300). If an individual was awarded
100 units, his or her share of the bonus pool would represent $292,307 (100
units x $2,923.07 per unit).
Plan Year
The term "plan year" comprises the period from January 1 to December 31 of the
specified year during which an accounting will be made of premiums written and
losses incurred on policies with effective dates from January 1 to December 31
of such year (termed "policy year").
Vesting
Participants will become vested based on completing the following years of
employment:
Plan year 33 1/3%
Plan year plus one year 66 2/3%
Plan year plus two years 100 %
In the event a participant terminates employment by virtue of death, disability
or normal retirement after completion of a plan year, the employee will be fully
vested in the units assigned to him or her for that plan year. In the event the
employee terminates employment by virtue of death, disability or normal
retirement before the completion of the plan year, the employee will
<PAGE>
- page 4 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
become partially vested in the units assigned to him or her for that plan year
on the basis of the number of months of employment completed in the plan year
divided by twelve. The resulting fraction will then be multiplied by the number
of Fixed units assigned to the participant, and these units will then be valued
on the same basis as the other units for that plan year.
Example:
- Participant awarded 30 Fixed units for plan years 1994
and 1995 completes normal retirement on July 1, 1995.
Participant would be fully vested in all future payments
applicable to plan year 1994. Participant would be vested
50% for plan year 1995.
Any units forfeited for any reason may be reassigned to other participants by
the CEO of Reliance National, subject to the approval of the CEO of Reliance
Insurance Group.
Pretax Operating Profit
Pretax operating profit for a plan year will be calculated on a policy year
basis using statutory accounting principles as follows:
Net policy year written premium $ xxxx
(including retro, audit and similar ------
adjustments)
Less:
Net Policy year losses incurred $ xxxx
Net Policy year loss expenses incurred xxxx
Net Calendar year underwriting expenses* xxxx
------ ------
Underwriting gain (loss) xxxx
Plus: Policy year net investment income
(excluding realized capital gain or loss) xxxx
------
Total $ xxxx
Plus: Other calender year income
(excluding realized capital gain/loss)
Less: Other calendar year expenses
(including policy year policyholders' dividends) $ xxxx
------
Pretax operating profit $ xxxx
======
* Defined as the sum of calendar year operating expenses and
acquisition expenses.
<PAGE>
- page 5 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
- Operating expenses exclude all incentive plan bonuses recorded during the
year.
- Acquisition expenses are determined by multiplying the calendar year
acquisition expense ratio by the policy year written premium.
Pretax operating profit for a plan year will be recalculated at the end of
subsequent calendar years. Policy year losses and loss adjustment expenses
incurred will be based on loss and loss expense ratios provided by the
Corporate Actuarial Department under the supervision of Reliance's Chief
Actuary.
Reasonable allocations will be made by Reliance Insurance Company to RN for
Reliance Insurance Company's corporate overhead under the normal allocation
methods.
Policy Year Net Investment Income
Policy year net investment income will be calculated by multiplying the average
portfolio yield (excluding realized or unrealized capital gains or losses), net
of investment expenses and excluding any extraordinary intercompany dividends or
other non-recurring adjustments per Reliance's Consolidated Annual Statement for
the calendar year which coincides with the plan year, by the average policy year
invested assets (as defined) of RN for each calendar year. For example, for plan
year 1993 the yield determined from the calendar year 1993 consolidated
statutory statement would be used. This yield will be used in all subsequent
calendar years to determine policy year net investment income for plan year
1993.
For example:
Calendar Year
-------------------------------------
1996 to
1993 1994 1995 2001 Total
---- ---- ---- ---- -----
Average Invested Assets (RN)
Policy Year 1994 xxxx xxxx xxxx xxxx xxxx
Reliance Portfolio Yield Per
1994 Consolidated Annual
Statement (yield for illustrative
purposes only) 7% 7% 7% 7%
Policy Year Investment Income:
(Yield x Invested Assets) xxxx xxxx xxxx xxxx xxxx
Policy year investment income for the plan year is calculated for nine calendar
years.
<PAGE>
- page 6 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
Policy Year Average Invested Assets
Average invested assets will be calculated for each policy year as follows:
Average loss and loss expense reserves
Plus: Average unearned premium reserves
Plus: Average accrued bonuses
Plus: Other identifiable liabilities
Less: Average receivable balances (including retro accruals, bonus advances
and TPA imprest fund balances)
Less: Average policy year fixed assets net of accumulated depreciation.
(Additions to fixed assets in the calendar year 1994 are deemed to be the
policy year assets for 1994)
Less: Average borrowed surplus
Less: Other identifiable assets (paid loss recoverables, funds held, etc.)
Borrowed Surplus
Borrowed surplus for a policy year is equal to allocated surplus less actual
surplus:
Allocated surplus = policy year net written premium dividend by 2.0.
Actual surplus = beginning allocated surplus plus cumulative policy year
pretax profits and losses after provision for Federeal income tax.
Example:
1994 policy year net written premium $1,000,000
Allocated surplus 500,000
Calendar Year: 1993 1994 1995
-------- -------- --------
Surplus beginning $500,000 $450,000 $480,000
Net income after taxes (50,000) 30,000 20,000
Actual surplus end (A) 450,000 480,000 500,000
Allocated surplus (B) 500,000 500,000 500,000
Borrowed Surplus (B)-(A) 50,000 20,000 0
Borrowed surplus is deducted from net invested assets for purposes of
calculating net investment income.
<PAGE>
- page 7 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
Distribution Schedule
Participation units will be paid as shown below after the end of the years
indicated:
Plan year plus 2 3 4 5 6 7 8
Cumulative
Percentage
Distribution 25% 50% 80% 85% 90% 95% 100%
Distributions will be adjusted for any prior distributions or advance bonuses
paid and for losses from other plan years. (See Exhibit 1.)
Amounts due participants for a given plan year will be offset by losses from
other plan years. The losses from such plan years will be applied in accordance
with the distribution schedule above, except as set forth in the next sentence.
If a plan year is expected to experience an ultimate cumulative loss, then 100%
of the cumulative loss from such year will be applied in reduction of
distributions from other plan years.
In Exhibit 2:
- No payment will be made in January 1996 because at the end of calendar
year 1995, the cumulative loss per unit for plan year 1993 to $500 per
unit exceeds the cumulative payable per unit for plan year 1992.
Distribution due a participant may not be adjusted for losses from other plan
years in which he/she was not a participant.
In Exhibit 2:
- If a participant in the 1994 plan year was not a participant in the
earlier plan years, he/she would receive a payment of $300 per unit in January
1997 ($1,200 earned x 25%).
A separate account will be maintained for each participant for each plan year in
which he/she participates. Exhibit 3 is a sample of an annual Statement of
Account to be provided each employee.
<PAGE>
- page 8 -
Reliance National
1994 Key Management Incentive Plan
----------------------------------
Miscellaneous
No award under this Plan shall be considered as compensation in calculating any
insurance, pension or other benefit for which the recipient is eligible unless
any such insurance, pension or other benefit is granted under a plan which
expressly provides that compensation under this Plan shall be considered as
compensation under such plan.
<PAGE>
EXHIBIT 1
RELIANCE NATIONAL
1994 KMIP
EXAMPLE OF FIXED AND VARIABLE UNITS
-----------------------------------
ASSIGNED AT INCEPTION OF PLAN YEAR
----------------------------------
PARTICIPANT FIXED VARIABLE TOTAL
----------- ----- -------- ------
A(CEO) 325.00 0.00 325.00
B 50.00
C 40.00
D 35.00
E 35.00
F 25.00
G 20.00
H 20.00
I 18.75
------- ------- --------
TOTAL 568.75 731.75 1,300.00
======= ======= ========
MODIFICATION OF UNITS AFTER PLAN YEAR PLUS TWO YEARS
----------------------------------------------------
A 325.00 0.00 325.00
B 50.00 170.00 220.00
C 40.00 100.00 140.00
D 35.00 125.00 140.00
E 35.00 70.00 140.00
F 25.00 25.00 100.00
G 20.00 90.00 80.00
H 20.00 95.00 80.00
I 18.75 56.25 75.00
------- ------- --------
TOTAL 568.75 731.75 1,300.00
======= ======= ========
<PAGE>
EXHIBIT 2
---------
<TABLE>
<CAPTION>
HYPOTHETICAL EXAMPLE
DISTRIBUTION PAID PER UNIT
--------------------------
Distribution
Schedule (A) Calendar Year
-----------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
Plan Year
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 25% 50% 80% 85% 90% 95% 100%
1993 25% 50% 80% 85% 90% 95%
1994 25 50 80 85 90
1995 25 50 80 85
1996 25 50 80
<CAPTION>
Bonus Earned
(Cumulative)(B)
---------------
1992 1,000 900 800 800 800 700 600
1993 (500) (600) (700) (800) (800) (900)
1994 1,200 1,200 1,300 1,300 1,400
1995 1,500 1,500 1,400 1,200
1996 (1,000) (1,000) (500)
<CAPTION>
Distribution Due
(Cumultive)
(C= A x B)
----------------
1992 250 450 640 680 720 665 600
1993(1) (500) (600) (700) (800) (800) (900)
1994 300 600 1,040 1,105 1,260
1995 375 750 1,120 1,020
1996(2) (250) (500) (400)
Net Payable-
Cumulative 250 (50) 340 955 1,460 1,590 1,580
Less:
Paid Cumulative(3) 0 250 250 340 995 1,460 1,590
Balance Due-
Cumulative 250 (300) 90 615 505 130 (10)
</TABLE>
(1) 100% of the loss is deducted from amounts due in other plan years
because the 1993 plan year was projected to have an ultimate loss.
(2) Only 25%, 50% and 80% of the 1996 plan year is deducted in calendar
years 1998, 1999 and 2000 respectively because the plan year is
expected to be ultimately profitable.
(3) Payment is made generally in January of the year following.
<PAGE>
EXHIBIT 3
---------
<TABLE>
<CAPTION>
Reliance National MIP
Status December 31, 1993
1988 Plan Year May 12, 1994
------------------------
ACTUAL PROJECTED
12/31/93 12/31/96
Amount Ratios Amount Ratios
------------------------------------------------------------
<S> <C> <C> <C> <C>
Policy Year Earned Premium 265,884,000 265,884,000
Loss & Lae 220,950,000 83.1% 220,950,000 83.1%
Expense 45,051,000 16,9% 45,051,000 16.9%
Underwriting Gain (Loss) (117,000) (117,000)
Combined Ratio 100.0% 100.0%
Investment Income 38,124,000 14.3% 42,852,000 16.1%
Pretax Profit 38,007,000 85.7% 42,735,000 83.9%
</TABLE>
<TABLE>
<CAPTION>
Bonus Calculation: Per Unit Per Unit
------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cumulative Bonus earned 4,940,910 3,800.70 5,555,550 4,273.50
Mini-Mip 101,016 101,016
Adjusted Award 4,839,894 3,723.00 5,454,534 4,195.80
Cumulative Bonus Payable 85% 4,113,910 3,164.55
Cumulative Paid 3,872,257 2,978.66
Balance Payable 241,653 185.89
Paid (Overpayment) (423,988) 665,641
</TABLE>
<TABLE>
Paid Balance Projected Earned Payable
Participants Units Earned Payable Paid 89 Paid 92 Paid 92 1994 1/31/94 to 1996 Less Paid 1995 1996 1997 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Unit 3723.00 3164.55 755.77 64.76 1397.81 486.43 4195.80 24.62 366.15 313.85
Individual 65 241,995 205,695 65,000 4,210 74,983 33,282 28,221 272,727 95,252 1,600 23,800 69,852 95,252
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPERATIONS
<S> <C>
The Reliance Insurance Group encompasses
all the insurance operations of Reliance Group
Holdings, Inc.
PROPERTY AND CASUALTY INSURANCE A broad range of commercial lines of insurance
sold throughout the United States and in
selected international locations.
TITLE INSURANCE Title insurance for residential and commercial real estate
nationwide; escrow, settlement and real estate appraisal
services in connection with real estate closings; relocation
services for employees of corporate clients.
CONTENTS
Financial Statements 1
Independent Auditors' Report 22
Selected Financial Data 23
Financial Review 26
Directors and Officers 33
Corporate Data 36
</TABLE>
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned......................................................... $2,634,092 $2,464,903 $2,362,233
Net investment income................................................... 258,923 250,799 225,780
Gain on sales of investments............................................ 9,218 158,196 50,136
Gain on sale of subsidiary.............................................. -- -- 8,999
Other................................................................... 141,609 116,802 109,142
---------- ---------- ----------
3,043,842 2,990,700 2,756,290
---------- ---------- ----------
CLAIMS AND EXPENSES:
Policy claims and settlement expenses................................... 1,372,960 1,317,397 1,390,160
Policy acquisition costs................................................ 387,924 327,437 289,591
Other insurance expenses................................................ 959,904 954,747 879,874
Other................................................................... 141,206 121,785 106,210
---------- ---------- ----------
2,861,994 2,721,366 2,665,835
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN
INVESTEE COMPANY...................................................... 181,848 269,334 90,455
Provision for income taxes.............................................. (48,742) (93,134) (20,368)
Equity in investee company.............................................. 9,478 12,441 5,206
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS....................................... 142,584 188,641 75,293
Income from discontinued operations..................................... -- -- 64,105
Loss on disposal of discontinued operations............................. -- -- (47,300)
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE.................... -- 188,641 92,098
Cumulative effect of change in accounting for income taxes.............. -- 24,335 --
---------- ---------- ----------
NET INCOME.............................................................. $ 142,584 $ 212,976 $ 92,098
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per-share amounts)
Marketable securities:
Fixed maturities held for investment--at amortized cost (quoted market $1,072,982
and $973,113)................................................................... $1,185,186 $ 936,643
Fixed maturities available for sale--at quoted market (cost $1,945,919
and $1,856,969)................................................................ 1,839,312 1,944,099
Equity securities--at quoted market (cost $482,529 and $458,217)................. 564,636 547,173
Short-term investments........................................................... 229,906 372,507
Cash.................................................................................. 37,891 61,897
Premiums receivable................................................................... 1,079,393 963,570
Other accounts and notes receivable................................................... 179,958 124,902
Reinsurance recoverables.............................................................. 2,928,533 2,573,688
Federal and foreign income taxes, including deferred taxes............................ 180,831 119,668
Investments in real estate--at cost, less accumulated depreciation.................... 283,955 277,326
Investment in investee company........................................................ 147,513 157,016
Deferred policy acquisition costs..................................................... 181,938 178,129
Other assets.......................................................................... 328,134 302,298
---------- ----------
$9,167,186 $8,558,916
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unearned premiums..................................................................... $1,288,454 $1,276,331
Unpaid claims and related expenses.................................................... 5,809,546 5,253,137
Accounts payable and accrued expenses................................................. 647,630 604,335
Reinsurance ceded premiums payable.................................................... 291,844 206,373
Term loans and short-term debt........................................................ 29,355 20,373
---------- ----------
8,066,829 7,360,549
---------- ----------
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....................................................... 717,533 692,237
Retained earnings................................................................ 363,819 335,374
Net unrealized gain (loss) on investments........................................ (27,881) 115,023
Net unrealized loss on foreign currency translation.............................. (21,218) (15,731)
---------- ----------
1,076,840 1,171,490
---------- ----------
$9,167,186 $8,558,916
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDER'S EQUITY
--------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
NET
UNREALIZED
NET GAIN (LOSS)
ADDITIONAL UNREALIZED ON FOREIGN COMMON
COMMON PAID-IN RETAINED GAIN (LOSS) ON CURRENCY SHAREHOLDER'S
STOCK CAPITAL EARNINGS INVESTMENTS TRANSLATION EQUITY
------- ---------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991.................. $44,587 $593,209 $ 304,501 $ 40,216 $ 6,291 $ 988,804
Transactions of investee company............ -- 10,578 -- 3,818 -- 14,396
Net income.................................. -- -- 92,098 -- -- 92,098
Dividends:
Preferred stock........................ -- -- (3,281) -- -- (3,281)
Common stock........................... -- -- (140,448) -- -- (140,448)
Capital contributions....................... -- 82,636 3,199 -- (3,684) 82,151
Appreciation after deferred income taxes.... -- -- -- 41,987 -- 41,987
Foreign currency translation................ -- -- -- -- (14,933) (14,933)
------- ---------- --------- -------------- ----------- -------------
Balance, December 31, 1992.................. 44,587 686,423 256,069 86,021 (12,326) 1,060,774
Transactions of investee company............ -- 814 -- 1,244 -- 2,058
Net income.................................. -- -- 212,976 -- -- 212,976
Dividends:
Preferred stock........................ -- -- (3,032) -- -- (3,032)
Common stock........................... -- -- (130,639) -- -- (130,639)
Capital contribution........................ -- 5,000 -- -- -- 5,000
Appreciation after deferred income taxes.... -- -- -- 27,758 -- 27,758
Foreign currency translation................ -- -- -- -- (3,405) (3,405)
------- ---------- --------- -------------- ----------- -------------
BALANCE, DECEMBER 31, 1993.................. 44,587 692,237 335,374 115,023 (15,731) 1,171,490
Transactions of investee company............ -- (597) -- (9,002) -- (9,599)
Net income.................................. -- -- 142,584 -- -- 142,584
Dividends:
Preferred stock........................ -- -- (2,672) -- -- (2,672)
Common stock........................... -- -- (111,467) -- -- (111,467)
Capital contributions....................... -- 25,893 -- -- -- 25,893
Depreciation after deferred income taxes.... -- -- -- (133,902) -- (133,902)
Foreign currency translation................ -- -- -- -- (5,487) (5,487)
------- ---------- --------- -------------- ----------- -------------
BALANCE, DECEMBER 31, 1994.................. $44,587 $717,533 $ 363,819 $ (27,881) $ (21,218) $ 1,076,840
------- ---------- --------- -------------- ----------- -------------
------- ---------- --------- -------------- ----------- -------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 142,584 $ 212,976 $ 92,098
Adjustments to reconcile net income to net cash provided
from operating activities:
Cumulative effect of change in accounting for income taxes................. -- (24,335) --
Gain on sales of investments............................................... (9,218) (158,196) (50,136)
Deferred policy acquisition costs.......................................... (3,809) (54,779) (13,182)
Premiums and other receivables and reinsurance recoverables................ (505,579) (221,947) (709,116)
Unearned premiums, unpaid claims and related expenses...................... 566,873 581,141 997,889
Accounts payable, accrued expenses and other............................... 130,432 (60,162) 13,692
--------- ---------- ---------
321,283 274,698 331,245
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale...................... 441,401 341,168 317,093
Proceeds from sales of fixed maturities held for investment..................... 18,481 -- 148,953
Proceeds from redemptions of fixed maturities available for sale................ 60,752 170,281 42,019
Proceeds from redemptions of fixed maturities held for investment............... 15,785 273,921 243,694
Proceeds from sales of equity securities........................................ 189,895 1,016,308 469,900
(Increase) decrease in short-term investments--net.............................. 151,965 240,884 (59,050)
Sale of net assets of a subsidiary.............................................. -- -- 118,500
Purchases of fixed maturities available for sale................................ (587,581) (958,817) (422,395)
Purchases of fixed maturities held for investment............................... (275,609) (586,677) (478,209)
Purchases of equity securities.................................................. (209,506) (680,760) (472,072)
Discontinued operations......................................................... 15,550 69,157 8,569
Other--net...................................................................... (72,905) (23,067) (65,371)
--------- ---------- ---------
(251,772) (137,602) (148,369)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution............................................................ 15,000 5,000 --
Redemption of preferred stock................................................... (3,360) (3,360) (3,360)
Increase (decrease) in term loans and short-term debt--net...................... 8,982 (2,105) (16,091)
Dividends....................................................................... (114,139) (133,671) (143,729)
--------- ---------- ---------
(93,517) (134,136) (163,180)
--------- ---------- ---------
Increase (decrease) in cash..................................................... (24,006) 2,960 19,696
Cash, beginning of year......................................................... 61,897 58,937 39,241
--------- ---------- ---------
Cash, end of year............................................................... $ 37,891 $ 61,897 $ 58,937
--------- ---------- ---------
--------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes refunded (paid).................................................... $ (44,500) $ (136,900) $ 12,000
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
In the fourth quarter of 1994, Reliance Financial Services Corporation
('Reliance Financial') contributed to the Company $9,287,000, par value, of its
10.36% Senior Reset Notes. See note 8 to the consolidated financial statements.
In connection with the 1992 sale of the operating assets of Frank B. Hall & Co.
Inc. ('Hall'), the Company received a capital contribution from Reliance
Financial. In 1994, the Company received an additional capital contribution from
Reliance Financial in connection with the sale of Hall. See note 15 to the
consolidated financial statements.
In 1992, Reliance Financial contributed to the Company all of the outstanding
common stock of RCG International, Inc., a company engaged in consulting and
technical services. See note 8 to the consolidated financial statements.
See notes to consolidated financial statements
4
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP OF THE COMPANY'S COMMON STOCK
Reliance Financial Services Corporation ('Reliance Financial') owns 100% of the
common stock of Reliance Insurance Company. Reliance Group Holdings, Inc. owns
100% of the common stock of Reliance Financial.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of all
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
INSURANCE
The financial statements of the insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles, which differ in
certain respects from those followed in reports to regulatory authorities.
Fixed maturity investments, the vast majority of which are publicly traded
securities, include bonds, notes and redeemable preferred stocks. Fixed maturity
investments classified as 'available for sale' represent securities that will be
held for an indefinite period of time and are carried at quoted market value
with the net unrealized gain or loss included in common shareholder's equity.
Such investments may be sold in response to changes in interest rates, future
general liquidity needs and similar factors. Fixed maturity investments
classified as 'held for investment' are carried at amortized cost since the
Company has the positive intent and ability to hold these securities to
maturity. Prior to June 30, 1992, the Company held all of its fixed maturity
portfolio as 'held for investment'. Accordingly, sales of fixed maturities held
for investment during 1992, as shown on the accompanying consolidated statement
of cash flows, represent sales of all fixed maturity investments during the
period January 1, 1992 through June 30, 1992. Investments in equity securities
include common stocks, where ownership of outstanding voting stock is less than
20%, and nonredeemable preferred stocks and are carried at quoted market value
with the net unrealized gain or loss included in common shareholder's equity.
Investments in which the Company has a 20% to 50% ownership interest, or
otherwise exercises significant influence, are reported using the equity method
of accounting. Short-term investments primarily consist of U.S. treasury
securities, certificates of deposit and commercial paper carried at cost which
approximates market. Investments whose declines in market values are deemed to
be other than temporary are written down to market value and the accrual of
investment income is discontinued. In circumstances where market values are not
available, investments are written down to estimated fair value. In determining
estimated fair value of investments, the Company reviews the issuer's financial
condition and the stability of its income, as well as the discounted cash flow
to be received by the Company. Write-downs and other realized gains and losses,
determined on a specific identification basis, are included in income.
Property and casualty insurance premiums reported as earned represent the
portion of premiums written applicable to the current period, computed on a
pro-rata basis over the terms of the policies in force. Premiums include
estimated audit premiums and estimated premiums on retrospectively rated
policies.
The costs associated with the acquisition of property and casualty business are
deferred and amortized on a straight-line basis over the terms (principally one
year) of the policies in force. Such deferred policy acquisition costs consist
of commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, including anticipated
investment income.
5
<PAGE>
Property and casualty unpaid claims and related expenses are based on an
evaluation of reported claims in addition to statistical projections of claims
incurred but not reported and loss adjustment expenses. Estimates of salvage and
subrogation are deducted from the liability. Adjustments of the probable
ultimate liability, based on subsequent developments, are included in operations
currently. At December 31, 1994 and 1993, liabilities for unpaid claims and
related expenses include $437,900,000 and $411,023,000 relating to
short-duration contracts which are expected to have fixed, periodic payment
patterns and have been discounted to present values using statutory annual rates
ranging from 3 1/2% to 6%.
Direct title insurance premiums and fees are recognized as revenue when policies
become effective. Agency title insurance premiums are recognized as revenue when
reported by the agent. Title insurance claims arise principally from unknown
title defects which exist at the time policies become effective. The reserve for
title losses, which is based on historical and anticipated loss experience,
represents the estimated costs to settle reported claims and estimated future
claims relating to policies issued. Changes in loss estimates, resulting from
management's continuing review process and differences between estimates and
actual payments, are included in operations currently.
INVESTMENTS IN REAL ESTATE
Investments in real estate consist primarily of shopping centers and office
buildings, and are carried at cost (less accumulated depreciation), which
includes real estate taxes, interest and other carrying costs incurred prior to
substantial completion of the real estate development projects. Investments in
real estate at December 31, 1994 include $55,300,000 related to undeveloped land
which has been rezoned for mixed use development. Interest capitalized relating
to the development of real estate properties was $398,000 in 1992. No interest
was capitalized in 1994 or 1993. Depreciation expense is provided using the
straight-line method.
The Company periodically evaluates the discounted cash flow of each of its real
estate properties over a ten-year period to determine whether they are carried
at or below net realizable value. These cash flow projections reflect changes in
occupancy, new leases, current rent roll, future expirations and general market
conditions. Based on this analysis, impairment write-downs, if required, are
made on a property-by-property basis. The Company does not rely on market value
appraisals in determining net realizable value and obtains such appraisals on an
infrequent basis.
INCOME TAXES
The Company and its domestic subsidiaries, where their ownership is at least 80%
of outstanding voting stock, are included in the consolidated federal income tax
return of Reliance Group Holdings, Inc. The Company provides for deferred income
taxes under the asset and liability method, whereby deferred income taxes result
from temporary differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements. In addition, deferred income
taxes are provided for unrealized appreciation and depreciation on investments
carried at quoted market value.
POSTRETIREMENT BENEFIT PLANS
Retirement pension benefits, covering substantially all employees, are provided
under noncontributory trusteed defined benefit pension plans. Contributions to
the pension plans are based on the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. In addition, the Company sponsors
defined contribution plans covering employees who meet eligibility requirements
and unfunded postretirement medical and life insurance plans for certain
employees of a subsidiary.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates. Results of operations are translated at average rates during the
year. The effects of exchange rate changes in translating foreign financial
statements are excluded from the consolidated statement of income and are
presented as a separate component of common shareholder's equity.
6
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of publicly traded financial instruments is determined
by the Company using quoted market prices, dealer quotes and prices obtained
from independent third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from independent third
parties or quoted market prices of comparable instruments. However, judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. See notes 2 and 3 regarding fair
value information for the Company's financial instruments.
The Company believes that the fair value of its term loans and short-term debt
at December 31, 1994 and 1993 approximates carrying value.
RECLASSIFICATIONS
The 1993 and 1992 consolidated statement of cash flows has been reclassified to
include gain on sales of investments as a component of cash flows from investing
activities, rather than a component of cash flows from operating activities.
Certain other reclassifications have been made to the Company's 1993 and 1992
consolidated financial statements to conform with the current year's
consolidated financial statements.
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.
2. INVESTMENTS
Fixed maturities held for investment at December 31, 1994 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities.................................... $ 536,746 $ 477,942 $ 202 $ 59,006
Corporate bonds and notes and other (2)............. 497,687 452,080 1,164 46,771
Redeemable preferred stock............................... 150,753 142,960 1,613 9,406
---------- ---------- ------ --------
$1,185,186 $1,072,982 $2,979 $115,183
========== ========== ====== ========
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $1,065,908,000 and $950,725,000.
(2) Includes notes of Reliance Financial with an amortized cost and market value
of $19,166,000 and $19,431,000.
7
<PAGE>
Fixed maturities available for sale at December 31, 1994 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities.......................... $ 495,007 $ 528,297 $ 615 $ 33,905
Public utilities.................................... 88,602 96,631 177 8,206
Corporate bonds and notes and other................. 914,904 971,630 32,020 88,746
Redeemable preferred stock............................... 340,799 349,361 5,695 14,257
---------- ---------- ------- --------
$1,839,312 $1,945,919 $38,507 $145,114
========== ========== ======= ========
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $1,533,070,000 and $1,387,956,000.
Fixed maturities held for investment at December 31, 1993 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses (1)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
Public utilities.................................... $ 433,138 $ 446,506 $14,668 $ 1,300
Corporate bonds and notes and other................. 367,697 383,517 17,190 1,370
Redeemable preferred stock............................... 135,808 143,090 7,382 100
---------- ---------- ------- --------
$ 936,643 $ 973,113 $39,240 $2,770
========== ========== ======= ======
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $78,143,000 and $75,373,000.
Fixed maturities available for sale at December 31, 1993 consisted of:
<TABLE>
<CAPTION>
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses (1)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities.......................... $ 475,060 $ 466,897 $10,087 $ 1,924
Public utilities.................................... 91,556 86,943 4,725 112
Corporate bonds and notes and other................. 994,154 943,921 59,013 8,780
Redeemable preferred stock............................... 383,329 359,208 25,796 1,675
---------- --------- ------- -------
$1,944,099 $1,856,969 $99,621 $12,491
========== ========== ======= =======
</TABLE>
(1) The amortized cost and market value of fixed maturity investments which have
unrealized losses were $386,455,000 and $373,964,000.
8
<PAGE>
As of December 31, 1994, the contractual maturities of fixed maturity
investments are as follows:
<TABLE>
<CAPTION>
Held for investment Available for sale
------------------------ ------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Due after one year through five years.................... $ 34,383 $ 33,924 $ 633,427 $ 596,571
Due after five years through ten years................... 374,340 346,739 446,452 444,450
Due after ten years...................................... 776,463 692,319 846,234 779,436
---------- ---------- ---------- ----------
1,185,186 1,072,982 1,926,113 1,820,457
Mortgage-backed securities............................... -- -- 19,806 18,855
---------- ---------- ---------- ----------
$1,185,186 $1,072,982 $1,945,919 $1,839,312
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Short-term investments represent securities which are scheduled to mature within
one year.
Net investment income consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Investment income:
Fixed maturities (1)............................................... $ 218,981 $ 193,180 $ 180,388
Equity securities.................................................. 27,390 29,640 22,229
Short-term investments............................................. 9,159 19,920 17,615
Other.............................................................. 14,159 15,832 13,664
---------- ---------- ----------
269,689 258,572 233,896
Investment expenses..................................................... (10,766) (7,773) (8,116)
---------- ---------- ----------
$ 258,923 $ 250,799 $ 225,780
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) Includes investment income from notes of Reliance Financial of $11,000 in
1994 and investment income from debentures of Reliance Group Holdings, Inc.
of $10,085,000 and $10,269,000 in 1993 and 1992.
Gain on sales of investments consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fixed maturities (1):
Realized gains..................................................... $ 44,512 $ 83,338 $ 40,359
Realized losses (2)................................................ (28,016) (21,179) (9,386)
---------- ---------- ----------
16,496 62,159 30,973
Equity securities....................................................... 8,890 98,944 19,628
Other (3)............................................................... (16,168) (2,907) (465)
---------- ---------- ----------
$ 9,218 $ 158,196 $ 50,136
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) For the year ended December 31, 1994, the Company sold fixed maturities held
for investment with an amortized cost of $18,100,000. These sales were
principally in response to a significant deterioration in the issuers'
creditworthiness.
(2) Includes $21,900,000, $18,400,000 and $9,000,000 in 1994, 1993 and 1992,
respectively, related to non-investment grade securities.
(3) Includes realized losses of $14,500,000 in 1994 related to certain foreign
currency contracts. As of December 31, 1994, the Company did not hold any
derivative financial instruments.
Gain on sales of investments in 1994 and 1993 included write-downs of
$23,500,000 and $23,400,000 equal to the difference between cost and market
values of certain investments to reflect other than temporary declines.
9
<PAGE>
Net unrealized appreciation (depreciation) on investments consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Unrealized appreciation (depreciation):
Equity securities....................................................... $ (6,849) $ (9,670) $ 31,347
Fixed maturities available for sale..................................... (193,737) 48,689 38,441
--------- -------- --------
(200,586) 39,019 69,788
Deferred income tax (provision) benefit...................................... 66,684 (11,261) (27,801)
Net unrealized appreciation (depreciation) in investments of
investee company........................................................... (9,002) 1,244 3,818
--------- -------- --------
$(142,904) $ 29,002 $ 45,805
--------- -------- --------
--------- -------- --------
Unrealized appreciation (depreciation) on fixed maturities
held for investment........................................................ $(148,674) $ 3,098 $ 17,496
--------- -------- --------
--------- -------- --------
</TABLE>
Net unrealized gain (loss) on investments consisted of:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Equity securities:
Unrealized gains........................................................ $ 114,231 $100,179 $ 99,986
Unrealized losses....................................................... (32,124) (11,223) (1,360)
--------- -------- --------
82,107 88,956 98,626
--------- -------- --------
Fixed maturities available for sale:
Unrealized gains........................................................ 38,507 99,621 66,392
Unrealized losses....................................................... (145,114) (12,491) (27,951)
--------- -------- --------
(106,607) 87,130 38,441
--------- -------- --------
(24,500) 176,086 137,067
Deferred income tax (provision) benefit...................................... 5,053 (61,631) (50,370)
Net unrealized gain (loss) in investments of investee company................ (8,434) 568 (676)
--------- -------- --------
$ (27,881) $115,023 $ 86,021
--------- -------- --------
--------- -------- --------
</TABLE>
Fixed maturity investments carried at $482,500,000 at December 31, 1994 were on
deposit under requirements of regulatory authorities, including deposits related
to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the U.S. government,
whose aggregate carrying value is in excess of 10% of the Company common
shareholder's equity at December 31, 1994 were comprised of nonredeemable
preferred stock of Aon Corporation and common stock of Symbol Technologies, Inc.
with a carrying and market value of $123,132,000 and $110,182,000, respectively.
10
<PAGE>
3. INVESTMENT IN INVESTEE COMPANY
Investment in investee company at December 31, 1994 and 1993 was $147,513,000,
and $157,016,000 which represents the Company's investment in Zenith National
Insurance Corp. ('Zenith'). Equity income in Zenith was $9,478,000, $12,441,000
and $5,206,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. Dividends received by the Company from Zenith were $6,574,000 for
each of the years ended December 31, 1994, 1993 and 1992.
Summarized financial information for Zenith is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues.................................................................. $595,113 $ 585,782 $ 549,335
Income before income taxes and extraordinary item......................... 57,571 73,479 19,706
Net income................................................................ 37,900 53,200 28,700
Net income per-share...................................................... 1.99 2.76 1.52
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except percentage of ownership)
Total assets......................................................................... $1,840,758 $1,857,790
Senior notes......................................................................... 74,111 73,989
Common shareholders' equity.......................................................... 309,860 349,465
Percentage of ownership.............................................................. 34.7% 34.5%
Market value of investment in equity securities...................................... 149,569 147,103
</TABLE>
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1994, retained earnings
included undistributed net income of $31,091,000 from Zenith.
4. PREMIUMS AND OTHER ACCOUNTS RECEIVABLE
As of December 31, 1994 and 1993, the Company sold with recourse $126,700,000
and $117,900,000 of reinsurance recoverables and premiums receivable relating to
its property and casualty insurance operations.
5. INCOME TAXES
Federal income tax has been computed as if the Company filed a separate
consolidated tax return with its domestic subsidiaries where their ownership is
at least 80% of outstanding voting stock. The current tax so computed is paid to
or due from Reliance Group Holdings, Inc.
Provision for income taxes on continuing operations consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal.............................................................. $ 53,426 $ 87,767 $ 44,924
Foreign.............................................................. 6,204 1,949 1,621
-------- ---------- ----------
59,630 89,716 46,545
Deferred federal.......................................................... (10,888) 3,418 (26,177)
-------- ---------- ----------
$ 48,742 $ 93,134 $ 20,368
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
11
<PAGE>
Domestic and foreign income from continuing operations before income taxes and
equity in investee company were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Domestic.................................................................... $163,350 $ 263,765 $ 85,687
Foreign..................................................................... 18,498 5,569 4,768
-------- --------- ---------
$181,848 $ 269,334 $ 90,455
-------- --------- ---------
-------- --------- ---------
</TABLE>
The reconciliation of taxes computed at the statutory rate (35% in 1994 and 1993
and 34% in 1992) to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Tax provision at statutory rate............................................. $ 63,647 $ 94,267 $ 30,755
Nontaxable investment income................................................ (13,989) (1,743) (7,999)
Impact of change in statutory rate from new tax act......................... -- (4,043) --
Other....................................................................... (916) 4,653 (2,388)
-------- --------- ---------
Provision for income taxes.................................................. $ 48,742 $ 93,134 $ 20,368
-------- --------- ---------
-------- --------- ---------
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Deferred tax assets:
Discounting of loss reserves...................................................... $ 197,655 $ 190,862
Tax basis differential of subsidiary not included in consolidated tax return...... 120,600 120,600
Operating loss carryforwards of subsidiary not included in
consolidated tax return......................................................... 57,925 54,600
Unearned premium reserve.......................................................... 40,748 41,198
Accruals not currently deductible................................................. 42,878 41,331
Other............................................................................. 71,938 50,184
--------- ---------
531,744 498,775
Deferred tax liabilities:
Deferred policy acquisition costs................................................. 62,874 61,915
Unrealized investment gains....................................................... -- 61,631
Investment in investee company.................................................... 17,499 20,898
Other............................................................................. 83,419 78,147
--------- ---------
367,952 276,184
Valuation allowance.................................................................... (164,042) (156,511)
--------- ---------
Net deferred tax asset................................................................. $ 203,910 $ 119,673
--------- ---------
--------- ---------
</TABLE>
The Company believes that its net deferred tax asset will be fully recoverable
under Section 847 of the Internal Revenue Code and from the utilization of
certain net operating loss carryforwards ('NOL'). The increase in the Company's
valuation allowance during 1994 relates principally to a subsidiary that is not
included in the consolidated tax return.
At December 31, 1994, a subsidiary of the Company, not included in the
consolidated tax return, had available NOL's of approximately $165,500,000. For
federal income tax purposes, approximately $131,500,000 expires in 2001,
$17,000,000 in 2002 and $17,000,000 in 2004. The Internal Revenue Code imposes
limitations on the availability of these NOL's since the subsidiary experienced
a more than 50 percentage point ownership change in 1989. The amount of the NOL
incurred prior to the ownership change which can be utilized in each subsequent
year is limited (the 'Loss Limitation') based on the value of the subsidiary on
the date of the ownership change. The annual Loss Limitation approximates
$25,000,000.
12
<PAGE>
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, 'Accounting for Income Taxes' ('FAS 109'). The effect of
adopting FAS 109 in 1993 was to increase net income by $24,878,000 representing
a decrease in the provision for income taxes of $4,043,000, an increase in
income for the cumulative effect of the change in accounting principle of
$24,335,000 and a decrease in extraordinary income from the utilization of NOL's
of $3,500,000. As a result of adopting FAS 109, previously unrecorded deferred
tax benefits from NOL's were recognized. These benefits amounted to $31,100,000,
net of a valuation allowance of $25,000,000.
6. UNPAID CLAIMS AND RELATED EXPENSES
The following table presents information relating to the liability for unpaid
claims and related expenses for the Company's property and casualty insurance
operations. The reconciliation of beginning and ending liability balances is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Liability for unpaid claims and related expenses, beginning
of year............................................................... $5,048,442 $4,571,792 $3,685,049
Less reinsurance recoverables...................................... 2,116,914 1,868,800 1,309,814
---------- ---------- ----------
Net liability for unpaid claims and related expenses, beginning
of year............................................................... 2,931,528 2,702,992 2,375,235
---------- ---------- ----------
Provision for policy claims and related expenses:
Provision for insured events of the current year................... 1,274,649 1,195,425 1,258,111
Increase in provision for insured events of prior years............ 22,444 40,169 31,487
---------- ---------- ----------
Total provision.................................................. 1,297,093 1,235,594 1,289,598
---------- ---------- ----------
Payments for policy claims and related expenses:
Attributable to insured events of the current year................. 321,538 229,778 271,878
Attributable to insured events of prior years...................... 780,961 776,881 689,181
---------- ---------- ----------
Total payments................................................... 1,102,499 1,006,659 961,059
---------- ---------- ----------
Foreign currency translation............................................ 1,659 (399) (782)
---------- ---------- ----------
Net liability for unpaid claims and related expenses, end of year....... 3,127,781 2,931,528 2,702,992
Plus reinsurance recoverables...................................... 2,453,702 2,116,914 1,868,800
---------- ---------- ----------
Liability for unpaid claims and related expenses, end of year........... $5,581,483 $5,048,442 $4,571,792
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The 1994 provision for property and casualty insured events of prior years
includes $17,000,000 of adverse development related to prior year
asbestos-related and environmental pollution claims. Development of asbestos-
related and environmental pollution claims primarily effects general liability
and multiple peril lines of business. The 1994 provision also includes
$14,700,000 of adverse development from other general liability lines. This
development was partially offset by $13,300,000 of favorable development in
workers' compensation. The 1993 provision included $21,100,000 of adverse
development from workers' compensation reinsurance pools and $35,200,000 of
adverse development related to prior year asbestos-related and environmental
pollution claims. This development was partially offset by favorable development
in other lines of business, including other general liability lines. The 1992
provision included $55,600,000 of adverse development from workers' compensation
and automobile reinsurance pools. This development was partially offset by
favorable development of $11,900,000 from two general liability claims and
favorable development of $10,700,000 related to unallocated loss adjustment
expenses.
13
<PAGE>
The following table presents information relating to the liability for unpaid
claims and related expenses for the Company's title insurance operations. The
reconciliation of beginning and ending liability balances is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Liability for unpaid claims and related expenses, beginning of year.......... $204,695 $173,328 $177,449
-------- -------- --------
Provision for policy claims and related expenses:
Provision for insured events of the current year........................ 71,060 76,955 95,963
Increase in provision for insured events of prior years................. 4,807 4,848 4,599
-------- -------- --------
Total provision....................................................... 75,867 81,803 100,562
-------- -------- --------
Payments for policy claims and related expenses:
Attributable to insured events of the current year...................... 4,475 2,356 7,450
Attributable to insured events of prior years........................... 48,024 48,080 78,950
-------- -------- --------
Total payments........................................................ 52,499 50,436 86,400
-------- -------- --------
Other (1).................................................................... -- -- (18,283)
-------- -------- --------
Liability for unpaid claims and related expenses, end of year................ $228,063 $204,695 $173,328
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Represents the effects of the sale and acquisition of certain subsidiaries.
The following table presents information relating to the net liability for
unpaid claims and related expenses pertaining to asbestos-related and
environmental pollution claims. Information is presented for 1994 and 1993 only,
as certain 1992 data is not available. The reconciliation of beginning and
ending net liability balances is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Net liability for unpaid claims and related expenses, beginning of year................. $122,034 $ 94,253
Provision for policy claims and related expenses........................................ 28,279 52,630
Payments for policy claims and related expenses......................................... (20,170) (24,849)
-------- --------
Net liability for unpaid claims and related expenses, end of year....................... $130,143 $122,034
-------- --------
-------- --------
</TABLE>
Included in the December 31, 1994 net liability for unpaid claims and related
expenses for asbestos-related and environmental pollution claims are $36,500,000
of loss costs for claims incurred but not reported, $49,400,000 of loss costs
for reported claims and $44,243,000 of related expenses. The Company continues
to receive claims asserting injuries from hazardous materials and alleged
damages to cover various clean-up costs. Loss and loss expense reserves for
asbestos-related and environmental pollution claims are established using
standard actuarial techniques as well as management's judgement. Coverage and
claim settlement issues, related to policies written in prior years, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business. See Financial Review section for further discussion.
7. PREFERRED SHAREHOLDERS' EQUITY
The nonconvertible, sinking fund preferred stock has cumulative dividend rights
of $2.68 per share and is redeemable, at the Company's option, at various prices
decreasing to $25 per share in 1996. The Company redeemed 134,389 shares during
each of 1994 and 1993, which were used to satisfy the mandatory annual
redemption of one-fifteenth of all shares issued. The Company also had
15,000,000 authorized shares of preferred stock.
14
<PAGE>
8. COMMON SHAREHOLDER'S EQUITY
Dividend payments by the Company, without prior regulatory approval, are limited
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
unassigned funds. In accordance with these regulatory restrictions, $124,500,000
is available for dividends to Reliance Financial in 1995, subject to the broad
discretionary powers of insurance regulatory authorities to further limit
dividend payments of insurance companies.
In the fourth quarter of 1994, Reliance Financial contributed to the Company
$15,000,000 in cash and its 10.36% Senior Reset Notes with a par value of
$9,287,000 and a market value of $9,304,000. The contributions increased common
shareholder's equity by $24,304,000 in the Company's 1994 financial statements.
A portion of the cash contribution was used to purchase an additional
$10,000,000, par value, of Reliance Financial's 10.36% Senior Reset Notes.
On December 31, 1992, Reliance Financial contributed to the Company, at carrying
value, all of the outstanding common stock of RCG International, Inc., a company
engaged in consulting and technical services. The contribution, which has been
reflected on the accompanying consolidated financial statements as of January 1,
1992, increased common shareholder's equity by $34,140,000 at January 1, 1992.
9. REINSURANCE
In the normal course of business, the property and casualty insurance companies
assume and cede reinsurance on both a pro-rata and excess basis. Reinsurance
provides greater diversification of business and limits the maximum net loss
potential arising from large claims. Although the ceding of reinsurance does not
discharge an insurer from its primary legal liability to a policyholder, the
reinsuring company assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the liability for unpaid claims and related expenses associated with the
reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying consolidated balance sheet. As of December 31, 1994
and 1993, reinsurance recoverables include $463,380,000 and $439,337,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
(In thousands)
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Direct.................. $ 2,654,437 $ 2,630,549 $ 2,587,149 $ 2,531,478 $ 2,480,417 $ 2,350,216
Assumed................. 330,261 345,398 323,422 304,422 280,530 312,730
Ceded................... (1,220,408) (1,198,629) (1,139,974) (1,264,361) (1,219,387) (1,127,206)
----------- ----------- ----------- ----------- ----------- -----------
Net premiums....... $ 1,764,290 $ 1,777,318 $ 1,770,597 $ 1,571,539 $ 1,541,560 $ 1,535,740
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Gross............................................................... $ 2,220,285 $ 2,097,428 $ 2,383,349
Reinsurance recoveries.............................................. (923,192) (861,834) (1,093,751)
----------- ----------- -----------
Net policy claims and settlement expenses...................... $ 1,297,093 $ 1,235,594 $ 1,289,598
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
15
<PAGE>
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers. The Company is
not aware of any impairment of the creditworthiness of any of its significant
reinsurers.
The Company's ten largest reinsurers, based on 1994 ceded premiums, are as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C>
(In thousands)
American Re-Insurance Company......................................................................... $132,778
North American Reinsurance Corp....................................................................... 98,756
Lloyd's of London..................................................................................... 93,503
Hertz International Reinsurance Ltd................................................................... 67,309
Commercial Risk Re-Insurance Co....................................................................... 45,822
G.I.O. Insurance Ltd.................................................................................. 35,869
TRN Insurance Company................................................................................. 34,692
Employers Reinsurance Corp............................................................................ 34,537
TIG Reinsurance Company............................................................................... 29,550
Transatlantic Reinsurance Co.......................................................................... 26,725
</TABLE>
10. OTHER INSURANCE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Salaries and commissions..................................................... $704,254 $684,362 $613,743
Taxes, other than income taxes............................................... 34,849 54,049 52,161
Rent......................................................................... 54,863 50,852 52,108
Policyholders' dividends..................................................... 2,630 6,342 9,827
Other........................................................................ 163,308 159,142 152,035
-------- -------- --------
$959,904 $954,747 $879,874
-------- -------- --------
-------- -------- --------
</TABLE>
11. POSTRETIREMENT BENEFIT PLANS
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,247,400 shares of Reliance Group Holdings, Inc. common
stock and 404,797 warrants to purchase shares of Reliance Group Holdings, Inc.
common stock.
Pension cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Service cost--benefits earned during the period.............................. $ 10,255 $ 7,882 $ 9,528
Interest cost on projected benefit obligation................................ 12,941 12,495 11,596
Actual return on plan assets................................................. 8,920 (25,596) (17,748)
Net amortization and deferral................................................ (26,252) 10,068 4,194
Effect of plan curtailment................................................... -- (1,212) (542)
-------- -------- --------
$ 5,864 $ 3,637 $ 7,028
-------- -------- --------
-------- -------- --------
</TABLE>
16
<PAGE>
A reconciliation of the funded status of the plans with the accrued pension cost
included in accounts payable and accrued expenses is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Actuarial present value of benefit obligation:
Vested............................................................................. $ 118,580 $ 128,639
Nonvested.......................................................................... 6,890 7,182
--------- ---------
Accumulated benefit obligation.......................................................... 125,470 135,821
Effect of anticipated future compensation levels........................................ 26,675 40,104
--------- ---------
Projected benefit obligation............................................................ 152,145 175,925
Plan assets at market value............................................................. (144,347) (157,836)
--------- ---------
Projected benefit obligation in excess of plan assets................................... 7,798 18,089
Unrecognized net asset at date of adoption.............................................. 10,076 11,696
Unrecognized net loss................................................................... (919) (15,303)
--------- ---------
Accrued pension cost.................................................................... $ 16,955 $ 14,482
--------- ---------
--------- ---------
</TABLE>
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $3,391,000, $4,381,000 and $7,914,000 in 1994, 1993 and 1992,
respectively.
The assumptions used to measure the projected benefit obligation at December 31,
1994 and 1993 include a discount rate of 9.0% and 7.5%, respectively. The
weighted average rate of compensation increase was 5.9% at December 31, 1994
compared to a fixed rate of compensation increase of 5.0% at December 31, 1993.
The expected long-term investment rate of return on plan assets for the years
ended December 31, 1994 and 1993 was 10.0%.
Contributions under the Company's defined contribution plans were $5,095,000,
$6,353,000 and $5,620,000 in 1994, 1993 and 1992, respectively, and were based
on a formula specified in the plan agreements.
The Company offers unfunded postretirement medical and life insurance plans to
certain employees of a subsidiary. Postretirement benefit cost includes the
following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Service cost--benefits earned during the period......................................... $ 226 $ 242
Interest cost on accumulated postretirement benefit obligation.......................... 715 893
Net amortization and deferral........................................................... 790 1,141
--------- ---------
$ 1,731 $ 2,276
--------- ---------
--------- ---------
</TABLE>
The components of the accumulated postretirement benefit obligation are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Accumulated postretirement benefit obligation:
Retirees........................................................................... $ 5,743 $ 7,131
Other active plan participants..................................................... 3,001 4,693
--------- ---------
Accumulated benefit obligation.......................................................... 8,744 11,824
Unrecognized net gain (loss)............................................................ 853 (1,755)
Unrecognized transition obligation...................................................... (8,630) (9,406)
--------- ---------
Accrued postretirement benefit cost..................................................... $ 967 $ 663
--------- ---------
--------- ---------
</TABLE>
17
<PAGE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1994 was 15.0% for 1995
decreasing until it reaches 7.0% in 2007, after which it remains constant. A
one-percentage-point change in the assumed health care cost trend rate for each
year would change the accumulated postretirement benefit obligation as of
December 31, 1994 and the 1994 net postretirement health care cost by
approximately 4.1% and 2.2%, respectively. The assumed discount rate used in
determining the accumulated postretirement benefit obligation at December 31,
1994 and 1993 was 9.0% and 7.5%, respectively.
12. SALE OF SUBSIDIARY
During 1992, Commonwealth Land Title Insurance Company ('Commonwealth') sold its
mortgage insurance operations, Commonwealth Mortgage Assurance Company ('CMAC'),
through a public offering of common stock of CMAC Investment Corporation ('CMAC
Investment'). Commonwealth sold 100% of its CMAC Investment common stock for net
proceeds of $118,500,000 resulting in a pretax gain of $8,999,000. Commonwealth
continues to own 800,000 shares of $4.125 Redeemable Preferred Stock of CMAC
Investment, which were purchased for $40,000,000 in connection with the
offering. For the ten months ended October 30, 1992, CMAC had revenues of
$65,354,000, income before income taxes of $15,875,000 and net income of
$10,649,000.
13. STATUTORY INFORMATION
Statutory net income was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Property and casualty insurance operations................................... $123,970 $217,353 $100,648
Title insurance operations................................................... 32,421 43,904 22,575
</TABLE>
Statutory policyholders' surplus was as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Property and casualty insurance operations (1)............................................ $908,538 $902,290
Title insurance operations................................................................ 180,757 176,868
</TABLE>
(1) Includes the Company's investment in title insurance operations. Also
reflects a reduction in statutory loss reserves of $104,100,000 and
$96,000,000 at December 31, 1994 and 1993, representing discounts of
workers' compensation reserves in excess of GAAP discounts.
14. RELATED PARTY TRANSACTIONS
In 1993, the Company purchased, at fair market value, an office building for
$10,500,000 from a wholly-owned subsidiary of Reliance Group Holdings, Inc. In
1992, the Company purchased, at fair market value, a shopping center for
$16,600,000 from a partnership in which a wholly-owned subsidiary of Reliance
Group Holdings, Inc. was the general partner.
15. DISCONTINUED OPERATIONS
Discontinued operations include the operations of United Pacific Life Insurance
Company ('UPL'), a wholly-owned subsidiary of the Company, and the insurance
brokerage operations of Frank B. Hall & Co. Inc. ('Hall').
During 1993, the Company sold its life insurance subsidiary, UPL, to General
Electric Capital Corporation. In connection with the sale, the Company
purchased, from UPL, securities and real estate with a carrying value of
$482,000,000. The aggregate consideration was $567,000,000. The sale resulted in
a loss of $87,300,000 which was recorded in 1992. For the year ended December
31, 1992, UPL had revenues of $638,770,000, income before income taxes of
$86,445,000 and net income of $57,352,000.
18
<PAGE>
During 1992, Hall, the Company's discontinued insurance brokerage operation,
completed the sale of substantially all of its operating assets and its
insurance brokerage, employee benefits consulting and related services
businesses to Aon Corporation ('Aon'). Total consideration received by Hall was
$457,000,000, plus the assumption by Aon of certain of Hall's operating
liabilities. The Company's gain on the sale of Hall's operating assets was
$40,000,000, net of state and federal taxes of $30,000,000. For the six months
ended June 30, 1992, Hall had revenues of $241,460,000, income before income
taxes of $9,471,000 and net income of $6,753,000. Pursuant to the terms of an
Agreement and Plan of Merger, each outstanding share of Hall, other than shares
owned by the Company, was converted into the right to receive .625 of a share of
Reliance Group Holdings, Inc. common stock. As a result, in 1992, Reliance Group
Holdings, Inc. issued 9,232,968 shares of its common stock as merger
consideration to certain holders of Hall common stock. The issuance of the
Reliance Group Holdings, Inc. common stock was reflected as a $48,011,000
noncash capital contribution in the Company's 1992 financial statements. The
Company has also agreed to provide $18,000,000 per year until 2007 of
reinsurance brokerage commissions to Aon. In the first quarter of 1994, in
connection with the settlement of certain litigation, Reliance Group Holdings,
Inc. issued 305,635 shares of its common stock as additional merger
consideration to former shareholders of Hall. The issuance of these shares was
reflected as a $1,589,000 noncash capital contribution in the Company's 1994
financial statements.
16. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
On November 8, 1988, voters in California approved Proposition 103, which
requires a rollback of rates for property and casualty insurance policies issued
or renewed after November 8, 1988 of 20% from November 1987 levels and freezes
rates at such lower levels until November 1989. Proposition 103 also requires
that subsequent rate changes be justified to, and approved by, an elected
insurance commissioner.
In 1989, the California Department of Insurance directed to United Pacific
Insurance Company, one of the Company's California subsidiaries which writes
business in California, a notice to reduce its current rates and make refunds to
its policyholders by approximately $10,000,000. In January 1991, the regulations
which formed the basis of the notice were repealed by the newly elected
Insurance Commissioner. Subsequently, there were several administrative hearings
on rate rollback and several different sets of regulations were issued. The
regulations were subject to ongoing administrative and legal challenges. In
February 1993, a Los Angeles Superior Court issued a decision declaring several
sections of the regulations invalid and enjoined the enforcement of the
regulations. On August 18, 1994, the California Supreme Court issued a decision
reversing the Superior Court and upholding the validity of the regulations
issued by the Insurance Commissioner. A petition filed with the United States
Supreme Court seeking review of the California Supreme Court decision was denied
on February 21, 1995. On November 28, 1994, Reliance Insurance Company and
several of its affiliates received an order from the outgoing Insurance
Commissioner ordering refunds totaling $44,800,000 plus interest of $27,500,000.
The Company believes that the refund order is based on incomplete and erroneous
data. Furthermore, the Company believes that it did not earn a fair rate of
return on its California business during the year at issue, 1989. Consequently,
it intends to contest the order vigorously. The Company is entitled to a hearing
to present evidence to establish what it believes to be an appropriate rollback
or refund amount, if any. In the fourth quarter of 1994, the Company recorded a
pre-tax charge of $11,600,000 related to Proposition 103. While this charge
reflects the Company's assessment of the impact of potential refunds to
policyholders under Proposition 103, the Company nevertheless intends to contest
the imposition of any refund on the basis of the matters set forth above. The
Company does not believe that it is probable that it will be subject to a refund
in an amount which will have a material adverse effect on its consolidated
financial statements.
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation arising in
the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action and believes, based on current knowledge and after consultation
with counsel, that the resolution of these matters will not have a material
adverse effect on the consolidated financial statements of the Company. In
addition, the Company is subject to the litigation set forth below.
19
<PAGE>
In March 1987, the Superintendent of Insurance of New York (the
'Superintendent'), as liquidator of Union Indemnity Insurance Company of New
York ('Union Indemnity'), formerly a wholly-owned subsidiary of Hall which the
Superintendent took possession of in 1985, commenced an action in the Supreme
Court of the State of New York seeking damages of not less than $140,000,000
against Hall, various subsidiaries of Hall, Hall's and Union Indemnity's
independent auditors and certain individuals who were former officers and
directors of Union Indemnity. The Superintendent sought to hold the defendants
liable for the insolvency of Union Indemnity alleging, among other claims, that
Hall breached fiduciary and other duties owed to Union Indemnity and violated
provisions of the New York State Insurance Code, that Union Indemnity did not
have a separate operating identity, and that Hall and the Hall subsidiaries
named as defendants constituted a single enterprise which was liable for Union
Indemnity's obligations to its policyholders and other creditors.
In July 1987, American Centennial Insurance Company, International Fidelity
Insurance Company, and Ranger Insurance Company (the 'American Centennial
Plaintiffs') commenced an action in the Supreme Court of the State of New York
against Hall, two subsidiaries of Hall, and certain individuals who were former
officers and directors of Union Indemnity seeking to hold the defendants liable
for certain alleged reinsurance obligations of Union Indemnity, certain
misrepresentations concerning Union Indemnity's financial position and the
breach of certain duties owed to the American Centennial Plaintiffs. The
American Centennial Plaintiffs sought damages of at least $54,900,000 and
punitive damages against all defendants.
The action brought by the Superintendent was settled by an agreement, dated June
2, 1989, under which Hall, now known as Prometheus Funding Corp. ('Prometheus'),
will make an initial payment of $19,000,000 and additional payments aggregating
$29,000,000 over a ten-year period without interest as follows: $1,500,000 each
in years one and two; $2,000,000 each in years three and four; $5,000,000 in
year five; $4,500,000 each in years six and seven; $4,000,000 in year eight; and
$2,000,000 each in years nine and ten. The settlement agreement provides for the
entry of an order by the court barring other claims against Hall relating to
Union Indemnity, including the claims by the American Centennial Plaintiffs
described above. The settlement agreement was submitted to the court for
approval in October 1989 and objections were filed by various parties. In March
1994, the Superintendent informed Prometheus that he did not intend to pursue
court approval of the settlement until the resolution of appellate proceedings
in a pending litigation between the Superintendent and certain of Union
Indemnity's reinsurers. Prometheus has advised the Superintendent that this
position is in breach of the settlement agreement's requirement that the parties
diligently make every effort to obtain court approval of the settlement, and
Prometheus has reserved all of its rights with respect thereto. There is no
assurance that such approval will be obtained. The settlement agreement will not
become effective until final approval by the court. Prometheus has recorded a
reserve of $36,000,000 representing the initial payment of $19,000,000, and the
present value of the additional remaining annual payments over a ten-year
period. In 1994, Prometheus received $600,000 in insurance proceeds and, in
prior years, had received an aggregate of $19,400,000 in insurance proceeds in
connection with this matter from its insurance carrier.
Thirty-one employers doing business in Texas have brought two actions in the
District Court of Dallas County, Texas, against, among others, approximately 200
individual insurance companies, including Reliance Insurance Company and several
of its subsidiaries. The plaintiffs in the actions, which were commenced against
the Reliance parties in April 1992 and February 1995 respectively (and the
second of which has been stayed in light of the pendency of the first), assert
that they were overcharged for workers' compensation insurance and multiple line
retrospectively rated casualty insurance between 1987 and 1992. In August 1994,
the plaintiffs in the first action moved for certification of a purported
plaintiff class consisting of all employers who purchased Texas workers'
compensation insurance from the insurance company defendants during the years in
question. Plaintiffs seek monetary damages, with interest and attorneys' fees,
against all defendants jointly and severally, together with a release of all
purported class members from liability for payment of unlawful premiums, and
injunctive relief. The Company has filed answers denying the allegations and is
contesting the actions vigorously. The Company does not believe that it is
probable that its liability, if any, in excess of what the Company has provided
for in respect of this matter, will have a material adverse effect on its
consolidated financial statements.
COMMITMENTS
The Company and its subsidiaries lease certain office facilities and equipment
under lease agreements that expire at various dates through 2011. Rent expense
for the years ended December 31, 1994, 1993 and 1992 was $92,400,000,
$92,000,000 and $90,700,000, respectively.
20
<PAGE>
At December 31, 1994, future net minimum rental payments required under
noncancelable leases were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C>
(In thousands)
1995............................................................................................... $ 63,408
1996............................................................................................... 52,756
1997............................................................................................... 40,947
1998............................................................................................... 25,340
1999............................................................................................... 20,443
2000 and thereafter................................................................................ 22,584
----------
$ 225,478
----------
----------
</TABLE>
17. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
REVENUES:
Property and casualty insurance
Premiums earned.................................................... $1,777,318 $1,571,539 $1,535,740
Net investment income.............................................. 232,310 226,517 199,556
Gain on sales of investments....................................... 8,702 153,410 47,053
---------- ---------- ----------
2,018,330 1,951,466 1,782,349
---------- ---------- ----------
Title and mortgage insurance
Premiums earned.................................................... 856,774 893,364 826,493
Net investment income.............................................. 26,613 24,282 26,224
Gain on sales of investments....................................... 516 4,786 3,083
Gain on sale of subsidiary......................................... -- -- 8,999
---------- ---------- ----------
883,903 922,432 864,799
---------- ---------- ----------
Other................................................................... 141,609 116,802 109,142
---------- ---------- ----------
$3,043,842 $2,990,700 $2,756,290
---------- ---------- ----------
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN
INVESTEE COMPANY:
Property and casualty insurance
Underwriting....................................................... $ (97,343) $ (175,565) $ (219,286)
Net investment income.............................................. 232,310 226,517 199,556
Gain on sales of investments....................................... 8,702 153,410 47,053
---------- ---------- ----------
143,669 204,362 27,323
---------- ---------- ----------
Title and mortgage insurance............................................ 31,326 59,966 59,113
---------- ---------- ----------
Other................................................................... 6,853 5,006 4,019
---------- ---------- ----------
$ 181,848 $ 269,334 $ 90,455
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance......................................... $8,554,841 $7,954,376 $7,433,884
Title insurance......................................................... 550,160 547,707 471,226
Other................................................................... 62,185 56,833 49,647
---------- ---------- ----------
$9,167,186 $8,558,916 $7,954,757
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Income from continuing operations before income taxes and equity in investee
company relating to property and casualty insurance underwriting has been
reduced by policyholders' dividends and other income and expense.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
21
<PAGE>
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994 Quarter
----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
REVENUES:
Premiums earned.................................................. $685,885 $734,588 $623,547 $590,072
Net investment income............................................ 62,650 64,603 65,362 66,308
Gain on sales of investments..................................... 3,637 1,672 3,403 506
Other............................................................ 31,475 37,109 36,847 36,178
-------- -------- -------- --------
$783,647 $837,972 $729,159 $693,064
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME....................................................... $ 19,114 $ 42,769 $ 44,374 $ 36,327
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1993 Quarter
----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Revenues:
Premiums earned.................................................. $550,028 $634,405 $612,768 $667,702
Net investment income............................................ 65,334 63,922 61,056 60,487
Gain on sales of investments..................................... 35,582 35,049 42,221 45,344
Other............................................................ 27,120 29,699 29,704 30,279
-------- -------- -------- --------
$678,064 $763,075 $745,749 $803,812
-------- -------- -------- --------
-------- -------- -------- --------
Income from continuing operations................................ $ 37,707 $ 51,927 $ 63,132 $ 35,875
Cumulative effect of change in accounting for income taxes....... 24,335 -- -- --
-------- -------- -------- --------
Net income....................................................... $ 62,042 $ 51,927 $ 63,132 $ 35,875
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Insurance Company
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Reliance
Insurance Company (a subsidiary of Reliance Group Holdings, Inc.) and
subsidiaries as of December 31, 1994 and 1993, and the related statements of
income, changes in common shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reliance Insurance Company and
subsidiaries at December 31, 1994 and 1993 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles.
As discussed in note 5 to the consolidated financial statements, in 1993 the
Company adopted Statement of Financial Accounting Standards No. 109 and,
accordingly, changed its method of accounting for income taxes.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 22, 1995
22
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
INCOME STATEMENT DATA:
REVENUES:
Property and casualty insurance
Premiums earned (1)....................... $1,777,318 $1,571,539 $1,535,740 $1,548,838 $1,630,021
Net investment income..................... 232,310 226,517 199,556 202,348 213,075
Gain (loss) on sales of investments....... 8,702 153,410 47,053 (1,682) (54,114)
Gain on sale of subsidiary (1)............ -- -- -- -- 403,500
---------- ---------- ---------- ---------- ----------
2,018,330 1,951,466 1,782,349 1,749,504 2,192,482
---------- ---------- ---------- ---------- ----------
Title and mortgage insurance
Premiums earned (2)....................... 856,774 893,364 826,493 675,904 602,089
Net investment income..................... 26,613 24,282 26,224 26,233 23,795
Gain (loss) on sales of investments....... 516 4,786 3,083 (6,528) (45)
Gain on sale of subsidiary (2)............ -- -- 8,999 -- --
---------- ---------- ---------- ---------- ----------
883,903 922,432 864,799 695,609 625,839
---------- ---------- ---------- ---------- ----------
Other.......................................... 141,609 116,802 109,142 -- --
---------- ---------- ---------- ---------- ----------
$3,043,842 $2,990,700 $2,756,290 $2,445,113 $2,818,321
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
GAIN ON SALES OF INVESTMENTS, INCOME TAXES
AND EQUITY IN INVESTEE COMPANIES:
Property and casualty insurance................ $ 134,967 $ 50,952 $ (19,730) $ (123,649) $ 68,923
Title and mortgage insurance................... 30,810 55,180 47,031 24,072 15,120
Other.......................................... 6,853 5,006 4,019 -- --
---------- ---------- ---------- ---------- ----------
172,630 111,138 31,320 (99,577) 84,043
Income tax (provision) benefit................. (45,515) (37,782) (1,822) 47,078 4,658
Equity in investee companies................... 9,478 12,441 5,206 (16,574) (16,265)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE GAIN ON SALES OF INVESTMENTS.......... 136,593 85,797 34,704 (69,073) 72,436
After-tax gain on sales of investments (3)..... 5,991 102,844 40,589 15,471 232,755
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS....... 142,584 188,641 75,293 (53,602) 305,191
Income (loss) from discontinued operations..... -- -- 64,105 31,444 (45,722)
Loss on disposal of discontinued operations.... -- -- (47,300) -- --
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE....... 142,584 188,641 92,098 (22,158) 259,469
Extraordinary items of investee companies...... -- -- -- 894 7,461
Cumulative effect of change in accounting for
income taxes................................. -- 24,335 -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).............................. $ 142,584 $ 212,976 $ 92,098 $ (21,264) $ 266,930
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
23
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except ratios)
OTHER OPERATING DATA (4):
Underwriting (loss)............................ $ (97,343) $ (175,565) $ (219,286) $ (325,997) $ (144,152)
Loss and loss expense ratio.................... 73.0% 78.6% 84.0% 90.1% 78.5%
Underwriting expense ratio..................... 31.4 32.2 30.1 30.9 30.4
---------- ---------- ---------- ---------- ----------
Combined ratio (5)............................. 104.4% 110.8% 114.1% 121.0% 108.9%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<CAPTION>
DECEMBER 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
BALANCE SHEET DATA:
Assets......................................... $9,167,186 $8,558,916 $7,954,757 $6,857,145 $5,746,526
Marketable securities.......................... 3,819,040 3,800,422 3,492,643 2,973,889 2,922,919
Term loans and short-term debt................. 29,355 20,373 22,478 38,734 32,633
Preferred shareholders' equity................. 23,517 26,877 30,237 33,597 36,957
Common shareholder's equity.................... 1,076,840 1,171,490 1,060,774 988,804 1,119,231
Statutory policyholders' surplus of property
and casualty insurance subsidiaries.......... 908,538 902,290 857,611 840,538 846,440
</TABLE>
(1) On April 30, 1990, the Company sold General Casualty Company of Wisconsin
('General Casualty'). Premiums earned by the property and casualty insurance
subsidiaries excluding General Casualty were $1.50 billion for the year
ended December 31, 1990.
(2) On October 30, 1992, the Company sold Commonwealth Mortgage Assurance
Company ('CMAC'). Premiums earned by the title insurance subsidiaries
excluding CMAC were $770.5 million, $613.7 million and $548.6 million for
the years ended December 31, 1992, 1991 and 1990, respectively.
(3) Includes net gain on sale of CMAC of $7.5 million in 1992 and net gain on
sale of General Casualty of $268.5 million in 1990.
(4) The data relates to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income and
expense.
(5) In 1994, the combined ratio excludes the effect of the $11.6 million charge
pertaining to Proposition 103.
24
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums written for each line of property and casualty insurance were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
General Liability.............................. $ 423,377 $ 369,895 $ 349,777 $ 312,935 $ 322,959
Workers' Compensation.......................... 312,808 377,592 418,685 503,323 366,295
Automobile..................................... 244,000 260,180 261,520 255,848 243,336
Multiple Peril................................. 180,074 187,438 126,070 134,286 193,531
Reinsurance.................................... 125,597 123,742 108,095 155,667 90,953
Surety......................................... 117,989 106,664 94,316 90,721 95,670
Involuntary.................................... 113,483 113,498 109,583 77,624 56,362
Ocean and Inland Marine........................ 103,865 105,254 49,658 51,651 51,394
Other (1)...................................... 143,097 126,334 23,856 28,989 191,925
General Casualty............................... -- -- -- -- 82,281
---------- ---------- ---------- ---------- ----------
$1,764,290 $1,770,597 $1,541,560 $1,611,044 $1,694,706
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Combined ratios (on a GAAP basis), after policyholders' dividends, for each line
of property and casualty insurance were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994(2) 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Liability.............................. 106.0% 105.0% 100.4% 100.1% 97.0%
Workers' Compensation.......................... 95.3 96.5 105.8 121.7 108.6
Automobile..................................... 116.6 125.5 119.4 114.2 106.8
Multiple Peril................................. 114.8 121.6 145.3 158.4 123.0
Reinsurance.................................... 111.3 104.8 122.0 113.5 106.5
Surety......................................... 74.3 81.0 80.9 89.4 80.8
Involuntary.................................... 100.3 133.6 147.6 179.4 149.2
Ocean and Inland Marine........................ 124.9 113.9 120.0 91.2 104.2
Other (1)...................................... 93.5 147.9 N/M N/M 124.0
General Casualty............................... -- -- -- -- 88.8
---------- ---------- ---------- ---------- ----------
104.4% 110.8% 114.1% 121.0% 108.9%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
N/M--Not Meaningful
(1) Includes personal lines.
(2) Excludes the effect of Proposition 103.
25
<PAGE>
RELIANCE INSURANCE COMPANY AND SUBSIDIARIES
FINANCIAL REVIEW
--------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gain on sales of
investments, of $136.6 million in 1994, which included improved underwriting
results in property and casualty insurance operations, compared to $85.8 million
in 1993 and $34.7 million in 1992. After-tax gain on sales of investments were
$6.0 million in 1994 compared to $102.8 million in 1993 and $40.6 million in
1992.
Net income was $142.6 million in 1994 compared to $213.0 million in 1993, which
included income of $24.3 million representing the cumulative effect of adopting
Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes'. Net income in 1992, which included results pertaining to discontinued
operations, was $92.1 million.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The property and casualty insurance operations reported pretax income, before
gain on sales of investments, of $135.0 million in 1994 compared to $51.0
million in 1993 and a loss of $19.7 million in 1992. Gains on sales of
investments were $8.7 million in 1994 compared to $153.4 million in 1993 and
$47.1 million in 1992.
The property and casualty insurance operations had strong underwriting results
in 1994, including continued underwriting profits in workers' compensation and
surety lines, as well as improved underwriting results in personal lines,
commercial automobile and involuntary insurance facilities. Underwriting losses
were $97.3 million in 1994 compared to $175.6 million in 1993 and $219.3 million
in 1992. Underwriting results continue to be adversely affected by catastrophe
losses. Catastrophe losses were $50.1 million in 1994 ($134.0 million before
reinsurance) which included $44.9 million arising from the January 1994
California earthquake, compared to $39.3 million in 1993 ($88.5 million before
reinsurance) and $61.1 million in 1992 ($119.2 million before reinsurance),
which included $45.6 million arising from Hurricane Andrew. The combined ratios
(calculated on a GAAP basis), after policyholders' dividends were 104.4%, 110.8%
and 114.1% for 1994, 1993 and 1992, respectively.
Net premiums written and premiums earned for each line of property and casualty
insurance were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
1994 1993 1992
Net Net Net Net Net Net
YEAR ENDED DECEMBER 31 Premiums Premiums Premiums Premiums Premiums Premiums
(In thousands) Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General Liability.................. $ 423,377 $ 427,864 $ 369,895 $ 337,151 $ 349,777 $ 325,963
Workers' Compensation.............. 312,808 323,891 377,592 360,613 418,685 427,337
Automobile......................... 244,000 251,038 260,180 225,910 261,520 250,246
Multiple Peril..................... 180,074 170,230 187,438 147,158 126,070 126,263
Reinsurance........................ 125,597 132,694 123,742 124,150 108,095 155,402
Surety............................. 117,989 108,833 106,664 97,414 94,316 93,246
Involuntary........................ 113,483 115,963 113,498 112,700 109,583 98,038
Ocean and Inland Marine............ 103,865 95,103 105,254 82,451 49,658 47,364
Other.............................. 143,097 151,702 126,334 83,992 23,856 11,881
---------- ---------- ---------- ---------- ---------- ----------
$1,764,290 $1,777,318 $1,770,597 $1,571,539 $1,541,560 $1,535,740
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
26
<PAGE>
The decline in net premiums written in 1994, when compared to 1993, is primarily
attributable to lower writings in workers' compensation reflecting an increase
in return premiums on retrospectively rated policies due to improved loss
experience and the trend toward high deductible non-retrospectively rated
insurance, which results in lower premiums and lower losses. In addition,
workers' compensation net premiums written in 1994 were reduced as a result of
certain litigation claims in Texas. See note 16 to the consolidated financial
statements. This decline was substantially offset by growth in general
liability, surety and other lines. The increase in other lines net premiums
written during 1994 reflects continued growth in accident and health premiums,
partially offset by a decline in personal lines premiums. The increase in net
premiums earned in 1994, when compared to 1993, is due to the non-renewal of
certain quota share reinsurance treaties. These treaties reduced 1993 net
premiums earned by $209.2 million. The increase in net written premiums in 1993,
when compared to 1992, reflects higher net retentions in multiple peril, general
liability and inland marine lines of business, as well as growth in reinsurance,
surety and accident and health premiums.
Despite higher catastrophe losses, particularly in reinsurance, underwriting
results in 1994 improved, when compared to 1993, reflecting lower underwriting
losses in commercial automobile and multiple peril lines of business, as well as
lower losses from involuntary insurance facilities. Underwriting losses from
involuntary insurance facilities were $338,000 in 1994 compared to $37.9 million
in 1993 and $46.7 million in 1992. The improvement in 1994 underwriting results
also reflects lower losses in personal lines, as the Company continues to exit
this business, and an increase in underwriting profits in the surety line of
business. Underwriting profits in surety lines grew to $27.5 million in 1994
compared to $18.4 million in 1993 and $17.4 million in 1992. The 1994
underwriting results include a charge of $11.6 million reflecting the Company's
assessment of the impact of California Proposition 103. See note 16 to the
consolidated financial statements. The improvement in underwriting results in
1993, when compared to 1992, reflects a lower level of catastrophe losses as
well as improved underwriting results in workers' compensation.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. See note 9 to the consolidated financial
statements.
Policy claims and settlement expenses includes a provision for insured events of
prior years of $22.4 million in 1994 compared to $40.2 million in 1993 and $31.5
million in 1992. The 1994 provision includes $17.0 million of adverse
development related to prior year asbestos-related and environmental pollution
claims. Development of asbestos-related and environmental pollution claims
primarily effects general liability and multiple peril lines of business. The
1994 provision also includes $14.7 million of adverse development from other
general liability lines. This development was partially offset by $13.3 million
of favorable development in workers' compensation. The 1993 provision included
$21.1 million of adverse development from workers' compensation reinsurance
pools and $35.2 million of adverse development related to prior year
asbestos-related and environmental pollution claims. This development was
partially offset by favorable development in other lines of business, including
other general liability lines. The 1992 provision included $55.6 million of
adverse development from workers' compensation and automobile reinsurance pools.
This development was partially offset by favorable development of $11.9 million
from two general liability claims and favorable development of $10.7 million
related to unallocated loss adjustment expenses.
The Company records involuntary assessments when such assessments are billed by
the respective state insurance facilities. These assessments are subject to
large variations in timing and amount and, accordingly, the Company cannot
reasonably estimate a minimum amount of liability prior to billing. While the
amount of any involuntary assessments cannot be predicted with certainty, the
Company believes that future assessments will not have a material effect on its
liquidity or capital resources.
27
<PAGE>
The liability for property and casualty insurance loss reserves at December 31,
1994 was $5.58 billion compared to $5.05 billion at December 31, 1993. This
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.
Reinsurance recoverables of $2.45 billion and $2.12 billion at December 31, 1994
and 1993, respectively, are included in the liability in accordance with
Statement of Financial Accounting Standards No. 113, 'Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts'.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix, the economic environment in which property and
casualty companies operate and the trend toward increasing claims and awards.
Estimates are continually reviewed and adjustments of the probable ultimate
liability based on subsequent developments and new data are included in
operating results for the periods in which they are made. In general, reserves
are initially established based upon the actuarial and underwriting data
utilized to set pricing levels and are reviewed as additional information,
including claims experience, becomes available. The Company regularly analyzes
its reserves and reviews its pricing and reserving methodologies so that future
adjustments to prior year reserves can be minimized. However, given the
complexity of this process, reserves will require continual updates and the
ultimate liability may be more or less than such estimates indicate. Over the
past five years, the Company has increased its premium writings in long tail
lines of business. Estimation of loss reserves for these lines of business is
more difficult than for short tail lines because claims may not become apparent
for a number of years, and a relatively higher proportion of ultimate losses are
considered incurred but not reported. As a result, variation in loss development
is more likely in these lines of business. The Company attempts to reduce these
variations in certain of its long tail lines, primarily directors and officers
liability, professional liability and general liability, by writing policies on
a claims-made basis which mitigates the long tail nature of the risks. The
Company also limits the loss from a single event through the use of reinsurance.
Included in the liability for loss reserves at December 31, 1994 are $182.2
million ($130.1 million net of recoverables from reinsurers) of loss reserves
pertaining to asbestos-related and environmental pollution claims. Included in
these reserves are reserves for claims incurred but not reported and reserves
for loss expenses, which include litigation expenses. The Company continues to
receive claims asserting injuries from hazardous materials and alleged damages
to cover various clean-up costs. Coverage and claim settlement issues, related
to policies written in prior years, such as the determination that coverage
exists and the definition of an occurrence, may cause the actual loss
development to exhibit more variation than the remainder of the Company's book
of business. The Company's net paid losses and related expenses for
asbestos-related and environmental pollution claims have not been material in
relation to the Company's total net paid losses and related expenses. Net paid
losses and related expenses (primarily legal fees and expenses) relating to
these claims were $20.2 million (including $7.9 million of related expenses),
$24.8 million (including $8.1 million of related expenses) and $16.1 million
(including $6.2 million of related expenses) for the years ended December 31,
1994, 1993 and 1992, respectively. Total payments for all property and casualty
insurance policy claims and related expenses were $1.1 billion, $1.0 billion and
$961.1 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The following table presents information related to the number of
insureds with asbestos-related and environmental pollution claims outstanding:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1994 1993
<S> <C> <C>
Number of insureds with outstanding claims, beginning of year..................................... 661 807
Additional insureds with claims during the year................................................... 307 369
Insureds with closed or settled claims during the year............................................ (302) (515)
---- ----
Number of insureds with outstanding claims, end of year........................................... 666 661
---- ----
---- ----
</TABLE>
28
<PAGE>
The average net paid loss for asbestos-related and environmental pollution
claims was $34,200 and $28,200 for the years 1994 and 1993, respectively. As of
December 31, 1994, the Company was involved in approximately 45 coverage
disputes (where a motion for declaratory judgement had been filed, the
resolution of which will require a judicial interpretation of an insurance
policy) related to asbestos or environmental pollution claims. The Company is
not aware of any pending litigation or pending claim which will result in
significant contingent liabilities in these areas. The Company believes it has
made reasonable provisions for these claims, although the ultimate liability may
be more or less than such reserves. The Company believes that future losses
associated with these claims will not have a material adverse effect on its
financial position, although there is no assurance that such losses will not
materially effect the Company's results of operations for any period.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $232.3 million in 1994 from $226.5 million in 1993 and $199.6
million in 1992. These increases resulted from growth in the size of the fixed
maturity investment portfolio.
Gain on sales of investments were $8.7 million in 1994 compared to $153.4
million in 1993, which primarily resulted from sales of equity securities, and
$47.1 million in 1992.
TITLE INSURANCE OPERATIONS
The title insurance operations reported pretax income, before gain on sales of
investments, of $30.8 million in 1994, $55.2 million in 1993 and $47.0 million
in 1992.
Premiums and fees were $856.8 million in 1994 compared to $893.4 million in 1993
and $826.5 million in 1992. Included in the 1992 premiums and fees were $56.0
million from the Company's mortgage insurance unit ('CMAC') which was sold
through a public offering in the fourth quarter of 1992. The decline in premiums
and fees in 1994 resulted from a decline in direct title insurance premiums due
to lower levels of residential refinancing activity. Refinancing activity has
declined steadily since March 1994 when mortgage interest rates began to rise.
This decline in direct title insurance premiums was partially offset by an
increase in agency premiums resulting from the strong market conditions that
existed in the fourth quarter of 1993 and the first quarter of 1994 and the
typical reporting lag of 60-90 days for agency premiums. The Company does not
anticipate an increase in residential activity during 1995. Partially offsetting
the decline in 1994 premiums and fees from residential transactions was an
increase in commercial real estate activity where operating margins are
generally higher. The increase in premiums and fees in 1993, when compared to
1992, reflected increased residential refinancing activity and, to a lesser
extent, increased residential resale activity and an acquisition completed in
late 1992.
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 $432.0 million in 1994 compared
to $418.4 million in 1993 and $382.1 million in 1992. Agency commissions as a
percentage of agency premiums declined in 1994 and 1993. These declines reflect
a lower portion of agency business in the Western states where agent commissions
are generally higher. Other expenses of the title insurance operations include
personnel costs relating to marketing activities, title searches, information
gathering on specific properties and preparation of insurance policies, as well
as costs associated with the maintenance of title plants. Other expenses were
$344.7 million in 1994 compared to $362.3 million in 1993 and $323.0 million in
1992. Included in the 1992 other expenses were $17.1 million from CMAC. The
decline in other expenses in 1994, when compared to 1993, reflects various cost
control programs, including staff reductions, undertaken by the Company. The
expense ratio of the title insurance operations (which includes agency
commissions) was 90.2% in 1994 compared to 87.3% in 1993 and 89.2% in 1992. The
increase in the 1994 expense ratio resulted from the decline in premiums. The
provision for claim losses was $75.9 million in 1994 compared to $81.8 million
in 1993 and $100.6 million in 1992, which included $32.4 million from CMAC.
29
<PAGE>
INVESTMENT PORTFOLIO
At December 31, 1994, the Company's investment portfolio aggregated $3.84
billion (at cost), of which 12.6% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At December
31, 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's fixed maturity portfolio consists of investment grade securities
(those rated 'BBB' or better by Standard & Poor's) and, to a lesser extent,
non-investment grade and non-rated securities. The risk of default is generally
considered to be greater for non-investment grade securities, when compared to
investment grade securities, since these issues may be more susceptible to
severe economic downturns. At December 31, 1994, the carrying values of
non-investment grade securities and securities not rated by Standard & Poor's
were $350.2 million (11% of the fixed income portfolio) and $145.1 million (4%
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.
Due to the rise in interest rates during 1994, the market value of the Company's
fixed maturity investments designated available for sale has declined. At
December 31, 1994, the unrealized loss on fixed maturities available for sale
was $106.6 million compared to an unrealized gain of $87.1 million at December
31, 1993. This decline in market value was the principal reason the Company's
common shareholder's equity decreased to $1.08 billion at December 31, 1994 from
$1.17 billion at December 31, 1993.
At December 31, 1994, approximately 31% of the Company's fixed maturity and
short-term investment portfolio was comprised of securities issued by utilities,
the vast majority of which are rated investment grade and are first mortgage or
senior secured bonds. The utility portfolio is widely diversified among various
geographic regions in the United States and is not dependent on the economic
stability of any one particular region. No other industry group comprises more
than 10% of the fixed maturity and short-term investment portfolio.
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 $141.6 million in 1994, $116.8 million in 1993 and $109.1
million in 1992. The increase in revenues during 1994 resulted from growth in
the information technology business. Operating expenses incurred by these
operations were $134.7 million in 1994, $111.7 million in 1993 and $104.6
million in 1992. Revenues and expenses of these operations are included in other
revenues and other expenses in the accompanying statement of income.
At December 31, 1994, the Company's real estate holdings had a carrying value of
$284.0 million, which includes 11 shopping centers with an aggregate carrying
value of $138.0 million, office buildings and other commercial properties, with
an aggregate carrying value of $90.7 million, and undeveloped land with a
carrying value of $55.3 million.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, 'Accounting for Income Taxes' ('FAS 109'). The cumulative
effect of adopting FAS 109 was to increase 1993 net income by $24.3 million. See
note 5 to the consolidated financial statements.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Insurance Law of Pennsylvania, where Reliance Insurance Company (the
Company's principal property and casualty insurance subsidiary) is domiciled,
limits the maximum amount of dividends which may be paid without approval by the
Pennsylvania Insurance Department. Under such law, Reliance Insurance Company
may pay dividends during the year equal to the greater of (a) 10% of the
preceding year-end policyholders' surplus or (b) the preceding year's statutory
net income, but in no event to exceed the amount of unassigned funds, which are
defined as 'undistributed, accumulated surplus including net income and
unrealized gains since the organization of the insurer'. In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the company's reinsurance and the adequacy of the company's
reserves. The maximum dividend permitted by law is not indicative of an
insurer's actual ability to pay dividends, which may be constrained by business
and regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings, competitive position, the amount of premiums
that can be written and the ability to pay future dividends. Furthermore, the
Pennsylvania Insurance Department has broad discretion to limit the payment of
dividends by insurance companies.
In addition, under California Insurance law, Reliance Insurance Company is
deemed to be a 'commercially domiciled' California insurer and therefore subject
to the dividend payment laws of California. The California laws which 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 1994, 1993 and 1992 were $114.1 million ($111.5 million for common
stock), $133.7 million ($130.6 million for common stock), and $143.7 million
($140.4 million for common stock), respectively. During 1995, $124.5 million
would be available for dividend payments by Reliance Insurance Company under
Pennsylvania and California 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. 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. Any significant limitation of Reliance Insurance
Company's dividends would adversely effect the Company's ability to service its
debt and to pay dividends on its common stock.
The Company collects and invests premiums prior to payment of associated claims,
which are generally made months or years subsequent to the receipt of premiums.
For the year ended December 31, 1994, the Company generated $321.3 million of
cash flow from operating activities compared to $274.7 million in 1993 and
$331.2 million in 1992. The increase in 1994 operating cash flow, when compared
to 1993, reflects improvement in the operating results of the Company's property
and casualty insurance subsidiaries. The decline in 1993 operating cash flow,
when compared to 1992, reflects increased income tax payments in 1993, including
$30.0 million related to the 1992 sale of Frank B. Hall & Co. Inc., compared to
income tax refunds in 1992. The Company carefully monitors its cash, short-term
investments and marketable securities to maintain adequate balances for the
timely payment of claims and other operating requirements. At December 31, 1994,
the Company had $267.8 million of cash and short-term investments.
31
<PAGE>
The Company used $251.8 million, $137.6 million and $148.4 million of cash flow
for investing activities for the years ended December 31, 1994, 1993 and 1992,
respectively. Net purchases of marketable securities were $194.4 million, $183.7
million and $210.1 million in 1994, 1993 and 1992, respectively. Sales of
discontinued life insurance operations and of a subsidiary provided cash of
$15.6 million, $69.2 million and $118.5 million in 1994, 1993 and 1992,
respectively.
The Company used $93.5 million, $134.1 million and $163.2 million of cash flow
for financing activities for the years ended December 31, 1994, 1993 and 1992,
respectively. Cash was used principally for the payment of 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, effective
in 1995, based on 1994 annual statutory financial statements. 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. The Company's
statutory capital is in excess of the minimum required risk-based capital.
Management cannot predict the ultimate impact of risk-based capital requirements
on the Company's competitive position.
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.
32
<PAGE>
DIRECTORS AND OFFICERS
---------------------------------------
RELIANCE INSURANCE
GROUP
---------------------------------------
DIRECTORS
---------------------------------------
George R. Baker(2)
CORPORATE DIRECTOR/ADVISOR
George E. Bello(1)
EXECUTIVE VICE PRESIDENT
AND CONTROLLER
RELIANCE GROUP HOLDINGS, INC.
Carter Burden
MANAGING GENERAL PARTNER
WILLIAM A.M. BURDEN & CO.
Dennis A. Busti
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
RELIANCE NATIONAL INSURANCE COMPANY
Dean W. Case
VICE CHAIRMAN OF THE BOARD
RELIANCE INSURANCE COMPANY
Lowell C. Freiberg(1)
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
RELIANCE GROUP HOLDINGS, INC.
Dr. Thomas P. Gerrity(2)
DEAN OF THE WHARTON SCHOOL
UNIVERSITY OF PENNSYLVANIA
Jewell Jackson McCabe
PRESIDENT
JEWELL JACKSON MCCABE ASSOCIATES
Irving Schneider(2)
EXECUTIVE VICE PRESIDENT
HELMSLEY-SPEAR, INC.
Bernard L. Schwartz
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
LORAL CORPORATION
Richard E. Snyder
CORPORATE DIRECTOR/ADVISOR
Thomas J. Stanton, Jr.
CHAIRMAN EMERITUS
NATIONAL WESTMINSTER BANK NJ
Robert M. Steinberg(1)
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
RELIANCE INSURANCE COMPANY
Saul P. Steinberg(1)
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
RELIANCE GROUP HOLDINGS, INC.
James E. Yacobucci
SENIOR VICE PRESIDENT
INVESTMENTS
RELIANCE GROUP HOLDINGS, INC.
(1) Executive and Finance
Committee Member
(2) Audit Committee Member
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
Saul P. Steinberg
CHAIRMAN OF THE EXECUTIVE AND
FINANCE COMMITTEE
Robert M. Steinberg
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Jerome H. Carr
CORPORATE SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Lowell C. Freiberg
SENIOR VICE PRESIDENT
Kenneth R. Frohlich
CORPORATE SENIOR VICE PRESIDENT AND
CHIEF ACTUARIAL OFFICER
Robert J. Joyce
SENIOR VICE PRESIDENT AND
TREASURER
James E. Yacobucci
SENIOR VICE PRESIDENT
INVESTMENTS
Stephen E. Tanguay
VICE PRESIDENT AND
GENERAL AUDITOR
---------------------------------------
RELIANCE
INSURANCE
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
Robert C. Olsman
PRESIDENT AND
CHIEF OPERATING OFFICER
Dennis C. Costello
SENIOR VICE PRESIDENT
CLAIMS
Bruce Farbman
SENIOR VICE PRESIDENT
HUMAN RESOURCES AND
ADMINISTRATION
Robert Krisowaty
SENIOR VICE PRESIDENT
FINANCE AND INFORMATION
SERVICES
Lee H. Routledge
VICE PRESIDENT AND
GENERAL COUNSEL
CUSTOM UNDERWRITING
FACILITY DIVISION
Joseph A. Giordano
PRESIDENT
33
<PAGE>
---------------------------------------
RELIANCE NATIONAL
INSURANCE COMPANY
---------------------------------------
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
Dennis A. Busti
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Robert F. Hall
EXECUTIVE VICE PRESIDENT
CLAIMS
Albert J. Marino
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND TREASURER
Mark L. Owens
EXECUTIVE VICE PRESIDENT
MARKETING
Eugene E. Pittelli
EXECUTIVE VICE PRESIDENT
Carl D. Sullo
EXECUTIVE VICE PRESIDENT
HUMAN RESOURCES
Mario P. Vitale
EXECUTIVE VICE PRESIDENT
Roger D. Walker
EXECUTIVE VICE PRESIDENT
Pennington H. Way, III
EXECUTIVE VICE PRESIDENT
Jeffrey A. Welikson
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND
SECRETARY
A. Raymond Williams
EXECUTIVE VICE PRESIDENT
Joseph F. Wynne
EXECUTIVE VICE PRESIDENT
Joel D. Yatskowitz
CHIEF ACTUARY
---------------------------------------
RELIANCE
SURETY COMPANY
---------------------------------------
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
George T. Holbrook, Jr.
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
C. Brian Schmalz
EXECUTIVE VICE PRESIDENT
AND CHIEF OPERATING
OFFICER
Lawrence W. Carlstrom
SENIOR VICE PRESIDENT
REGIONAL OPERATING
OFFICER
Vincent G. Fasano
SENIOR VICE PRESIDENT
AND CHIEF CLAIMS OFFICER
Edward M. Titus
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
---------------------------------------
RELIANCE
REINSURANCE
CORP.
---------------------------------------
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
George H. Roberts
PRESIDENT
Joseph C. Capezza
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
John D. Countryman
SENIOR VICE PRESIDENT
CASUALTY FACULTATIVE
Jon E. Ingersoll
SENIOR VICE PRESIDENT
TREATY UNDERWRITING
Arthur J. Mella
SENIOR VICE PRESIDENT
CLAIMS AND ADMINISTRATION
Robert S. Miccolis
SENIOR VICE PRESIDENT
AND ACTUARY
Edward J. Stanco
SENIOR VICE PRESIDENT
CUSTOMIZED REINSURANCE
PRODUCTS
34
<PAGE>
---------------------------------------
COMMONWEALTH LAND
TITLE INSURANCE
COMPANY
---------------------------------------
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
Herbert Wender
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Robert J. Hauser, Jr.
PRESIDENT AND
CHIEF OPERATING OFFICER
Irving Morgenroth
EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL
William R. Bock
SENIOR VICE PRESIDENT AND
CHIEF ADMINISTRATIVE OFFICER
Fredrick H. Hemphill, Jr.
SENIOR VICE PRESIDENT AND
CHIEF INFORMATION OFFICER
John P. Rapp
SENIOR VICE PRESIDENT
UNDERWRITING
Jeffrey A. Tischler
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Stephen H. Weatherby
SENIOR VICE PRESIDENT AND
CONTROLLER
Gregory J. Walsh
GENERAL AUDITOR
---------------------------------------
REGIONAL OFFICES
---------------------------------------
East
BALTIMORE, MD
Southeast
ATLANTA, GA
Midwest
LANSING, MI
Southwest
DALLAS, TX
Northwest
BELLEVUE, WA
West
SAN FRANCISCO, CA
National Title Services
PHILADELPHIA, PA
---------------------------------------
COMMONWEALTH
RELOCATION SERVICES,
INC.
---------------------------------------
---------------------------------------
PRINCIPAL OFFICERS
---------------------------------------
William G. Walsh, Jr.
PRESIDENT
Albert Chipego
EXECUTIVE VICE PRESIDENT
35
<PAGE>
CORPORATE DATA
---------------------------------------
---------------------------------------
Reliance
property and casualty
companies have offices in
the following cities:
---------------------------------------
UNITED STATES
Arizona
PHOENIX*
California
CONCORD
GLENDALE*
IRVINE*
LOS ANGELES
SACRAMENTO*
SAN DIEGO
SAN FRANCISCO
SAN JOSE*
SANTA BARBARA
Colorado
DENVER
Connecticut
HARTFORD*
Florida
ORLANDO*
WEST PALM BEACH
Georgia
ATLANTA
Idaho
BOISE
Illinois
CHICAGO
Indiana
INDIANAPOLIS
Kansas
KANSAS CITY
Kentucky
LOUISVILLE
Louisiana
NEW ORLEANS
Maryland
CHESAPEAKE*
Massachusetts
BOSTON
Michigan
DETROIT*
Minnesota
MINNEAPOLIS
Missouri
ST. LOUIS
New Jersey
EDISON
New Mexico
ALBUQUERQUE*
New York
ALBANY*
NEW YORK CITY
ROCHESTER*
North Carolina
CHARLOTTE
DURHAM*
Ohio
CINCINNATI*
COLUMBUS
Oregon
EUGENE
PORTLAND*
Pennsylvania
PHILADELPHIA
PITTSBURGH
VALLEY FORGE*
Tennessee
NASHVILLE
Texas
DALLAS*
HOUSTON
SAN ANTONIO
Utah
SALT LAKE CITY
Virginia
RICHMOND
Washington
FEDERAL WAY*
SEATTLE
ARGENTINA
BUENOS AIRES
CANADA
TORONTO
VANCOUVER
HOLLAND
ROTTERDAM
MEXICO
MEXICO CITY
SPAIN
MADRID
UNITED KINGDOM
LONDON
THE RELIANCE INSURANCE GROUP
PROPERTY AND CASUALTY INSURANCE
Reliance Insurance Company
Reliance National Insurance Company
Reliance Reinsurance Corp.
Reliance Surety Company
Firemark Insurance Company
Regent International Insurance Company, Ltd.
Reliance de Argentina, S.A.
Reliance Insurance Company of California
Reliance Insurance Company of Illinois
Reliance Lloyds
Reliance National (Barbados) Insurance, Ltd.
Reliance National Indemnity Company
Reliance National Insurance Company of New York
Reliance National Insurance Company (U.K.) Limited
Reliance Reinsurance Company
Seguros Renamex, S.A. (Mexico)
United Pacific Insurance Company
United Pacific Insurance Company of New York
TITLE INSURANCE AND RELATED SERVICES
Commonwealth Land Title Insurance Company
Transamerica Title Insurance Company
CLT Appraisal Services, Inc.
Commonwealth Relocation Services, Inc.
Continental Title Insurance Company
CRS Financial Services, Inc.
Day One, Inc.
Industrial Valley Title Insurance Company
Transamerica Title Insurance Company of New York
*Claims Service Location
36
<PAGE>
THE RELIANCE INSURANCE GROUP
---------------------------------------
CORPORATE DATA
NATIONAL HEADQUARTERS
Reliance Insurance Group
4 Penn Center Plaza
Philadelphia, PA 19103
(215) 864-4000
TRANSFER AGENT AND REGISTRAR
COMMON AND PREFERRED STOCKS
First Interstate Bank, Ltd.
P.O. Box 54261
Terminal Annex
Los Angeles, CA 90054
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Philadelphia, PA
ANNUAL MEETING
The annual meeting of shareholders of Reliance Insurance Company will be held on
May 31, 1995, at 10:00 a.m. at its National Headquarters at 4 Penn Center Plaza,
Philadelphia, Pennsylvania 19103.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished to shareholders upon written request to:
Corporate Communications, Reliance Group Holdings, Inc., 55 East 52nd St., New
York, New York 10055.
STOCK EXCHANGE LISTING
Reliance Insurance Company $2.68 Series A Cumulative Preferred Stock is listed
on the Philadelphia Stock Exchange. Symbol 'RIC' PrA.'
EXHIBIT 21.1
Set forth below is a list of subsidiaries of the Registrant. Omitted from
the following list are the names of particular subsidiaries which, considered in
the aggregate as a single subsidiary, do not constitute a significant
subsidiary. Subsidiaries of subsidiaries are indented.
Jurisdiction
of
Name Incorporation
---- -------------
..Diamond Insurance Services, Inc. Delaware
..Onyx, Inc. Delaware
..Reliance Reinsurance Company Delaware
..Sterling Administrative Services, Inc. Pennsylvania
..Platinum Investors, Inc. Delaware
..Cananwill, Ltd. Bermuda
..Reliance Insurance Company of California California
..Firemark Insurance Company Pennsylvania
..Reliance National Indemnity Company Wisconsin
..Regent International Insurance Company, Ltd. Bermuda
..Reliance Insurance Company of Illinois Illinois
..Reliance National Insurance Company of New York New York
..Reliance Life Companies Pennsylvania
..Reliance Surety Company Delaware
..United Pacific Insurance Company Pennsylvania
....Uni-Pac Corporation Washington
..RDG, Inc. Delaware
..Marketing Management, Inc. Delaware
..United Pacific Insurance Company of New York New York
..Reliance Custom Underwriting Facility, Inc. Pennsylvania
..Reliance Surety Managers, Inc. Pennsylvania
..Reliance Reinsurance Corp. Pennsylvania
..Reliance Consumer Services, Inc. Texas
..Reliance Special Risk, Inc. Pennsylvania
....Reliance Specialty Programs, Inc. Pennsylvania
..Reliance Lloyds Texas
..Reliance Insurance Companies Foundation Pennsylvania
..Reliance National Risk Specialists, Inc. Pennsylvania
..Reliance National Insurance Company Delaware
..Seguros Proteccion Mutua, S.A. Mexico
....Reliance National Risk Services, Inc. New York
....Blackmoor Group, Inc. New York
......Blackmoor Insurance Agency, Inc. New York
..Reliance National (U.K.) Ltd. England
....Reliance National Insurance Company (U.K.) Ltd. England
..Reliance National (Barbados) Insurance, Ltd. Barbados
..Reliance Insurance Group Brokerage Division, Inc. Pennsylvania
..Transamerica Title Insurance Company Arizona
....Transamerica Title Insurance Company of New York New York
....Title Transfer Services, Inc. Colorado
..State Title Insurance Company Pennsylvania
....Commonwealth Land Title Insurance Company Pennsylvania
......CLT Appraisal Services, Inc. Pennsylvania
......Commonwealth Land Title Company California
......Commonwealth Land Title Company of Austin Texas
......Commonwealth Land Title Company of Dallas Texas
......Commonwealth Land Title Company of El Paso Texas
......Commonwealth Land Title Company of Fort Worth Texas
......Commonwealth Land Title Company of Houston Texas
......Commonwealth Land Title Company of
Jefferson County Texas
......Commonwealth Land Title Company of San Antonio Texas
......Commonwealth Land Title Company of Washington Washington
......Commonwealth Land Title Corporation (Iowa) Iowa
......Commonwealth Relocation Services, Inc. Pennsylvania
......Commonwealth Title of Arizona Arizona
......CRS Financial Services, Inc. Pennsylvania
......Day One, Inc. Pennsylvania
......DelPenn Land Company Delaware
......District-Realty Title Insurance Corporation Maryland
......El Paso Abstract Co. Colorado
......Industrial Valley Title Insurance Company Pennsylvania
........Continental Title Insurance Company New Jersey
......Monumental Title Corporation Maryland
......Osage Corporation Pennsylvania
......Property Services, Inc. Pennsylvania
......Ranier Title Company Washington
......T & T Co. Holding Company Florida
........Title & Trust Company of Florida Florida
........Lauderdale Title Insurance Corporation Florida
......The National 1031 Exchange Corporation California
......Title Guarantee Company of Rhode Island Rhode Island
......Title Insurance Company Alabama
..Reliance Development Company, Inc. of Tucson Delaware
....Reliance Centro Limited Partnership Arizona
..Reliance Development Pueblo Parking, Inc. Arizona
....Reliance Pueblo Limited Partnership Arizona
..Prometheus Funding Corp. Delaware
..RCG International, Inc. Delaware
....RCG-Moody International Limited England
......ICSB B.V. Holland
........ICSB G.m.b.H. Germany
........ICSB Ltd. Hong Kong
........ICSB Sarl France
......Maghraby Moody International BV (MMI BV) Netherlands
......MMI Italia SRL Italy
......MMI Maghraby Moody International GmbH Germany
......Moody-Tottrup Gulf Limited Channel Is.
........Moody-Tottrup International Ltd. (Japan) Japan
......RCG International (Trade Name - Canada) Canada
......BMIQA Limited England
......Associated Offices Quality Certification Ltd. England
......Maghraby Moody International Limited England
........Moody International, Inc. Delaware
......The Steel Protection Consultancy Ltd. England
....Herbert W. Davis and Company New Jersey
....RCG/Asbach, Inc. Delaware
....RCG/Hagler, Bailly, Inc. Dist. of Columbia
....RCG/Pro-Access, Inc. Delaware
....RCG Information Technology, Inc. New Jersey
....Werner International, Inc. Delaware
......Werner Management Consultants, Inc. New York
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet and the Consolidated Statement of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 1,839,312
<DEBT-CARRYING-VALUE> 1,185,186
<DEBT-MARKET-VALUE> 1,072,982
<EQUITIES> 564,636
<MORTGAGE> 0
<REAL-ESTATE> 283,955
<TOTAL-INVEST> 4,102,995
<CASH> 37,891
<RECOVER-REINSURE> 2,928,533
<DEFERRED-ACQUISITION> 181,938
<TOTAL-ASSETS> 9,167,186
<POLICY-LOSSES> 5,809,546
<UNEARNED-PREMIUMS> 1,288,454
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 29,355
23,517
0
<COMMON> 44,587
<OTHER-SE> 1,032,253
<TOTAL-LIABILITY-AND-EQUITY> 9,167,186
2,634,092
<INVESTMENT-INCOME> 258,923
<INVESTMENT-GAINS> 9,218
<OTHER-INCOME> 141,609
<BENEFITS> 1,372,960
<UNDERWRITING-AMORTIZATION> 387,924
<UNDERWRITING-OTHER> 959,904
<INCOME-PRETAX> 181,848
<INCOME-TAX> (48,742)
<INCOME-CONTINUING> 142,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,584
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 2,931,528
<PROVISION-CURRENT> 1,274,649
<PROVISION-PRIOR> 22,444
<PAYMENTS-CURRENT> 321,538
<PAYMENTS-PRIOR> 780,961
<RESERVE-CLOSE> 3,127,781
<CUMULATIVE-DEFICIENCY> 22,444
</TABLE>
