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RELIANCE
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RELIANCE GROUP HOLDINGS, INC.
1996 ANNUAL REPORT
[LOGO]
ABOUT THE COMPANY
Reliance Group Holdings, Inc. (NYSE: REL) is both a leading property and
casualty insurer with specialized capabilities and coverages, and the nation's
third-largest title insurer. In addition to these core businesses, Reliance has
an information technology consulting operation.
In the past five years, Reliance has achieved:
o A dramatic shift to more profitable, specialized property and casualty
insurance coverages
o Commercial business growth, productivity and service enhancements from its
title insurance operations
o Excellent operating income
o Superior underwriting
o A significantly strengthened balance sheet
o Outstanding investment returns
o Strong returns on equity
TABLE OF CONTENTS
Reliance At A Glance 2
Letter to Shareholders 4
Review of Operations 10
Financial Information 20
Directors and Officers 59
Corporate Data 60
FINANCIAL HIGHLIGHTS
in thousands, except per share amounts 1996 1995 1994
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Revenues $3,090,587 $2,905,987 $3,047,050
Income from continuing operations
before gain on sales of investments
and 1996 charge to increase net loss
reserves for asbestos-related and
environmental pollution claims
(A&E reserves) 103,061 76,431 38,790
Income from continuing operations
before gain on sales of investments 15,961 76,431 38,790
Net income 48,207 88,056 43,821
Per share information:
Income from continuing operations
before gain on sales of investments
and 1996 charge to increase
A&E reserves .88 .66 .34
Income from continuing operations
before gain on sales of investments .14 .66 .34
Net income .41 .73 .38
Assets 10,591,131 9,988,213 9,369,553
Shareholders' equity 676,680 678,348 386,750
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Operating Income
Dollars in Millions
96* 103.1*
96 16.0
95 76.4
94 38.8
* Excluding charge to increase A&E reserves
Shareholders' Equity
Dollars in Millions
96 676.7
95 678.3
94 386.8
Assets
Dollars in Billions
96 10.6
95 10.0
94 9.4
1
RELIANCE GROUP HOLDINGS, INC. AT A GLANCE
4 pie charts stacked
Percent of Net Property and Casualty Premiums
Written
Reliance National 45%
Reliance Insurance 38%
Reliance Surety 9%
Reliance Reinsurance 8%
Consolidated Combined Ratio
Percent
96 101.6*
95 101.8
94 104.4
The combined ratio is the ratio of claims and expenses to earned premiums -- the
better the performance, the lower the ratio.
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RELIANCE NATIONAL
Market Focus
Operating in the U.S. and selected international markets with a broad range of
innovative and specialized coverages and risk management services for Fortune
1,000 companies.
Vital Statistics
Reliance National
Combined Ratio
Percent
96 101.7
95 99.1
94 104.5
1996 Highlights
o Broadened international presence with new offices in Amsterdam, Cologne,
Stockholm, Singapore and Bahia Xxxxxx, Argentina
o Established Reliant, nonstandard auto insurer
o Established global infrastructure department to underwrite coverage for roads,
ports, power stations and related projects in emerging nations
Looking Ahead
Will continue expanding in both U.S. and selected international markets.
Domestically, growth is anticipated in nonstandard auto, accident and health,
workers' compensation and employment practices coverages.
RELIANCE INSURANCE
Market Focus
Traditional and innovative coverages for the more complex commercial risks of
middle-market customers, typically, corporations with 25 to 1,000 employees, and
with revenues from $5 million to $300 million.
Vital Statistics
Reliance Insurance
Combined Ratio
Percent
96 104.9*
95 106.3
94 106.4
1996 Highlights
o Premium growth of 8%
o Invested in technology and people to enhance claims management capabilities
and service excellence
o Opened new offices in Dallas and Kansas City
Looking Ahead
Reliance Insurance will continue to meet middle-market demands by delivering a
wide array of products and services through its nationwide network of local
offices.
2
RELIANCE SURETY
Market Focus
Contract surety bonds, commercial surety bonds and fidelity bonds.
Vital Statistics
Reliance Surety
Combined Ratio
Percent
96 75.5
95 65.6
94 74.3
1996 Highlights
o Excellent premium growth of 14%
o Success meeting needs of smaller contractors through "Firemark"
program; new Firemark offices opened in Atlanta, Phoenix, Richmond,
San Diego and San Francisco
o Recorded strong growth in fidelity and commercial bond business
Looking Ahead
Anticipate growth in Firemark surety program serving smaller contractors,
fidelity bonds and Express Surety product (small, high-volume bonds sold through
cost-efficient distribution system).
RELIANCE REINSURANCE
Market Focus
Treaty and facultative casualty reinsurance for small and midsize insurers, and
for specialty divisions of larger insurers.
Vital Statistics
Reliance Reinsurance
Combined Ratio
Percent
96 102.7*
95 114.9
94 111.3
1996 Highlights
o Achieved solid growth with renewed focus on casualty coverages; premiums grew
27% in 1996
o Targeted attractive markets including standard and nonstandard auto and
workers' compensation coverages
o Customized products division active in providing finite risk contracts
Looking Ahead
Will build on close relationships with clients to develop tailored solutions in
areas such as capital deployment. Continued focus on writing lower layers of
risk where loss experience is more predictable and pricing more attractive.
COMMONWEALTH LAND TITLE INSURANCE
Market Focus
Title insurance, appraisal services, escrow services and a range of related real
estate services for residential and commercial property owners, financial
intermediaries and mortgage originators.
Vital Statistics
Commonwealth Land Title
Revenues and Pretax Operating Income
Dollars in Millions
Revenue
96 780.2
95 671.9
94 856.8
Pretax Operating Income
96 38.2
95 12.3
94 30.8
1996 Highlights
o Commonwealth continues to be a market leader, the third-largest title
insurance company in the United States; premiums and fees up 16% over prior
year
o Achieved record commercial title revenues
o Augmented commercial market presence with new offices in Atlanta, Chicago and
Seattle
o Acquired new offices in rapidly growing Rocky Mountain region
Looking Ahead
Positive trends include continuing favorable housing affordability, fee income
opportunities, more frequent residential refinancings, increased commercial real
estate transaction activity and lower claims over the past few years, leading to
declining loss ratios.
RCG INFORMATION TECHNOLOGY
Market Focus
A full-service computer consulting company with expertise in year 2000 software
solutions and other programming, development and consulting services.
Vital Statistics
RCG Information Technology
Revenues
Dollars in Millions
96 136.7
95 106.5
94 90.0
1996 Highlights
o Grew in excess of industry rate; 1996 revenues up 28% over prior year
o Enhanced year 2000 software solution capabilities by acquiring both Quintic
Systems and Century Conversion Software
o Invested in corporate infrastructure and opened offices in Atlanta, Columbia,
Danbury, Raleigh and Tarrytown
Looking Ahead
RCG Information Technology will continue investing in capability-enhancing
resources to take advantage of trends toward outsourcing of computer
programming, systems analysis, design and related services including year 2000
reprogramming.
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* Excludes second quarter $134 million asbestos-related and environmental
pollution reserve addition. Including this reserve addition, the 1996
consolidated property and casualty combined ratio was 109.0%, the combined
ratio for Reliance Insurance was 121.9%, and the combined ratio for Reliance
Reinsurance was 115.5%.
3
TO OUR SHAREHOLDERS
Reliance Group's progress over the last several years continued in 1996. We
achieved solid operating income, sound investment returns and a strengthened
financial position.
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This was an excellent year for us, and we have entered 1997 confident in what we
can accomplish for our shareholders with our valuable franchise, our specialized
capabilities, and an unremitting focus on our customers and markets.
o Operating income in 1996 was $103.1 million ($ .88 per share), excluding an
after-tax charge of $87.1 million ($ .74 per share) to increase our
asbestos-related and environmental pollution (A&E) reserves. Including the A&E
charge, operating income was $16.0 million ($ .14 per share).
o Net income in 1996 was $135.3 million ($1.15 per share), excluding the A&E
charge. Including this charge, net income was $48.2 million ($ .41 per share)
in 1996.
o Although our reported return on equity was 7.48%, Reliance achieved a return
on equity of 19.43%, excluding the A&E charge. This return is consistent with
our goal of achieving returns on equity of 15% or better and is a more
meaningful measure of the performance of our ongoing business, since the A&E
charge is for claims from policies written in or before 1987.
o The addition of $134 million to our net loss reserves for asbestos-related
and environmental pollution claims, which we made in the second quarter, is
another important step in becoming a stronger company. Utilizing newly
developed data and methodologies, we performed an extensive study and
established conservative reserves. At year-end, total A&E reserves for
policies written in or before 1987 stood at $213 million, or 10.4 times
average paid losses over the past three years. Our action helps put behind
us an issue that has beset much of the property and casualty industry.
o Even with the charge to strengthen reserves, shareholders' equity at
year-end was $676.7 million, and book value per share was $5.92. Also,
Reliance grew its statutory surplus in 1996 to $1.2 billion.
o Including the A&E charge, our property and casualty pretax operating income
was $86.8 million, and our combined ratio was 109.0%. Our property and
casualty pretax operating income, excluding the A&E charge, was $220.8
million. We also had an outstanding combined ratio of 101.6%, excluding the
A&E charge. This ratio is among the best in the industry and demonstrates
our ability to succeed in what continues to be a challenging and competitive
environment.
GOALS
o Continued growth in our core business
o Consistent growth in earnings per share
o A return on equity of at least 15%
o Reductions in financial leverage leading to higher credit ratings
4
Photo - Executive Portraiture/Silhouetted.
Standing, left to right: Xxxxxx X. Xxxxx, Xxxx X. Xxxxxxxxx, Xxxxxx X.
Xxxxxxxxx, Xxxxxx X Xxxxxxxx.
Seated, left to right: Xxxxxx X Xxxxxxxxx, Xxxxx X. Xxxxxxxxx
(Photo caption)
Standing, left to right:
Xxxxxx X. Xxxxx, EVP and Controller;
Xxxx X. Xxxxxxxxx, Chairman and Chief Executive Officer;
Xxxxxx X. Xxxxxxxxx, President and Chief Operating Officer;
and Xxxxxx X. Xxxxxxxx, SVP and Chief Financial Officer.
Xxxxxx X. Xxxxxxxxx, SVP and General Counsel;
and Xxxxx X. Xxxxxxxxx, SVP-Investments.
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o Our title insurance business was an important contributor to our progress.
Title revenues were up 16%, to $780.2 million in 1996, and pretax operating
income grew substantially to $38.2 million.
Reliance today is acknowledged by customers, brokers, agents and its peers
as one of the most disciplined and successful specialized property and casualty
and title insurers. And we are totally committed to translating our success in
the marketplace into success for our shareholders.
While Reliance has accomplished much in the past several years, we have set
high goals for the future:
o Continued growth in our core business
o Consistent growth in earnings per share
o A return on equity of at least 15%
o Reductions in financial leverage leading to higher credit ratings
As we build our core property and casualty and title businesses, strengthen
our financial position and unlock the value of our investments, we are confident
in our ability to achieve our goals.
Property and Casualty Insurance
Reliance Group continues to intensify its focus on specialized property and
casualty insurance coverages.
Just about every insurer is talking specialization today, but for many
years, Reliance has been successfully executing a strategy of specialization. We
define this strategy as a disciplined focus on markets and products where we can
provide distinctive capabilities and achieve above-average returns. Each of our
four property and casualty profit centers, Reliance National, Reliance
Insurance, Reliance Surety and Reliance Reinsurance, has built a valuable
franchise serving targeted markets.
We are succeeding in what is generally considered a soft market by growing
and investing in those segments where opportunities are most rewarding, while
cutting back business in segments that are unattractive. It's a simple strategy,
but its successful execution
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requires discipline, the willingness to say "No" to business that yields
inadequate risk-adjusted returns for shareholders. This strategy also requires
unremitting attention to markets and customers. A flat and focused management
structure helps Reliance stay close to the marketplace and move quickly to seize
opportunities.
For example, in 1996 we reduced our writings in excess and surplus lines to
the large corporate market and property reinsurance coverages. At the same time,
we wrote profitable new business in surety, casualty reinsurance, directors and
officers, and the more complex commercial risks for middle-market customers.
Reinsurance demonstrates the flexible, market-driven approach that Reliance
Group brings to all of its businesses. We have found reinsurance pricing for
large-account, large-capacity, excess-of-loss treaties to be attractive. So
Reliance National has been a large buyer of this coverage. On the other hand,
providing reinsurance in the lower layers of risk to smaller companies is a
profitable, growing business for Reliance Reinsurance.
Even within a specific line of business, opportunities and risks may vary
dramatically by the nature of each specific risk, by the precise policy language
chosen, and by the state or region where the business is written. While
competitors sometimes paint with a broader brush, we pay close attention to
these distinctions, and profit from them.
We also have reduced our exposure to catastrophes through several
refinements to our underwriting, including our exit a few years ago from most
homeowner coverages. Catastrophes added only 1.1 points to our property and
casualty combined ratio, compared with an industry average of approximately 3
points.
Gross property and casualty premiums grew 11% in 1996, while net premiums
grew 4%. The primary reasons for the difference are our extensive use of
reinsurance to limit our risk exposures and the growing popularity of
self-insurance arrangements for large corporate clients. We are a leader in this
attractive business. While it generates lower premiums than traditional policies
do, it also results in lower losses.
We do not pursue premium growth at the expense of underwriting excellence
and profitability, but we have been successful at retaining profitable accounts
and winning quality new business.
Underwriting excellence and premium growth are compatible when building
business on a foundation of strong relationships, value-added services and
technical expertise. A perfect example is Reliance Surety, the industry leader,
which grew premiums 14% and achieved an excellent combined ratio of 75.5%.
Our diverse book of business is one of our most important advantages. We are
not overly dependent on any one market.
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Statutory Surplus
Dollars in Millions
96 1,187
95 1,128
94 909
"Property-casualty operations positioned to continue to outperform the industry,
a result of successful implementation of specialist strategy"
Xxxxxxx X. Xxxxxxxxx & Co.
February 1997
6
Title Insurance
Reliance's title insurance operations, Commonwealth Land Title and Transnation
Title, achieved excellent results in 1996, having significantly increased
revenues from both residential and commercial business. Revenues grew to
$780.2 million in 1996 from $671.9 million a year ago. Pretax operating income
was $38.2 million, compared with $12.3 million a year ago.
As the third-largest title insurance company in the United States,
Commonwealth has achieved strong operating efficiencies. By carefully managing
expenses and staying on top of market conditions, Commonwealth has enhanced its
productivity.
We continue to be optimistic for 1997. Lower claims over the past few years
should result in a declining loss ratio. A healthy economy and stable mortgage
rates would contribute to a solid real estate market and superior results at
Commonwealth.
RCG Information Technology
In addition to our core property and casualty and title insurance operations,
Reliance has a valuable investment in the information technology consulting
business. RCG Information Technology had revenues of $136.7 million in 1996,
up 28% over 1995. Approximately 1,700 professionals operate through 14
locations across the United States and provide computer-related professional
services to Fortune 1,000 clients. In 1996, we took steps to grow this
business, building corporate infrastructure, opening new branches, hiring
additional management and technical talent, and making targeted acquisitions.
RCG Information Technology has built its capacity to serve clients in areas
where demand for computer-based solutions is greatest, such as software
outsourcing, supplemental staffing and client-server technologies. One of our
areas of expertise is the reprogramming of systems to accommodate the year 2000
and beyond, a task costing businesses and governments billions of dollars to
complete.
We believe our information technology consulting business is a valuable
asset, and we intend to enhance its long-term value to our shareholders by
continuing to build its operations.
Investment Performance
Outstanding investment returns are a hallmark of Reliance. At year-end 1996,
Reliance's total portfolio of $4.5 billion was comprised of $3.8 billion (84%)
in fixed-income instruments and $700 million (16%) in equities. In 1996, a
year of rising interest rates, our total return on the fixed-income portfolio
was 5.1%. Our equity investments, including nonredeemable preferred stocks,
returned 12.3%. Over the past five years, the total annual return on our
fixed-income portfolio averaged 7.8%. Our equity portfolio generated an
average annual five-year return of 17.6%.
Fundamental credit analysis continues to be the cornerstone of our
fixed-income investment strategy. We conduct extensive research on companies,
focusing not only on financial statements but on overall business trends,
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"Reliance Group Holdings Prospects continue to brighten"
Xxxxxxxxxxx & Co., Inc.
February 1997
7
TO OUR SHAREHOLDERS, continued
including competition, demographics and technological change, attempting to
identify deteriorating or improving trends before they are reflected in credit
ratings. Additionally, we are sensitive to the duration of our fixed-income
portfolio. We adjust it to reflect our expectations about the level and term
structure of interest rates, while always taking into account the duration of
our claims liabilities.
Our investments in common stocks remain targeted at those businesses and
companies that offer the potential for extraordinary returns over intermediate
and longer-term time horizons.
Just as information technology and wireless communications have proven to be
important industries in the 1990s, biotechnology, we believe, will be extremely
important and profitable in the first decade of the next century. Accordingly,
we have made several investments in the field over the past two years. Our
enthusiasm for biotechnology is bolstered by the substantial number of new drug
applications now being filed by the young companies in this industry and by the
improved efficacy and lower costs of treating disease using these new drug
therapies. In addition, the industry's financial management is increasingly
sophisticated, and the large pharmaceutical companies are demonstrating an
appetite for joint ventures and acquisitions in the field.
Our investments in biotechnology companies have been very successful. We
made our first investments in this field in 1994. At year-end, the portfolio
totaled $197 million, including unrealized gains of $87 million. In addition, in
1996, we realized gains on this portfolio of $16 million.
Investment returns are a critical component of every insurer's success; we
believe it is important to optimize results consistent with prudent risk
parameters.
Outlook
We are investing for the future. Continuing our international expansion, we
opened an office in Singapore to serve as a base for our Asia operations. We
have begun to write business in Hong Kong, Indonesia and South Korea. In Europe
this past year, we added offices in Amsterdam, Cologne and Stockholm to our
continental presence, and we continue to grow in London, our headquarters for
the region. In the Western Hemisphere, where we have offices in Canada and
wholly owned subsidiaries in Argentina and Mexico, in 1996 we opened a new
office in Bahia Xxxxxx, Argentina.
Nonstandard auto is one of our promising new lines of business. We began
writing policies in the summer of 1996. The market is huge, $18 billion and
growing. We recognize the unique characteristics of this business, so we are
building a stand-alone organization with the culture, systems and structure
specifically tailored to it.
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"Better than industry average results... Reliance is well positioned for future
earnings growth."
Xxxxxxxxx, Lufkin & Xxxxxxxx
February 1997
8
"The outlook for 1997 and 1998 remains positive due to growth in attractive
property casualty segments as well as continued favorable operating conditions
for title operations."
Xxx-Xxxx, Xxxxxx
February 1997
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We also have opened offices and appointed new producers to accelerate our
progress serving the more complex commercial risks of middle-market clients.
Other areas we've targeted for growth include casualty reinsurance, the small
contractor surety market and fidelity bonds.
In the title business, Commonwealth is increasing its penetration of the
commercial market and is growing in the rapidly developing Rocky Mountain
region, where it acquired several additional offices in 1996.
Looking forward, we see opportunity for Reliance in many of the major trends
affecting our industry. Consolidation and reorganization are causing many
competitors to look inward. Having begun our evolution several years ago, we
have a competitive advantage. We are better able to focus on customers. Risks
are becoming more complex, playing to our strong technical skills and
specialized capabilities. Also, the pace of change is accelerating. With the
demise of predictable market cycles, adjustments to strategy, pricing and risk
assessments need to be made on a continuous basis. Reliance is well placed to
respond rapidly to changes in market conditions. Our resources are close to the
marketplace, and we have a culture with a strong bias for action based on market
insight.
We hope this letter conveys our conviction that Reliance is no ordinary
insurer. Conventional products and business-as-usual behavior can only lead to
disappointing performance. Reliance is accountable, innovative, market driven
and entrepreneurial.
We are confident and enthusiastic because the people of Reliance have built
a valuable franchise that distinguishes us in our business. Our outstanding
management team works together very effectively and brings together
complementary skills and experience. Our insurance industry knowledge is
unsurpassed; our managers and professionals have perspective and experience
drawn from a wide range of disciplines. We understand the forces at work in the
larger financial arena and in our clients' industries.
Our commitment to superior service, market acumen, and innovative property
and casualty coverages has differentiated us. Our clients know what we stand for
and what we aspire to achieve.
We own our future. Reliance has moved beyond the industry's restructuring
and refocusing stage, and is executing strategies for achieving outstanding
shareholder returns. We have delivered on our promises and are focusing with
increasing precision on what we do best. We're pleased with the growing
recognition that Reliance Group has been earning from the investment community,
and are totally committed to achieving outstanding results on your behalf in
1997 and beyond.
/s/ Xxxx X. Xxxxxxxxx /s/ Xxxxxx X. Xxxxxxxxx
Xxxx X. Xxxxxxxxx Xxxxxx X. Xxxxxxxxx
Chairman and Chief Executive Officer President and Chief Operating
Officer
9
REVIEW OF OPERATIONS
Reliance is successfully executing a strategy of specialization: a disciplined
focus on markets and products where we can provide customers with distinctive
capabilities and solutions while achieving above-average returns.
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Reliance National provides a broad range of specialized coverages and risk
management services for Fortune 1,000 companies.
Reliance Insurance serves the middle market with a full range of product
offerings and a strong local presence.
Reliance Surety, the nation's most successful surety company, writes contract
surety bonds, commercial surety bonds and fidelity bonds.
Reliance Reinsurance has a profitable focus on casualty reinsurance for small to
midsize insurers.
Commonwealth Land Title is the nation's third-largest title insurer, serving
both the commercial and residential markets.
RCG Information Technology is a full-service computer consulting company with
expertise in areas such as year 2000 software solutions and other programming,
development and consulting services.
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(Photo Caption)
Standing, left to right:
Xxxxxx X. Xxxxxx,
President, Reliance Insurance;
Xxxxxx X. Xxxxxxxxx,
President and Chief Operating Officer, Reliance Group Holdings, Inc.;
Xxxxxx X. Xxxxx,
President, Reliance National; and
Xxxxxx X. Xxxxxxxxxxx,
President, RCG Information Technology.
Seated, left to right:
Xxxxxxx Xxxxxx,
Chairman, Commonwealth Land Title;
C. Xxxxx Xxxxxxx, President, Reliance Surety; and
Xxxxxx X. Xxxxxxx,
President, Reliance Reinsurance.
Photo
Executive Portraiture/Silhouetted
Standing, left to right: Xxxxxx X. Xxxxxx, Xxxxxx X. Xxxxxxxxx, Xxxxxx X.
Xxxxx, Xxxxxx X. Xxxxxxxxxxx
Seated, left to right: Xxxxxxx Xxxxxx, C. Xxxxx Xxxxxxx, Xxxxxx X. Xxxxxxx]
10
RELIANCE NATIONAL
101.7%
Reliance National achieved an outstanding combined ratio even as it invests for
the future. Start-up expenses for new businesses contributed 1.4 points to this
ratio.
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Reliance National has the right people, skills, culture, structure and
incentives to serve national and international markets for specialty lines, and
risk management services for Fortune 1,000 companies.
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An undistracted focus on its targeted market distinguishes Reliance National
from the majority of its competition. Reliance National is fast moving,
innovative, efficient and prudent in providing tailored coverages and addressing
the needs of risk managers and national brokers.
To ensure underwriting excellence, Reliance National utilizes a team
approach, which brings together underwriters, actuaries, loss-control
specialists and claims experts who review, structure and price all policies. In
1996, the combined ratio was 101.7%.
Reliance National has been in the forefront of the move, first by very large
corporations, now by others as well, to self-insured, "captive" arrangements.
These innovations have cash-flow and cost-control benefits for companies willing
to assume a greater share of the risks that they had traditionally placed with
insurance carriers. For Reliance National, these arrangements are a profitable
business and entail less risk than traditional policies do.
A leader in attractive segments such as risk management, directors and
officers, aviation and marine coverages, Reliance National continues to expand
its market presence both domestically and internationally. Growth opportunities
include international business, accident and health, and nonstandard auto
coverages.
Internationally, Reliance National has 15 offices in 10 countries. It writes
policies in about 25 countries, and through direct presences and alliances, it
has the capacity to do business in more than 50 countries. In 1996, Reliance
National opened new offices in Amsterdam, Cologne, Stockholm, Singapore and
Bahia Xxxxxx, Argentina.
In addition, Reliance National has established a global infrastructure
department to underwrite comprehensive international coverage for public and
private entities engaged in the development of roads, ports, industrial
facilities, power stations and related projects in emerging economies.
Reliant, the new nonstandard auto business, wrote its first business in July
1996. Its goal for 1997 is $100 million in premiums. Recognizing the unique
11
characteristics of the market, Reliant has a management team recruited from
industry leaders in nonstandard auto insurance and has built an efficient
organization with the right systems and structure for this business. Reliant is
focusing its efforts on independent agents who account for approximately
three-quarters of this growing, $18 billion market.
MARKET LAUNCH
An employee-leasing company wanted to reduce its sizable workers' compensation
insurance costs by adopting a high-deductible policy. However, the rapidly
growing company did not want to tie up the collateral that these policies
require. Reliance National stepped forward with a solution, an innovative
structure that required less up-front capital. Before long, the company was
ranked in the top three of its industry, and it embarked on an initial public
offering (IPO). Working with the insured and the broker, Reliance National then
tailored a guaranteed-cost policy that limited the company's potential
liabilities and gave investors added confidence, contributing to a successful
IPO.
[Middle, right hand side
Photo illustration of freestanding letters "IPO"]
RELIANCE INSURANCE
Reliance Insurance has a compelling middle-market strategy, offering a full
range of specialized products and services through a strong local network.
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Middle-market clients, typically corporations with 25 to 1,000 employees,
and with revenues from $5 million to $300 million, have increasingly
sophisticated insurance needs. At the same time, these clients want to be served
locally. Yet regional insurers often lack strong product capabilities, and many
larger companies have closed local offices. Reliance Insurance bridges this gap
with its distinctive middle-market focus, providing effective solutions for
managing complex risks and quality service. By offering a full range of
products through a broad-based office network, Reliance Insurance answers the
needs of those producers and insureds who want ready access to all of their
insurance solutions from one source.
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SOPHISTICATED AND LOCAL
Reliance Insurance has both sophisticated product capabilities and a broad local
presence. Middle-market clients look for both from their insurers.
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Reliance Insurance has long had strong skills for underwriting more complex
risks. These capabilities are being actively marketed on a nationwide basis.
Reliance Insurance appointed new producers to serve this growing market and
expanded its network of underwriting and service facilities. In 1996, it opened
new offices in Dallas and Kansas City.
Claims management is another area where Reliance Insurance intends to
differentiate itself from the competition. The claims division has invested in
technology and people, and now manages claims for third parties as well as other
Reliance businesses. Superior claims capabilities will reduce losses and
solidify relationships with producers and clients, leading to high business
retention and a reputation that will attract new business.
As a consequence of all of these efforts, premium growth at Reliance
Insurance was 8% in 1996.
The combined ratio was 104.9%, excluding the asbestos and environmental
charge (121.9% including the A&E charge). Reliance Insurance is working toward
further improvements through a combination of continued strong underwriting,
premium growth and productive expense management.
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CLAIM FAME
A large West Coast roofing contractor wanted its small claims handled without
going through a lot of administrative hoopla. Under traditional arrangements,
for example, if a drop of roofing tar falls on an auto, it results in a small
claim, and a large amount of red tape for the insured. After talking
unsuccessfully to several carriers, the company turned to Reliance Insurance,
whose underwriting and specialty claims units developed an innovative solution.
The liability policy provides for on-site adjustment of small property damage
claims with subsequent audits and controls. Time and administrative costs have
been reduced, and claims experience continues to be favorable.
[Lower right hand side
Photo illustration of papers bound with red tape, with tin snips on top]
13
RELIANCE SURETY
Outstanding results at Reliance Surety demonstrate that underwriting excellence
and solid premium growth can be compatible when a company has the right people,
capabilities and customer relationships.
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The continuing success of Reliance Surety is the result of strong, long-term
relationships with producers and core contractors, industry expertise, efficient
technology, creative problem solving and active management of the claims
function. Over the past five years, Reliance Surety has achieved average annual
premium growth of 12% and an average combined ratio of 74.9%. Reliance Surety, a
surety industry leader, is demonstrably the best in the business. In 1996,
premiums grew 14%, and the combined ratio was an excellent 75.5%.
The core business of Reliance Surety, serving large and midsize contractors,
continues strong. Just as rewarding, investments in the small contractor segment
and in the fidelity and the commercial bond businesses have contributed to
growth and profitability.
The Firemark program, serving smaller contractors, achieved 33% premium
growth in 1996. This market offers Reliance Surety an opportunity to develop
relationships with smaller growing companies, tailoring surety solutions to
their specific needs. During the year, Firemark offices opened in Atlanta,
Phoenix, Richmond, San Diego and San Francisco.
--------------------------------------------------------------------------------
GROWTH
Premiums at Reliance Surety grew 14% in 1996. Annual premium growth since 1991
has averaged 12%.
--------------------------------------------------------------------------------
SURE ENOUGH
A construction contractor had a difficult dilemma. Surety coverage was essential
to its business but virtually unobtainable because its corporate parent had
filed for bankruptcy. By working closely with the producer, the parent company,
the contractor and lenders, Reliance Surety developed a solution. Bringing
together its underwriting, financial and claims experts, Reliance Surety was
able to address the risks and resolve the problem. A bond program was put in
place, which gives Reliance sufficient protection while allowing the contractor
to continue its business without disruption.
[Lower right hand side
Photo illustration of building construction combined with puzzle]
14
Fidelity premiums also recorded strong growth, 31%, in 1996. Express
Surety--small, high-volume, low-risk bonds sold through a cost-efficient
distribution system--is another area of growth in 1996 and beyond.
These products are becoming a larger share of the business of Reliance
Surety, contributing to continued growth and excellence.
--------------------------------------------------------------------------------
RELIANCE REINSURANCE
Superior service, underwriting expertise and a renewed focus on casualty
coverages have led to a dramatic resurgence at Reliance Reinsurance.
--------------------------------------------------------------------------------
Reliance Reinsurance has had long-standing success from its core book of
casualty reinsurance for small to midsize insurers and the specialty divisions
of larger companies. In the early 1990s, expansion into property reinsurance led
to disappointing results. However, in 1996, Reliance Reinsurance renewed its
focus on casualty coverages and achieved sound underwriting results and solid
growth.
Property coverages as a percentage of total premiums were only 10% in 1996,
compared with 33% in 1995. Even with this substantial refocus, total net
premiums grew 27% in 1996. Growth has come from both existing relationships and
new clients and from lines of business where loss experience has proven
favorable. This past year, Reliance Reinsurance had a combined ratio of 102.7%,
excluding the asbestos and environmental charge (115.5% including the A&E
charge).
By establishing close working relationships with clients, Reliance
Reinsurance is able to develop innovative solutions tailor-made for their
individual needs. This partnership approach also enables Reliance Reinsurance to
assist its clients in developing balance-sheet and capital-planning strategies
to support their overall financial objectives. The customized products division,
for example, is particularly active in providing finite risk contracts and other
products to assist clients in improving their capital position relative to
premium writings.
Reliance Reinsurance continues to write in the lower layers of risk, where
pricing is more attractive and loss experience more predictable. Targeted
classes of business such as standard and nonstandard auto insurance and workers'
compensation have generated excellent returns and now account for more than half
of total premiums.
--------------------------------------------------------------------------------
TAILOR-MADE
The emphasis at Reliance Reinsurance is on providing service and underwriting
expertise--custom solutions that result from close working relationships with
clients.
15
A CAPITAL SOLUTION FOR GROWTH
A midsize workers' compensation insurer had an opportunity to write additional
quality business, but its capital position limited its ability to grow. Reliance
Reinsurance developed a multifaceted solution including a quota share
reinsurance treaty on the existing book. In addition, Reliance appointed the
insurer as a program manager for new business, enabling it to issue Reliance
policies under strict underwriting guidelines. The marketing and claims
functions were structured so that the insurer could continue to provide seamless
service to its producers and insureds. Now the company is again able to grow and
serve its customers.
[Upper right hand side
Photo illustration of broken eggshell with newly hatched chick]
--------------------------------------------------------------------------------
COMMONWEALTH LAND TITLE INSURANCE
The nation's third-largest title company, Commonwealth Land Title, profits from
a high level of professional expertise and service, productivity management and
a wide range of real estate information products for the residential and
commercial markets.
--------------------------------------------------------------------------------
Its market leadership and strong financial position have enabled Commonwealth
to maximize opportunities in a solid real estate market. According to a 1996
Harvard University study, with improved housing affordability, the number of
homeowners in the United States is growing at a record pace.
Commonwealth has positioned itself to be an effective presence serving
decision makers at every decision point in the real estate transaction. Real
estate investment trusts and other principals in commercial transactions, real
estate brokers, national and regional mortgage lenders, and attorneys are all
efficiently served by Commonwealth's national network of branch offices and
agents.
--------------------------------------------------------------------------------
16%
Title revenues grew 16% in 1996 to $780.2 million. Pretax operating income
reached $38.2 million.
16
This network was augmented in 1996 by expanding its commercial capabilities
in key markets including Atlanta, Phoenix, Seattle and Washington, DC, and by
acquiring several offices in the rapidly growing Rocky Mountain region.
Commonwealth achieved solid results in 1996. Revenues grew 16% to $780.2
million, and as a result of the significant operating leverage of Commonwealth
and lower paid losses, pretax operating income grew substantially to $38.2
million.
Several important factors should contribute to continued success. Over the
past few years, paid losses have substantially declined, increasing overall
underwriting profitability. Also, real estate information service products are
creating fee income opportunities. Homeowners are refinancing with greater
frequency, which creates additional transaction opportunities and reduces the
length of time that policies are subject to claims. Favorable interest rates
and strong economic activity are contributing to a sound residential and
commercial real estate market.
--------------------------------------------------------------------------------
THE RIGHT INGREDIENTS
An investor group seeking to acquire three food manufacturing companies with
sizable real estate holdings throughout the United States had only five business
days to meet its lenders' title insurance, collateral and disbursement
requirements. The investor group turned to Commonwealth, which tied together
title policies initially issued by three separate insurers and produced
commitments for 17 properties located in eight states. Commonwealth served as
escrow agent for the three acquisitions, as well as for the related real estate
transactions. During a single weekend, Commonwealth professionals finalized the
complex escrow agreement, and coordinated the payment of prior loans and the
release of liens, readying for the following business day an intricate series of
electronic fund transfers totaling hundreds of millions of dollars.
[Lower left hand side
Photo illustration of table place setting (fork, plate, knife and spoon) with
alarm clock on plate]
17
Title insurance, an array of related services and a strong customer focus
place Commonwealth at the center of opportunity within America's crucial real
estate industry.
--------------------------------------------------------------------------------
RCG INFORMATION TECHNOLOGY
Software systems, services and integration firms--a $50 billion industry--are
projected to grow 15% to 18% annually. RCG Information Technology is investing
in new offices, management and technical resources to capture a larger share of
this profitable market.
--------------------------------------------------------------------------------
Growth at RCG Information Technology actually has exceeded the industry rate:
Revenues in 1996 were $136.7 million, up 28% over the prior year. RCG
Information Technology is a full-service computer consulting company with
expertise in areas including year 2000 software conversions, programming,
project management and consulting, systems analysis, development and design.
Capabilities cover a variety of platforms, from PC applications to large-scale
mainframe systems. Clients are provided with individual consultants or entire
project teams.
Through its system development centers and offices in 14 states, RCG
Information Technology serves corporations in a wide variety of industries
including communications, electronics, publishing, pharmaceuticals, energy,
transportation, retail and finance, as well as government and not-for-profit
entities.
RCG Information Technology is building its capabilities to take further
advantage of industry opportunities created by the trend toward outsourcing and
the growing demand for programmers and technology-driven solutions. New
management, marketing and systems professionals have been recruited. Offices
were opened in 1996 in Atlanta, Columbia, Danbury, Raleigh and Tarrytown. In
addition, focused acquisitions have enhanced the company's capabilities, market
reach and revenue potential.
--------------------------------------------------------------------------------
1999 2000
RCG Information Technology has strong capabilities for assisting
companies to ready their computer systems for the year 2000 and beyond.
18
In 1996, RCG Information Technology acquired Quintic Systems and an
affiliated company, Century Conversion Software, which provide year 2000
software assessment and conversion tools, client support and project management
services. Many large companies will be spending $40 million or more on year 2000
systems conversions. The total cost of addressing the year 2000 problem
worldwide is estimated at hundreds of billions of dollars. RCG Information
Technology is positioned to support clients in meeting this challenge.
--------------------------------------------------------------------------------
SYSTEM SUCCESS
One of the world's largest banks needed to develop global systems for its
business units and integrate them into its centralized operating environment.
The bank turned to RCG Information Technology (RCG IT) for the right solutions.
RCG IT designed and developed multiplatform systems utilizing mainframe,
midrange and client server technologies that support the bank's global
relationship banking, global trust accounting and mutual fund loan operations.
RCG IT also manages and maintains the systems under a long-term operating
agreement and is assisting the bank with its year 2000 compliance needs. This
ongoing relationship is consistent with RCG IT's long-term client partnership
philosophy.
[Middle right hand side
Photo illustration of globe with computer mouse attached]
19
FINANCIAL INFORMATION
Selected Financial Data 21
Financial Review 24
Consolidated Financial Statements 32
Notes to Consolidated Financial Statements 36
Independent Auditors' Report 56
Report of Management 57
Market and Dividend Information 58
Directors and Officers 59
Corporate Data 60
20
Selected Financial Data Reliance Group Holdings, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Income Statement Data:
Revenues:
Property and casualty insurance
Premiums earned................................ $ 1,800,854 $ 1,774,591 $ 1,777,318 $ 1,571,539 $ 1,535,740
Net investment income.......................... 257,133 247,343 232,299 216,432 189,287
Gain on sales of investments................... 49,264 27,381 8,851 129,018 50,080
------------ ------------ ------------ ------------- ------------
2,107,251 2,049,315 2,018,468 1,916,989 1,775,107
------------ ------------ ------------ ------------- ------------
Title and mortgage insurance
Premiums earned(1)............................. 780,157 671,947 856,774 893,364 826,493
Net investment income.......................... 30,455 27,946 26,613 24,282 26,224
Gain on sales of investments................... 346 1,729 516 4,786 3,267
Gain on sale of subsidiary(1).................. - - - - 8,999
------------ ------------ ------------ ------------- ------------
810,958 701,622 883,903 922,432 864,983
------------ ------------ ------------ ------------- ------------
Other............................................. 172,378 155,050 144,679 123,398 117,244
------------ ------------ ------------ ------------- ------------
$ 3,090,587 $ 2,905,987 $ 3,047,050 $ 2,962,819 $ 2,757,334
============ ============ ============ ============= ============
Income (loss) from continuing operations before
gain on sales of investments, income taxes
and equity in investee company:
Property and casualty insurance................... $ 218,746 $ 201,699 $ 134,956 $ 41,212 $ (29,999)
Asbestos and environmental loss
reserve increase............................... (134,000)(2) - - - -
------------ ------------ ------------ ------------- ------------
84,746 201,699 134,956 41,212 (29,999)
Title and mortgage insurance...................... 38,234 12,283 30,810 55,180 47,031
Corporate interest expense........................ (74,253) (76,230) (75,619) (89,517) (95,574)
Corporate overhead and other...................... (51,738) (47,184) (51,371) (56,584) (64,730)
------------ ------------- ------------ ------------- ------------
(3,011) 90,568 38,776 (49,709) (143,272)
Income tax (provision) benefit ................... 10,064 (21,929) (9,464) 35,831 52,138
Equity in investee company........................ 8,908 7,792 9,478 12,441 5,206
------------ ------------ ------------ ------------- ------------
Income (loss) from continuing operations
before gain on sales of investments............ 15,961(2) 76,431 38,790 (1,437) (85,928)
After-tax gain on sales of investments............ 32,246 19,485 5,031 86,973 42,708
------------ ------------ ------------ ------------- -------------
Income (loss) from continuing operations.......... $ 48,207(2) $ 95,916 $ 43,821 $ 85,536 $ (43,220)
============ ============ ============= ============ ============
Net income (loss)................................. $ 48,207 $ 88,056 $ 43,821 $ 73,525 $ (35,655)
============ ============ ============ ============= ============
Per-share information:
Income (loss) from continuing operations
before gain on sales of investments............ $ .14(2) $ .66 $ .34 $ (.02) $ (1.14)
After-tax gain on sales of investments............ .27 .17 .04 .94 .57
------ ------- ------- ------- -------
Income (loss) from continuing operations.......... $ .41(2) $ .83 $ .38 $ .92 $ (.57)
===== ======= ======= ======= =======
Net income (loss)................................. $ .41 $ .73 $ .38 $ .79 $ (.47)
====== ======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 117,563 116,045 115,097 92,858 75,555
Cash dividends per common share................... $ .32 $ .32 $ .32 $ .32 $ .32
21
Selected Financial Data Reliance Group Holdings, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except ratios)
Other Operating Data(3):
Underwriting loss................................. $ (38,387)(4) $ (45,644) $ (97,343) $ (175,220) $ (219,286)
Loss and loss expense ratio....................... 67.6%(4) 67.7% 73.0% 78.6% 84.0%
Underwriting expense ratio........................ 34.0 34.1 31.4 32.2 30.1
------ ------- ------- ------- -------
Combined ratio(5)................................. 101.6%(4) 101.8% 104.4% 110.8% 114.1%
===== ======= ======= ======= =======
December 31 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance Sheet Data:
Assets............................................ $ 10,591,131 $ 9,988,213 $ 9,369,553 $ 8,815,214 $ 8,185,611
Marketable securities............................. 4,447,276 4,298,510 3,799,874 3,797,315 3,435,595
Excess of cost over fair value of net
assets acquired................................ 249,464 259,444 269,424 279,404 289,385
Debt outstanding(6)............................... 901,532 878,419 892,579 911,071 1,000,698
Shareholders' equity.............................. 676,680 678,348 386,750 518,626 257,800
Statutory policyholders' surplus of property
and casualty insurance subsidiaries............ 1,187,056 1,128,336 908,538 902,290 857,611
(1) 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 for the year ended December 31, 1992.
(2) The 1996 results include a charge of $134.0 million ($87.1 million
after-tax, or $.74 per-share) to increase net loss reserves for
asbestos-related and environmental pollution claims for business written
in or before 1987.
(3) The data relate to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income and
expense.
(4) The 1996 data excludes the charge of $134.0 million (7.4 combined ratio
points) to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987.
The actual 1996 underwriting loss was $172.4 million, the loss and loss
expense ratio was 75.0% and the combined ratio was 109.0%.
(5) In 1995 and 1994, the combined ratio excluded the effect of the $4.0
million and $11.6 million charge pertaining to Proposition 103.
(6) Debt outstanding included a subsidiary's preferred stock which was
redeemed in 1995.
22
Property and Casualty Insurance Operations Reliance Group Holdings, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
Net premiums written for each line of property and casualty insurance are as
follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
General Liability................................. $ 466,636 $ 468,951 $ 423,377 $ 369,895 $ 349,777
Automobile........................................ 265,206 239,819 244,000 260,180 261,520
Workers' Compensation............................. 249,638 265,882 312,808 377,592 418,685
Multiple Peril.................................... 211,857 184,600 180,074 187,438 126,070
Surety............................................ 159,183 139,298 117,989 106,664 94,316
Reinsurance....................................... 151,099 118,969 125,597 123,742 108,095
Ocean and Inland Marine........................... 129,148 118,757 103,865 105,254 49,658
Fire and Allied................................... 64,250 68,118 49,977 40,372 15,891
Accident and Health............................... 61,873 58,426 51,976 35,649 7,965
Involuntary....................................... 44,229 81,006 113,483 113,498 109,583
Other............................................. 43,080 35,214 41,144 50,313 -
------------ ------------ ------------ ------------- ------------
$ 1,846,199 $ 1,779,040 $ 1,764,290 $ 1,770,597 $ 1,541,560
============ ============ ============ ============= ============
Combined ratios (on a GAAP basis), after policyholders' dividends, for each line
of property and casualty insurance are as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996(1) 1995(2) 1994(2) 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
General Liability................................. 95.5% 102.4% 106.0% 105.0% 100.4%
Automobile........................................ 123.7 126.3 116.6 125.5 119.4
Workers' Compensation............................. 94.1 79.1 95.3 96.5 105.8
Multiple Peril.................................... 107.0 117.3 114.8 121.6 145.3
Surety............................................ 75.5 65.6 74.3 81.0 80.9
Reinsurance....................................... 102.7 114.9 111.3 104.8 122.0
Ocean and Inland Marine........................... 100.3 96.0 124.9 113.9 120.0
Fire and Allied................................... 100.9 117.4 75.5 158.4 186.5
Accident and Health............................... 96.0 81.2 88.9 94.2 94.6
Involuntary....................................... 98.8 94.6 100.3 133.6 147.6
Other............................................. 156.6 155.7 120.7 187.8 -
----- ----- ----- ----- -----
101.6% 101.8% 104.4% 110.8% 114.1%
===== ===== ===== ===== =====
(1) Excludes the effect of the $134.0 million increase in net loss reserves
for asbestos-related and environmental pollution claims for business
written in or before 1987. This charge impacted the general liability,
automobile, multiple peril and reinsurance lines of business. Including
this charge, the total combined ratio was 109.0%, while the combined
ratios of the general liability, automobile, multiple peril and
reinsurance lines of business were 113.8%, 124.5%, 123.9% and 115.5%,
respectively.
(2) Excludes the effect of the $4.0 million and $11.6 million charge
pertaining to Proposition 103 in 1995 and 1994.
23
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL REVIEW
--------------------------------------------------------------------------------
OVERVIEW
The Company had income from continuing operations, before gains on sales of
investments, of $16.0 million ($.14 per share) in 1996. Operating results in
1996 include an after-tax charge of $87.1 million ($.74 per share) to increase
property and casualty insurance net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. Excluding
the effects of this charge, income from continuing operations, before gains on
sales of investments, was $103.1 million ($.88 per share) compared to $76.4
million ($.66 per share) in 1995 and $38.8 million ($.34 per share) in 1994. The
improved results in 1996 and 1995 reflect the continued strong performance of
the property and casualty insurance operations. In addition, the 1996 results
benefitted from improved title insurance operations. After-tax gains on sales of
investments were $32.2 million ($.27 per share) in 1996 compared to $19.5
million ($.17 per share) in 1995 and $5.0 million ($.04 per share) in 1994.
Net income in 1996 was $48.2 million ($.41 per share). Excluding the effects of
the charge to strengthen asbestos and environmental net loss reserves, net
income in 1996 was $135.3 million ($1.15 per share), compared to $88.1 million
($.73 per share) in 1995 and $43.8 million ($.38 per share) in 1994. Net income
in 1995 included a loss of $4.5 million on the disposal of discontinued life
insurance operations by Zenith National Insurance Corp. ("Zenith"), an investee
company, and an extraordinary loss of $3.4 million from the early extinguishment
of debt.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Based on a study of their asbestos-related and environmental pollution reserves,
the property and casualty insurance operations recorded a charge of $134.0
million in the second quarter of 1996 to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in or
before 1987. The study entailed an extensive and detailed review of the
Company's claims, analysis of new industry data, review of policies and classes
of business written by the Company and the industry at large, and new actuarial
methodologies for projecting ultimate losses based on payment patterns and
claims analyses. The loss reserve levels established represent the Company's
estimate of ultimate losses, based on current information and actuarial
methodologies. Excluding the effects of the $134.0 million charge to strengthen
asbestos and environmental net loss reserves, property and casualty insurance
pretax operating income was $218.7 million in 1996 compared to $201.7 million in
1995 and $135.0 million in 1994. Pretax gains on sales of investments were $49.3
million in 1996 compared to $27.4 million in 1995 and $8.9 million in 1994.
------------------------------------------------------------------------------------------------------------------------------------
Net premiums written and premiums earned for each line of property and casualty
insurance are as follows:
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
------------------------------------------------------------------------------------------------------------------------------------
(In thousands) Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
General Liability..................... $ 466,636 $ 437,634 $ 468,951 $ 451,867 $ 423,377 $ 427,864
Automobile............................ 265,206 260,735 239,819 236,592 244,000 251,038
Workers' Compensation................. 249,638 276,938 265,882 290,241 312,808 323,891
Multiple Peril........................ 211,857 200,301 184,600 180,166 180,074 170,230
Surety................................ 159,183 147,416 139,298 127,355 117,989 108,833
Reinsurance........................... 151,099 140,334 118,969 119,921 125,597 132,694
Ocean and Inland Marine............... 129,148 123,352 118,757 115,590 103,865 95,103
Fire and Allied....................... 64,250 63,020 68,118 61,430 49,977 56,495
Accident and Health................... 61,873 60,394 58,426 58,636 51,976 49,550
Involuntary........................... 44,229 50,489 81,006 88,734 113,483 115,963
Other................................. 43,080 40,241 35,214 44,059 41,144 45,657
-------------- ----------- ----------- ----------- ----------- -----------
$1,846,199 $1,800,854 $1,779,040 $1,774,591 $1,764,290 $1,777,318
============== =========== =========== =========== =========== ===========
24
Premiums written and earned in 1996 benefitted from increased writings in the
commercial multiple peril and automobile lines and increased reinsurance
premiums resulting from new casualty treaties. Net premiums written and earned
in 1996 and 1995 also benefitted from growth in surety premiums, resulting from
a higher level of construction activity by insureds and growth in small
contractor business. These increases were partially offset by declines in
involuntary premiums as well as a decline in workers' compensation premiums
resulting from the shift by insureds to captive insurance programs and other
arrangements that reduce net premium retention.
The underwriting loss in 1996 was $172.4 million and the combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 109.0%.
Excluding the effects of the charge to strengthen asbestos and environmental
net loss reserves, the 1996 underwriting loss was $38.4 million and the
combined ratio was 101.6%, compared to an underwriting loss of $45.6 million in
1995 with a combined ratio of 101.8% and an underwriting loss of $97.3 million
in 1994 with a combined ratio of 104.4%. The strong underwriting results in
1996 and 1995 reflect continued underwriting profits in workers' compensation,
surety and accident and health lines of business, partially offset by
underwriting losses in automobile lines. The Company has undertaken several
initiatives to improve automobile underwriting results including, (i)
elimination of certain unprofitable programs, (ii) increasing prices and
deductible limits, and (iii) strengthening the automobile claims function. The
1996 underwriting results also benefitted from improved results in general
liability, as well as in multiple peril, reinsurance and fire and allied lines
of business, reflecting lower catastrophe losses which were $19.9 million
($26.1 million before reinsurance) in 1996, $25.7 million ($78.5 million before
reinsurance) in 1995 and $50.1 million ($134.0 million before reinsurance) in
1994. The low level of catastrophe losses reflects the Company's efforts to
reduce its catastrophe exposures by exiting homeowners' coverage, reducing
property coverage in the reinsurance line of business and establishing rigorous
underwriting criteria in catastrophe prone regions. The 1995 and 1994
underwriting results included charges of $4.0 million and $11.6 million,
respectively, relating to the Company's settlement with the California
Department of Insurance resolving its total liability for refunds and interest
under Proposition 103.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. The Company's aggregate reinsurance recoverables
were $3.58 billion at December 31, 1996, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but
not reported, unearned premiums and paid claims. The Company is subject to
credit risk with respect to its reinsurers, as the ceding of risk to reinsurers
does not relieve the Company of its liability to insureds. In order to minimize
losses from uncollectible reinsurance, the Company places its reinsurance with
a number of different reinsurers and utilizes a security committee to approve,
in advance, the reinsurers which meet its standards of financial strength. The
Company holds substantial amounts of collateral to secure recoverables from
unauthorized reinsurers. See note 8 to the consolidated financial statements.
Policy claims and settlement expenses include a provision for insured events of
prior years of $138.7 million in 1996 compared to $38.5 million in 1995 and
$22.4 million in 1994. The provision for all years includes adverse development
related to prior year asbestos-related and environmental pollution claims,
which primarily affect general liability, multiple peril and reinsurance lines
of business, and includes a pretax charge of $134.0 million in 1996 to
increase net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. The 1996 provision also
includes adverse development in the automobile line, offset by favorable
development in workers' compensation. The 1995 provision also included
adverse development in other general liability, automobile and reinsurance
lines, partially offset by favorable development in workers' compensation. The
1994 provision also included adverse development in other general liability
lines, partially offset by favorable development in workers' compensation.
25
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.
The liability for property and casualty insurance loss reserves at December 31,
1996 was $6.27 billion compared to $5.86 billion at December 31, 1995. 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 $2.95 billion and $2.68 billion at December 31,
1996 and 1995, respectively, are included in the liability.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new
data are included in operating results for the periods in which they are made.
In general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The Company
regularly analyzes its reserves and reviews its pricing and reserving
methodologies so that future adjustments to prior years reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be more or less than such
estimates indicate. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail claims may not
become apparent for a number of years, and a relatively higher proportion of
ultimate losses are considered incurred but not reported. As a result,
variation in loss development is more likely in long tail lines of business.
The Company attempts to reduce these variations in certain of its long tail
lines, primarily directors and officers liability and professional liability,
by writing policies on a claims-made basis which mitigates the long tail nature
of the risks. The Company also limits the potential loss from a single event
through the extensive use of reinsurance.
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
Net investment income of the property and casualty insurance operations
increased to $257.1 million in 1996 from $247.3 million in 1995 and $232.3
million in 1994. These increases reflect growth in the size of the fixed
maturity investment portfolio.
Gains on sales of investments were $49.3 million in 1996 compared to $27.4
million in 1995 and $8.9 million in 1994. Gains on sales of investments in
1996 resulted from sales of equity securities.
26
TITLE INSURANCE OPERATIONS
The title insurance operations reported pretax income, before gains on sales of
investments, of $38.2 million in 1996, $12.3 million in 1995 and $30.8 million
in 1994.
Premiums and fees were $780.2 million in 1996 compared to $671.9 million in
1995 and $856.8 million in 1994. The increase in premiums and fees in 1996,
when compared to 1995, resulted from an increase in residential resale and new
home sale activity reflecting a strong economy and favorable mortgage interest
rates. In addition, the title insurance operations achieved a record level of
commercial title insurance premiums. Premiums and fees in 1994 benefitted from
increased agency revenues reflecting the strong real estate market conditions
that existed in late 1993 and early 1994.
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are the title insurance
operations' single largest expense. Agency commissions, which fluctuate in
direct relation to agency premiums, were $355.8 million in 1996 compared to
$310.7 million in 1995 and $432.0 million in 1994. 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 $355.4 million in 1996 compared to $318.4 million
in 1995 and $344.7 million in 1994. The expense ratio of the title insurance
operations (which includes agency commissions) was 90.5% in 1996 compared to
93.1% in 1995 and 90.0% in 1994. The decline in the expense ratio in 1996, when
compared to 1995, resulted from an increase in direct title insurance premiums
and effective expense control measures. The provision for policy claims was
$61.1 million in 1996 compared to $58.5 million in 1995 and $75.9 million in
1994. The title insurance operations have benefitted from favorable claims
experience in recent years, a trend which is expected to continue. Paid claim
losses have declined to $37.1 million in 1996 from $45.8 million in 1995 and
$52.5 million in 1994.
INVESTMENT PORTFOLIO
At December 31, 1996, the Company's investment portfolio aggregated $4.18
billion (at cost), of which 10% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At
December 31, 1996, no one issuer comprised more than 3.0% of the fixed maturity
and short-term investment portfolio. 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 securities 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, 1996, the carrying
values of non-investment grade securities and securities not rated by Standard
& Poor's were $499.5 million (13% of the fixed income portfolio) and $93.6
million (2% of the fixed income portfolio), respectively. At December 31, 1995,
the carrying values of non-investment grade securities and securities not rated
by Standard & Poor's were $299.0 million (8% of the fixed income portfolio) and
$64.4 million (2% of the fixed income portfolio), respectively. Substantially
all of the Company's non-investment grade and non-rated securities are
classified as available for sale and, accordingly, are carried at market value.
See note 2 to the consolidated financial statements.
27
At December 31, 1996, 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 note 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
RCG International, Inc. ("RCG"), a subsidiary of the Company, primarily
provides technical services in the information technology industry. Information
technology revenues were $136.7 million in 1996, $106.5 million in 1995 and
$90.0 million in 1994. The increase in revenues in both 1996 and 1995 resulted
from increased assignments from existing clients and new clients. Information
technology operating expenses were $134.4 million in 1996, $101.0 million in
1995 and $84.6 million in 1994. RCG's revenues and expenses are included in
other revenues and other operating expenses in the accompanying consolidated
statement of income. For the years 1995 and 1994 other revenues and other
operating expenses included certain consulting operations which were sold in
1995.
At December 31, 1996, the Company's real estate operations had holdings with a
carrying value of $286.7 million, which includes nine shopping centers with an
aggregate carrying value of $118.8 million, office buildings and other
commercial properties with an aggregate carrying value of $105.5 million and
undeveloped land with a carrying value of $62.4 million.
INTEREST EXPENSE
Consolidated interest expense was $87.7 million in 1996 compared to $90.2
million in 1995 and $91.1 million in 1994. The decline in interest expense
resulted from the refinancing of certain of the Company's debt in 1996 and
1995, which decreased the interest rates on such debt.
EQUITY IN INVESTEE COMPANY
Equity in investee company income was $8.9 million, $7.8 million and $9.5
million in 1996, 1995 and 1994, respectively, from the Company's investment in
Zenith. The increase in equity income in 1996, when compared to 1995, reflects
improved underwriting results due, in part, to lower catastrophe losses. The
decline in equity income in 1995, when compared to 1994, reflects an increase
in Zenith's property and casualty underwriting losses, particularly in workers'
compensation. In 1995, the Company recognized an after-tax loss of $4.5 million
on the disposal of discontinued life insurance operations by Zenith.
28
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These net payments aggregated $139.2
million for the year ended December 31, 1996. The Company's ability to receive
cash dividends has depended upon and continues to depend upon the dividend
paying ability of its insurance subsidiaries. The Insurance Law of
Pennsylvania, where Reliance Insurance Company (the Company's principal
property and casualty insurance subsidiary) is domiciled, limits the maximum
amount of dividends which may be paid without approval by the Pennsylvania
Insurance Department. Under such law, Reliance Insurance Company may pay
dividends during the year equal to the greater of (a) 10% of the preceding
year-end policyholders' surplus or (b) the preceding year's statutory net
income, but in no event to exceed the amount of the 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.
Common stock dividends paid by Reliance Insurance Company were $111.5 million
in each of 1996, 1995 and 1994. During 1997, $118.5 million would be available
for dividend payments by Reliance Insurance Company under Pennsylvania law. The
Company believes such amount will be sufficient to meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required prior approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely affect the
Company's ability to service its debt and to pay dividends on its common stock.
Reliance Insurance 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, 1996, Reliance Insurance
Company generated $243.6 million of cash flow from operating activities.
Reliance Insurance 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, 1996, Reliance
Insurance Company had $356 million of cash and short-term investments.
29
For the year ended December 31, 1996, the Company generated $160.4 million of
cash flow from operating activities compared to $168.5 million in 1995 and
$245.8 million in 1994. The decrease in the 1996 operating cash flow, when
compared to 1995, reflects higher net payments for property and casualty
insurance policy claims and related expenses, partially offset by higher
levels of operating cash flow from the title insurance operations, reflecting
an increase in their operating income and a decline in paid claims. The
decrease in the 1995 operating cash flow, when compared to 1994, reflected
higher net payments for property and casualty insurance policy claims and
related expenses. In addition, operating cash flow for the title insurance
operations declined in 1995 primarily due to lower levels of title insurance
income.
The Company used $159.9 million, $111.2 million and $243.6 million of cash flow
for investing activities for the years ended December 31, 1996, 1995 and 1994,
respectively. Net purchases of marketable securities were $102.1 million, $87.9
million and $184.5 million in 1996, 1995 and 1994, respectively.
The Company used $12.5 million of cash flow for financing activities for the
year ended December 31, 1996, primarily for the payment of dividends, partially
offset by additional term loan borrowings. The Company used $53.4 million and
$47.3 million of cash flow for financing activities for the years ended
December 31, 1995 and 1994, principally for the payment of dividends and
reduction of debt.
The Company has a revolving credit facility and term loan agreement with
various banks. On November 8, 1996, the Company increased term loan borrowings
by $25 million to $162.5 million. The additional borrowings were used to redeem
all outstanding ($25 million principal amount) 9.48% senior reset notes. The
revolving credit facility provides for aggregate maximum outstanding borrowings
of $100 million. At December 31, 1996, borrowings aggregating $35 million were
outstanding under this facility. The Company had $901.5 million of debt
outstanding at December 31, 1996 with approximately $6.6 million maturing on or
before December 31, 1997. An additional $620.4 million of debt matures on or
before December 31, 2001 of which $563.6 million matures in the year 2000. The
Company expects to repay these amounts, at their existing maturities, utilizing
a combination of refinancing these obligations and cash flow generated from
operations. In addition, at December 31, 1996, Reliance Financial Services
Corporation guaranteed $38 million of partnership debt. See note 14 to the
consolidated financial statements.
30
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based
capital refers to the determination of the amount of statutory capital required
for an insurer based on the risks assumed by the insurer (including, for
example, investment risks, credit risks relating to reinsurance recoverables
and underwriting risks) rather than just the amount of net premiums written by
the insurer. A formula that applies prescribed factors to the various risk
elements in an insurer's business is used to determine the minimum statutory
capital requirement for the insurer. An insurer having less statutory capital
than the formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the
Company's statutory insurance companies have statutory capital in excess of the
minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could
result in increased scrutiny or, in some cases, action taken by state
regulatory authorities and/or downgrades in an insurer's ratings.
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
action pending against it and believes, based on current knowledge and after
consultation with outside counsel, that the resolution of these matters will
not have a material adverse effect on the consolidated financial statements of
the Company. See note 14 to the consolidated financial statements.
31
Consolidated Statement of Income Reliance Group Holdings, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues:
Premiums earned................................................................. $ 2,581,011 $ 2,446,538 $ 2,634,092
Net investment income........................................................... 287,588 275,289 258,912
Gain on sales of investments.................................................... 49,610 27,377 7,767
Other........................................................................... 172,378 156,783 146,279
------------ ------------- ------------
3,090,587 2,905,987 3,047,050
------------ ------------- ------------
Claims and expenses:
Policy claims and settlement expenses........................................... 1,411,453 1,260,445 1,372,960
Policy acquisition costs and other insurance expenses........................... 1,327,306 1,238,142 1,347,828
Interest........................................................................ 87,724 90,245 91,136
Other operating expenses........................................................ 217,505 196,631 188,583
------------ ------------- ------------
3,043,988 2,785,463 3,000,507
------------ ------------- ------------
Income before income taxes and equity
in investee company.......................................................... 46,599 120,524 46,543
Provision for income taxes...................................................... (7,300) (32,400) (12,200)
Equity in investee company...................................................... 8,908 7,792 9,478
------------ ------------- ------------
Income from continuing operations .............................................. 48,207 95,916 43,821
Loss on disposal of discontinued operations of
investee company........................................................... - (4,497) -
------------ -------------- ------------
Income before extraordinary item ............................................... 48,207 91,419 43,821
Extraordinary item - early extinguishment of debt............................... - (3,363) -
------------ ------------- ------------
Net income...................................................................... $ 48,207 $ 88,056 $ 43,821
============ ============= ============
Per-share information:
Income from continuing operations .............................................. $ .41 $ .83 $ .38
Loss on disposal of discontinued operations of
investee company............................................................ - (.04) -
----- ------ -----
Income before extraordinary item ............................................... .41 .79 .38
Extraordinary item - early extinguishment of debt............................... - (.06) -
----- ------ -----
Net income...................................................................... $ .41 $ .73 $ .38
===== ====== =====
Weighted average number of common and
common equivalent shares outstanding......................................... 117,563 116,045 115,097
See notes to consolidated financial statements
32
Consolidated Balance Sheet Reliance Group Holdings, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
Assets December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amount)
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $801,738 and $791,459).................................................. $ 787,836 $ 753,563
Fixed maturities available for sale - at quoted market
(amortized cost $2,595,929 and $2,299,510)............................................. 2,623,669 2,371,995
Equity securities - at quoted market (cost
$436,053 and $408,054)............................................................... 716,606 672,668
Short-term investments.................................................................... 319,165 500,284
Cash......................................................................................... 40,853 52,914
Premiums and other receivables............................................................... 1,250,331 1,211,027
Reinsurance recoverables..................................................................... 3,576,953 3,163,073
Investments in real estate - at cost, less accumulated depreciation.......................... 286,664 281,923
Investment in investee company............................................................... 159,157 157,667
Deferred policy acquisition costs............................................................ 215,438 194,648
Excess of cost over fair value of net assets acquired,
less accumulated amortization.......................................................... 249,464 259,444
Other assets................................................................................. 364,995 369,007
-------------- ------------
$ 10,591,131 $ 9,988,213
============== ============
Liabilities and Shareholders' Equity
----------------------------------------------------------------------------------------------------------------------------------
Unearned premiums............................................................................ $ 1,468,299 $ 1,299,465
Unpaid claims and related expenses........................................................... 6,530,258 6,100,129
Accounts payable and accrued expenses........................................................ 578,002 638,009
Reinsurance ceded premiums payable........................................................... 365,412 325,246
Federal and foreign income taxes, including deferred taxes................................... 70,948 68,597
Term loans and short-term debt............................................................... 236,167 188,101
Debentures and notes......................................................................... 665,365 690,318
-------------- ------------
9,914,451 9,309,865
-------------- ------------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per-share, 225,000
shares authorized, 114,282 and 113,440 shares
issued and outstanding................................................................ 11,428 11,344
Additional paid-in capital................................................................ 540,465 535,091
Retained earnings (deficit)............................................................... (50,012) (61,694)
Net unrealized gain on investments........................................................ 198,786 219,356
Net unrealized loss on foreign currency translation....................................... (23,987) (25,749)
-------------- ------------
676,680 678,348
-------------- ------------
$ 10,591,131 $ 9,988,213
============== ============
See notes to consolidated financial statements
33
Consolidated Statement of Changes
in Shareholders' Equity Reliance Group Holdings, Inc. and Subsidiaries
-----------------------------------------------------------------------------------------------------------------------------------
Net
Net Unrealized
Unrealized Loss on
Additional Retained Gain Foreign
Common Paid-In Earnings (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share
amounts)
Balance, January 1, 1994 $ 11,152 $ 525,289 $ (118,143) $ 115,023 $ (14,695) $ 518,626
Issuance of common stock 161 8,752 - - - 8,913
Transactions of investee
company and other - (62) - (9,002) - (9,064)
Net income - - 43,821 - - 43,821
Dividends ($.32 per-share) - - (36,157) - - (36,157)
Depreciation after deferred income
taxes - - - (133,902) - (133,902)
Foreign currency translation - - - - (5,487) (5,487)
---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1994 11,313 533,979 (110,479) (27,881) (20,182) 386,750
Issuance of common stock 31 1,165 - - - 1,196
Transactions of investee company
and other - (53) - 8,693 - 8,640
Net income - - 88,056 - - 88,056
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary - - (3,029) - - (3,029)
Dividends ($.32 per-share) - - (36,242) - - (36,242)
Appreciation after deferred
income taxes - - - 238,544 - 238,544
Foreign currency translation - - - - (5,567) (5,567)
---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1995 11,344 535,091 (61,694) 219,356 (25,749) 678,348
Issuance of common stock 84 5,754 - - - 5,838
Transactions of investee company - (380) - (1,504) - (1,884)
Net income - - 48,207 - - 48,207
Dividends ($.32 per-share) - - (36,525) - - (36,525)
Depreciation after deferred
income taxes - - - (19,066) - (19,066)
Foreign currency translation - - - - 1,762 1,762
---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1996 $ 11,428 $ 540,465 $ (50,012) $ 198,786 $ (23,987) $ 676,680
========== ========== =========== =========== ========== ==========
See notes to consolidated financial statements
34
Consolidated Statement of Cash Flows Reliance Group Holdings, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income........................................................................ $ 48,207 $ 88,056 $ 43,821
Adjustments to reconcile net income to net cash
provided from operating activities:
Gain on sales of investments................................................. (49,610) (27,377) (7,767)
Deferred policy acquisition costs............................................ (20,790) (12,710) (3,809)
Premiums and other receivables and reinsurance recoverables.................. (452,785) (240,742) (482,557)
Unearned premiums, unpaid claims and related expenses........................ 590,760 315,288 566,873
Accounts payable, accrued expenses and other................................. 44,583 45,991 129,213
------------ ------------- ------------
160,365 168,506 245,774
------------ ------------- ------------
Cash flows from investing activities:
Proceeds from sales of:
Fixed maturities available for sale............................................ 629,688 536,795 441,401
Fixed maturities held for investment........................................... 28,910 39,218 18,481
Equity securities.............................................................. 360,983 400,635 189,895
Maturities and repayments of:
Fixed maturities available for sale............................................ 106,811 49,218 60,752
Fixed maturities held for investment........................................... 31,141 54,038 15,785
Purchases of:
Fixed maturities available for sale............................................ (1,027,256) (514,491) (587,581)
Fixed maturities held for investment........................................... (83,190) (108,053) (265,672)
Equity securities.............................................................. (343,146) (262,075) (209,506)
(Increase) decrease in short-term investments - net............................... 193,940 (283,141) 151,965
Other - net....................................................................... (57,810) (23,296) (59,158)
------------ ------------- ------------
(159,929) (111,152) (243,638)
------------ ------------- ------------
Cash flows from financing activities:
Increase in term loans............................................................ 86,327 120,298 75,272
Increase (decrease) in short-term debt - net...................................... (2,174) (5,400) 10,652
Repayments of term loans.......................................................... (40,483) (68,152) (81,942)
Issuance of common stock.......................................................... 5,838 1,196 7,324
Repurchases of senior reset notes................................................. (25,000) (40,348) (19,062)
Debt issuance costs............................................................... (480) (1,000) -
Dividends......................................................................... (36,525) (36,242) (36,157)
Redemption of redeemable preferred stock of a subsidiary.......................... - (23,769) (3,360)
------------ ------------- ------------
(12,497) (53,417) (47,273)
------------ ------------- ------------
Increase (decrease) in cash....................................................... (12,061) 3,937 (45,137)
Cash, beginning of year........................................................... 52,914 48,977 94,114
------------ ------------- ------------
Cash, end of year................................................................. $ 40,853 $ 52,914 $ 48,977
============ ============= ============
Supplemental disclosures of cash flow information:
Interest paid..................................................................... $ 75,100 $ 77,200 $ 91,100
============ ============= ============
Income taxes paid................................................................. $ 8,900 $ 9,500 $ 3,300
============ ============= ============
See notes to consolidated financial statements
35
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Reliance Group Holdings, Inc. and Subsidiaries
1. Nature of Operations/Summary of Significant Accounting Policies
NATURE OF OPERATIONS
The Company's principal operations consist of property and casualty insurance
and title insurance. The Company's property and casualty insurance business
consists of four principal operations: Reliance National, Reliance Insurance,
Reliance Surety and Reliance Reinsurance. Reliance National offers, through
national and regional brokers and program agents, a broad range of commercial
property and casualty insurance products and services for large companies and
specialty line customers. Reliance National selects market segments where it
can provide specialized coverages and services, and it conducts business
nationwide and in certain international markets. In addition, in 1996, Reliance
National began to offer nonstandard automobile insurance. In 1996, Reliance
National accounted for 45% of the net premiums written by the Company's
property and casualty insurance operations. The Reliance Insurance operation
offers, through independent agents, program agents and brokers, commercial
property and casualty insurance coverages for mid-sized companies primarily
throughout the United States. Reliance Insurance also offers traditional and
specialized coverages for more complex risks as well as insurance programs for
groups with common insurance needs. In 1996, Reliance Insurance accounted for
38% of the net premiums written by the Company's property and casualty
insurance operations. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States and conducts its business through branch
offices, independent agents and brokers. Reliance Reinsurance offers, through
reinsurance brokers, treaty and facultative reinsurance for small to medium
sized regional and specialty insurance companies located in the United States.
The Company's property and casualty insurance operations accounted for
$1,800,854,000 (70%) of the Company's 1996 net premiums earned.
The Company's title insurance business consists of Commonwealth Land Title
Insurance Company, Transnation Title Insurance Company and their subsidiaries
("Commonwealth/Transnation"). Commonwealth/Transnation writes, through direct
and agency operations, title insurance for residential and commercial real
estate nationwide and provides escrow, appraisal and settlement services in
connection with real estate closings. Commonwealth/Transnation accounted for
$780,157,000 (30%) of the Company's 1996 net premiums earned.
The Company also provides information technology consulting services offering
computer-related professional services to large corporate clients throughout
the United States. Information technology revenues were $136,700,000 in 1996.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of
all subsidiaries. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Such statements
include informed estimates and judgments of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Actual results may differ from these estimates.
All material intercompany balances and transactions have been eliminated in
consolidation.
INSURANCE
The financial statements of the insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles, which differ in
certain respects from those followed in reports to regulatory authorities.
Fixed maturity investments, the vast majority of which are publicly traded
securities, include bonds, notes and redeemable preferred stocks. Fixed
maturity investments classified as "available for sale" represent securities
that will be held for an indefinite period of time and are carried at quoted
market value with the net unrealized gain or loss included in shareholders'
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. In 1995, the Financial Accounting Standards Board issued a special
report which permitted a one-time reassessment of the classification of
securities designated held for investment. Accordingly, the Company
reclassified fixed maturity securities with a market value of $426,442,000 and
an amortized cost of $410,395,000 from the held for investment portfolio into
the available for sale portfolio. This reclassification resulted in an increase
in shareholders' equity of $10,431,000. Investments in equity securities
include common stocks, where the Company's ownership of outstanding voting
stock is less than 20%, and nonredeemable preferred stocks and are carried at
quoted market value with the net unrealized gain or loss included in
shareholders' equity. Investments in which the Company has a 20% to 50%
ownership interest of voting stock, or otherwise exercises significant
influence, are reported using the equity method of accounting. Short-term
investments primarily consist of United States government and other foreign
government securities, certificates of deposit and commercial paper carried at
cost which approximates market value. Investments whose declines in market
36
values are deemed to be other than temporary are written down to market value.
In circumstances where market values are not available, investments are written
down to estimated fair value. In determining estimated fair value of
investments, the Company reviews the issuer's financial condition and the
stability of its income, as well as the discounted cash flow to be received by
the Company. Write-downs and other realized gains and losses, determined on a
specific identification basis, are included in income.
Property and casualty insurance premiums reported as earned represent the
portion of premiums written applicable to the current period, computed on a
pro-rata basis over the terms of the policies in force. Premiums include
estimated audit premiums and estimated premiums on retrospectively rated
policies.
The costs associated with the acquisition of property and casualty business are
deferred and amortized on a straight-line basis over the terms (principally one
year) of the policies in force. Such deferred policy acquisition costs consist
of commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, including anticipated
investment income.
Property and casualty unpaid claims and related expenses are estimated based on
an evaluation of reported claims in addition to statistical projections of
claims incurred but not reported and loss adjustment expenses. Estimates of
salvage and subrogation are deducted from the liability. The Company applies a
variety of generally accepted actuarial techniques to determine the estimates
of ultimate liability. The process of estimating claims is a complex task and
the ultimate liability may be more or less than such estimates indicate.
Adjustments of the probable ultimate liability, based on subsequent
developments, are included in operations currently.
Direct title insurance premiums and fees are recognized as revenue when
policies become effective. Agency title insurance premiums are recognized as
revenue when reported by the agent. Title insurance claims arise principally
from unknown title defects which exist at the time policies become effective.
The reserve for title losses, which is based on historical and anticipated loss
experience, represents the estimated costs to settle reported claims and claims
incurred but not reported. The process of estimating claims is a complex task
and the actual payments may be more or less than such estimates indicate.
Changes in loss estimates, based on subsequent developments, 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, 1996 include $62,400,000 related to undeveloped
land which is zoned for mixed use development. Depreciation expense is provided
using the straight-line method.
The Company's real estate properties are reviewed for impairment whenever
events or circumstances indicate that the carrying value of such properties may
not be recoverable. In performing the review for recoverability of carrying
value, the Company estimates the future undiscounted cash flows expected to
result from the use of each of its properties and their eventual disposition.
These cash flow projections reflect changes in occupancy, new leases, current
rent roll, future expirations and general market conditions. If the total
expected future undiscounted cash flows are less than the carrying value of
such properties, impairment losses are recognized on a property-by-property
basis. An impairment loss is measured by the amount that the carrying value of
the property exceeds its fair value.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired is being amortized
over 40 years using the straight-line method. The Company evaluates the
carrying amount of the excess of cost over fair value of net assets acquired by
analyzing historical and expected future income and undiscounted cash flows of
its operations.
INCOME TAXES
The Company and its domestic subsidiaries, where their ownership is at least
80% of outstanding voting stock, file a consolidated federal income tax return.
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.
37
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 shareholders' equity. Exchange gains and
losses resulting from foreign currency transactions are included in operations
currently.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of publicly traded financial instruments is determined
by the Company using quoted market prices, dealer quotes and prices obtained
from independent third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from independent third
parties or quoted market prices of comparable instruments. However, judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange.
The carrying values and fair values of financial instruments are as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Assets:
Marketable securities:
Fixed maturities:
Held for investment............................. $ 787,836 $ 801,738 $ 753,563 $ 791,459
Available for sale.............................. 2,623,669 2,623,669 2,371,995 2,371,995
Equity securities.................................. 716,606 716,606 672,668 672,668
Short-term investments............................. 319,165 319,165 500,284 500,284
Investment in investee company........................ 159,157 179,975 157,667 140,529
Liabilities:
Term loans and short-term debt........................ 236,167 236,167 188,101 188,101
Debentures and notes.................................. 665,365 684,553 690,318 711,540
PER-SHARE INFORMATION
Income per-share is computed by using the weighted average number of common
shares outstanding during the period, reduced, when appropriate, by shares of
common stock held for contribution to the Company's defined contribution plans.
Common stock equivalents have been included in shares outstanding where such
effects are dilutive.
In 1995, all of the outstanding shares of redeemable preferred stock of
Reliance Insurance Company, which had a carrying value of $20,740,000, were
redeemed. The cost of the early redemption in excess of the carrying value of
the preferred stock, $3,029,000 ("Redemption Premium"), was charged directly to
shareholders' equity. For purposes of computing net income per-share in 1995,
the Redemption Premium was deducted from net income available to common
shareholders' and classified as an extraordinary loss. This reduced net income
per-share by $.03.
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's 1995 and 1994
consolidated financial statements to conform with the current year's
consolidated financial statements.
38
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The adoption of this
Statement, which is not required until 1997, is not expected to have a material
effect on the Company's consolidated financial statements.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The adoption of this
Statement had no material effect on the Company's consolidated financial
statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This Statement was effective for 1996 and
encouraged, but did not require, companies to adopt a fair value based method
of accounting for stock compensation plans, under which compensation cost is
measured based on the fair value of the award at the grant date. The resulting
compensation cost would be charged to income. Companies may continue to account
for these plans as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations ("APB
25"), under which compensation cost is measured as the excess, if any, of the
quoted market price of the stock at the grant date over the exercise price to
acquire the stock. Companies not adopting the fair value based method of FAS
123 must present pro forma disclosures of net income and net income per-share
as if this method had been applied. The Company has elected to continue to
follow APB 25 in accounting for its plans. See note 10 for the pro forma
disclosures of net income and net income per-share.
2. Investments
Fixed maturities held for investment at December 31, 1996 consisted of:
---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
Public utilities....................................... $ 355,567 $ 357,377 $ 4,759 $ 2,949
Foreign government..................................... 145,065 150,622 6,583 1,026
Corporate bonds and notes and other.................... 174,386 178,400 6,870 2,856
Redeemable preferred stock................................ 112,818 115,339 2,657 136
------------ ------------ ------------ ------------
$ 787,836 $ 801,738 $ 20,869 $ 6,967
============ ============ ============ ============
(1) The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $242,880,000 and
$235,913,000.
Fixed maturities available for sale at December 31, 1996 consisted of:
---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities............................. $ 702,472 $ 704,386 $ 2,928 $ 4,842
States, municipalities and political
subdivisions......................................... 132,163 128,874 4,221 932
Public utilities....................................... 373,389 374,404 5,792 6,807
Corporate bonds and notes and other.................... 892,091 889,016 31,498 28,423
Redeemable preferred stock................................ 523,554 499,249 26,776 2,471
------------ ------------ ------------ ------------
$ 2,623,669 $ 2,595,929 $ 71,215 $ 43,475
============ ============ ============ ============
(1) The amortized cost and market value of fixed maturities available for
sale which have unrealized losses were $1,116,139,000 and $1,072,664,000.
39
Fixed maturities held for investment at December 31, 1995 consisted of:
---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
Public utilities....................................... $ 296,456 $ 309,920 $ 13,470 $ 6
Foreign government..................................... 133,252 139,042 6,715 925
Corporate bonds and notes and other.................... 181,849 193,087 11,526 288
Redeemable preferred stock................................ 142,006 149,410 7,405 1
------------ ------------ ------------ ------------
$ 753,563 $ 791,459 $ 39,116 $ 1,220
============ ============ ============ ============
(1) The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $41,358,000 and $40,138,000.
Fixed maturities available for sale at December 31, 1995 consisted of:
---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities............................. $ 685,376 $ 679,007 $ 7,867 $ 1,498
States, municipalities and political
subdivisions......................................... 133,093 125,967 7,151 25
Public utilities....................................... 313,906 305,652 8,900 646
Corporate bonds and notes and other.................... 868,291 837,060 44,864 13,633
Redeemable preferred stock................................ 371,329 351,824 21,445 1,940
------------ ------------ ------------ ------------
$ 2,371,995 $ 2,299,510 $ 90,227 $ 17,742
============ ============ ============ ============
(1) The amortized cost and market value of fixed maturities available for
sale which have unrealized losses were $603,568,000 and $585,826,000.
As of December 31, 1996, the contractual maturities of fixed maturity
investments are as follows:
----------------------------------------------------------------------------------------------------------------------------------
Held for investment Available for sale
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Due within one year....................................... $ 2,046 $ 2,079 $ 62,538 $ 62,915
Due after one year through five years..................... 102,270 107,114 537,805 541,773
Due after five years through ten years.................... 315,437 323,020 597,028 599,049
Due after ten years....................................... 368,083 369,525 1,113,204 1,134,904
------------ ------------ ------------- ------------
787,836 801,738 2,310,575 2,338,641
Mortgage-backed securities................................ - - 285,354 285,028
------------ ------------ ------------- ------------
$ 787,836 $ 801,738 $ 2,595,929 $ 2,623,669
============ ============ ============= ============
40
Net investment income consisted of:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Investment income:
Fixed maturities.............................................................. $ 236,093 $ 221,279 $ 218,970
Equity securities............................................................. 12,990 20,187 27,390
Short-term investments........................................................ 32,244 30,292 9,159
Other......................................................................... 18,652 15,359 14,159
------------ ------------- ------------
299,979 287,117 269,678
Investment expenses............................................................. (12,391) (11,828) (10,766)
------------ ------------- ------------
$ 287,588 $ 275,289 $ 258,912
============ ============= ============
Gain on sales of investments consisted of:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Fixed maturities(1):
Realized gains............................................................... $ 15,302 $ 47,764 $ 44,661
Realized losses(2)........................................................... (18,022) (28,406) (28,016)
------------ ------------- ------------
(2,720) 19,358 16,645
Equity securities(3)............................................................ 58,296 19,457 7,290
Other(3),(4).................................................................... (5,966) (11,438) (16,168)
------------ ------------- ------------
$ 49,610 $ 27,377 $ 7,767
============ ============= ============
(1) The Company sold fixed maturities held for investment with an amortized
cost of $26,100,000, $41,000,000 and $18,100,000 in 1996, 1995 and 1994,
respectively. These sales were in response to a significant deterioration
in the issuers' creditworthiness.
(2) Includes realized losses of $600,000, $7,600,000 and $11,600,000 in 1996,
1995 and 1994, respectively, and write-downs of $3,200,000, $15,700,000
and $10,300,000 in 1996, 1995 and 1994, respectively, related to
securities not rated investment grade.
(3) Gain on sales of equity securities and other in 1996, 1995 and 1994
includes write-downs of $3,600,000, $1,500,000 and $13,200,000,
respectively.
(4) Includes exchange losses of $3,300,000 in 1996 and $10,400,000 in 1995
related to certain foreign currency denominated investments and realized
losses of $14,500,000 in 1994 related to certain foreign currency
contracts.
Net unrealized appreciation (depreciation) on investments consisted of:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Unrealized appreciation (depreciation):
Equity securities............................................................ $ 15,939 $ 182,507 $ (6,849)
Fixed maturities available for sale.......................................... (44,745) 179,092 (193,737)
------------ ------------- ------------
(28,806) 361,599 (200,586)
Deferred income tax (provision) benefit......................................... 9,740 (123,055) 66,684
Net unrealized appreciation (depreciation) in
investments of investee company.............................................. (1,504) 8,693 (9,002)
------------ ------------- ------------
$ (20,570) $ 247,237 $ (142,904)
============ ------------- ============
Unrealized appreciation (depreciation) on
fixed maturities held for investment......................................... $ (23,994) $ 150,365 $ (152,046)
============ ============= ============
41
Net unrealized gain (loss) on investments consisted of:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Equity securities:
Unrealized gains............................................................. $ 293,269 $ 276,760 $ 114,231
Unrealized losses............................................................ (12,716) (12,146) (32,124)
------------ ------------- ------------
280,553 264,614 82,107
------------ ------------- ------------
Fixed maturities available for sale:
Unrealized gains............................................................. 71,215 90,227 38,507
Unrealized losses............................................................ (43,475) (17,742) (145,114)
------------ ------------- ------------
27,740 72,485 (106,607)
------------ ------------- ------------
308,293 337,099 (24,500)
Deferred income tax (provision) benefit......................................... (108,262) (118,002) 5,053
Net unrealized gain (loss) in investments of investee company................... (1,245) 259 (8,434)
------------ ------------- ------------
$ 198,786 $ 219,356 $ (27,881)
============ ============= ============
Fixed maturity investments carried at $553,600,000 at December 31, 1996 were on
deposit under requirements of regulatory authorities, including deposits related
to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the United States
government, whose aggregate carrying value is in excess of 10% of the Company's
shareholders' equity at December 31, 1996 are as follows:
----------------------------------------------------------------------------------------------------------------------------------
Carrying Value Market Value
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Fixed Maturity Investments:
Commonwealth Edison Co.................................................................... $ 73,552 $ 73,031
Ford Motor Credit Co...................................................................... 76,368 76,368
Time Warner Inc........................................................................... 85,319 85,319
United Kingdom Gilts...................................................................... 98,931 98,710
Equity Securities:
Human Genome Sciences, Inc................................................................ 99,822 99,822
Occidental Petroleum Corp................................................................. 67,848 67,848
Symbol Technologies, Inc.................................................................. 158,355 158,355
3. Investment in Investee Company
Investment in investee company at December 31, 1996 and 1995 was $159,157,000
and $157,667,000 which represents the Company's investment in Zenith National
Insurance Corp. ("Zenith"). Equity income in Zenith was $8,908,000, $7,792,000
and $9,478,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations by Zenith.
The Company's prior period results of operations were not reclassified since
amounts attributable to Zenith's life insurance operations were not significant.
Dividends received by the Company from Zenith were $6,574,000 for each of the
years ended December 31, 1996, 1995 and 1994.
42
Summarized financial information for Zenith is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues ....................................................................... $ 556,371 $ 519,020 $ 512,455
Income from continuing operations before income taxes........................... 57,117 29,422 45,106
Loss on disposal of discontinued life insurance operations...................... - (19,553) -
Net income...................................................................... 37,600 6,600 37,900
Net income per-share............................................................ 2.11 .36 1.99
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
Total assets................................................................................... $ 1,242,724 $ 1,115,433
Senior notes................................................................................... 74,353 74,232
Common shareholders' equity.................................................................... 337,503 330,432
Percentage of ownership........................................................................ 37.4% 37.0%
The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1996, retained earnings
(deficit) included undistributed net income of $30,146,000 from Zenith.
4. Premiums and Other Receivables
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Premiums receivable............................................................................ $ 1,104,331 $ 1,075,226
Investment income receivable................................................................... 57,571 54,524
Accounts, notes and other receivables.......................................................... 88,429 81,277
------------ ------------
$ 1,250,331 $ 1,211,027
============ ============
At December 31, 1996, substantially all receivables were due within one year.
As of December 31, 1996 and 1995, the Company sold with limited recourse
$97,200,000 and $122,400,000 of reinsurance recoverables and premiums receivable
relating to its insurance operations. Pursuant to these recourse provisions, the
maximum amount, at December 31, 1996, that the Company may be obligated to
repurchase is $7,500,000.
5. Income Taxes
Provision for income taxes consisted of:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Current:
Federal...................................................................... $ (6,313) $ 11,611 $ 8,996
Foreign...................................................................... 7,888 6,830 6,204
------------ ------------- ------------
1,575 18,441 15,200
Deferred federal................................................................ 5,725 13,959 (3,000)
------------ ------------- ------------
$ 7,300 $ 32,400 $ 12,200
============ ============= ============
Domestic and foreign income before income taxes and equity in investee company
is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Domestic........................................................................ $ 24,062 $ 101,010 $ 28,045
Foreign......................................................................... 22,537 19,514 18,498
------------ ------------- ------------
$ 46,599 $ 120,524 $ 46,543
============ ============= ============
43
The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Tax provision at statutory rate................................................. $ 16,310 $ 42,183 $ 16,290
Nontaxable investment income.................................................... (14,403) (13,405) (13,989)
Amortization of excess of cost over fair value of net assets acquired........... 3,150 3,150 3,150
Net increase in valuation allowance............................................. 2,400 1,226 5,774
Other........................................................................... (157) (754) 975
------------- ------------- ------------
Provision for income taxes...................................................... $ 7,300 $ 32,400 $ 12,200
============ ============= ============
The tax effects of items comprising the Company's net deferred tax asset are as
follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Discounting of loss reserves................................................................ $ 195,442 $ 200,907
Tax basis differential of subsidiary not included in consolidated tax return................ 111,815 111,815
Operating loss carryforwards of subsidiary not included in consolidated tax return.......... 61,110 57,925
Unearned premium reserve.................................................................... 43,063 40,354
Accruals not currently deductible........................................................... 62,481 61,492
Other....................................................................................... 66,445 68,120
------------ ------------
540,356 540,613
Deferred tax liabilities:
Deferred policy acquisition costs........................................................... 75,062 67,785
Unrealized investment gains................................................................. 108,262 118,002
Investment in investee company.............................................................. 21,098 20,576
Other....................................................................................... 103,445 109,220
------------ ------------
232,489 225,030
Valuation allowance............................................................................ (169,215) (166,848)
------------ ------------
Net deferred tax asset......................................................................... $ 63,274 $ 58,182
============ ============
For the years ended December 31, 1996, 1995 and 1994, the Company's valuation
allowance and income tax provision were increased by $2,400,000, $1,226,000 and
$5,774,000 relating primarily to deferred tax assets for which it is likely that
tax benefits will not be realized.
At December 31, 1996, a subsidiary of the Company, not included in the
consolidated tax return, had available net operating loss carryforwards ("NOL")
of approximately $174,600,000, of which $129,700,000 is subject to a valuation
allowance. For federal income tax purposes, approximately $129,300,000 expires
in 2001, $17,000,000 in 2002, $17,000,000 in 2004, $2,200,000 in 2010 and
$9,100,000 in 2011. The Internal Revenue Code imposes limitations on the
availability of these NOL's since the subsidiary experienced a more than 50
percentage point ownership change in 1989. The amount of the NOL incurred prior
to the ownership change which can be utilized in each subsequent year is limited
(the "Loss Limitation") based on the value of the subsidiary on the date of the
ownership change. The annual Loss Limitation approximates $25,000,000.
The Company is seeking a redetermination in the U.S. Tax Court of an asserted
tax deficiency for the year ended December 31, 1980, as set forth by the
Commissioner of Internal Revenue in a Notice of Deficiency dated June 27, 1994.
See note 14 to the consolidated financial statements.
The IRS is currently examining the Company's 1986 through 1991 federal income
tax returns. While the outcome of the current examinations is uncertain, the
Company does not believe it is probable that its additional tax liability, if
any, will have a material adverse effect on its consolidated financial
statements.
44
6. Unpaid Claims and Related Expenses
The reconciliation of the beginning to ending liability for unpaid claims and
related expenses ("loss reserves") for the Company's property and casualty
insurance operations is as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Loss reserves, beginning of year................................................ $ 5,859,352 $ 5,581,483 $ 5,048,442
Less reinsurance recoverables................................................ 2,679,917 2,453,702 2,116,914
------------ ------------- ------------
Net loss reserves, beginning of year............................................ 3,179,435 3,127,781 2,931,528
------------ ------------- ------------
Provision for policy claims and related expenses:
Provision for insured events of the current year............................. 1,211,672 1,163,447 1,274,649
Increase in provision for insured events of prior years...................... 138,665 38,512 22,444
------------ ------------- ------------
Total provision............................................................ 1,350,337 1,201,959 1,297,093
------------ ------------- ------------
Payments for policy claims and related expenses:
Attributable to insured events of the current year........................... 298,838 271,915 321,538
Attributable to insured events of prior years................................ 926,996 868,622 780,961
------------ ------------- ------------
Total payments............................................................. 1,225,834 1,140,537 1,102,499
------------ ------------- ------------
Foreign currency translation.................................................... 7,668 (9,768) 1,659
------------ -------------- ------------
Net loss reserves, end of year.................................................. 3,311,606 3,179,435 3,127,781
Plus reinsurance recoverables................................................ 2,953,814 2,679,917 2,453,702
------------ ------------- ------------
Loss reserves, end of year...................................................... $ 6,265,420 $ 5,859,352 $ 5,581,483
============ ============= ============
The provision for insured events of prior years for 1996, 1995 and 1994 includes
adverse development related to asbestos-related and environmental pollution
claims, which primarily affect general liability, multiple peril and reinsurance
lines of business, and includes a pretax charge of $134,000,000 in the second
quarter of 1996 to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. The 1996
provision also includes adverse development in the automobile line, offset by
favorable development in workers' compensation. The 1995 provision also
included adverse development in other general liability, automobile and
reinsurance lines, partially offset by favorable development in workers'
compensation. The 1994 provision also included adverse development in other
general liability lines, partially offset by favorable development in workers'
compensation.
At December 31, 1996 and 1995, loss reserves include $396,700,000 and
$400,200,000 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%.
45
The reconciliation of the beginning to ending loss reserves for the Company's
title insurance operations is as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Loss reserves, beginning of year................................................ $ 240,777 $ 228,063 $ 204,695
------------ ------------- ------------
Provision for policy claims and related expenses:
Provision for insured events of the current year............................. 59,771 57,900 71,060
Increase in provision for insured events of prior years...................... 1,345 586 4,807
------------- ------------ ------------
Total provision............................................................ 61,116 58,486 75,867
------------ ------------- ------------
Payments for policy claims and related expenses:
Attributable to insured events of the current year........................... 1,755 2,187 4,475
Attributable to insured events of prior years................................ 35,300 43,585 48,024
------------ ------------- ------------
Total payments............................................................. 37,055 45,772 52,499
------------ ------------- ------------
Loss reserves, end of year...................................................... $ 264,838 $ 240,777 $ 228,063
============ ============= ============
The reconciliation of the beginning to ending net loss reserves for business
written in or before 1987 pertaining to asbestos-related and environmental
pollution claims is as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net loss reserves, beginning of year............................................ $ 101,008 $ 100,404 $ 97,040
Provision for policy claims and related expenses................................ 135,801 23,547 17,996
Payments for policy claims and related expenses................................. (23,762) (22,943) (14,632)
------------ ------------- ------------
Net loss reserves, end of year.................................................. $ 213,047 $ 101,008 $ 100,404
============ ============= ============
The 1996 provision for policy claims and related expenses includes a pretax
charge of $134,000,000 to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. In the
second quarter of 1996, the Company completed a study of its asbestos-related
and environmental pollution reserves. The study entailed a detailed review of
the Company's claims, analysis of new industry data, review of policies and
classes of business written by the Company and industry at large, and new
actuarial methodologies for projecting ultimate losses based on payment patterns
and claims analyses. The loss reserve levels established represent the Company's
estimate of its ultimate losses, based on current information and actuarial
methodologies.
Included in the December 31, 1996 net loss reserves for business written in or
before 1987 pertaining to asbestos-related and
environmental pollution claims are $78,184,000 of loss costs for claims
incurred but not reported, $49,245,000 of loss costs for reported claims and
$85,618,000 of related expenses.
For business written in or before 1987, the number of insureds with asbestos-
related and environmental pollution claims outstanding is as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Number of insureds with outstanding claims, beginning of year.................................... 447 477
Additional insureds with claims during the year.................................................. 153 188
Insureds with closed or settled claims during the year........................................... (252) (218)
-------- ---------
Number of insureds with outstanding claims, end of year.......................................... 348 447
======== =========
For business written in or before 1987, the average net paid loss for
asbestos-related and environmental pollution claims was $50,200 and $61,100 for
the years 1996 and 1995.
46
In addition, the Company currently underwrites policies covering asbestos
removal and provides environmental pollution coverages for other insureds,
primarily on a claims made basis. The net loss reserves for these policies as of
December 31, 1996, 1995 and 1994 were $27,764,000, $29,698,000 and $29,739,000,
respectively. The provisions for these policy claims and related expenses for
the years 1996, 1995 and 1994 were $5,857,000, $2,357,000 and $10,283,000,
respectively, and related payments were $7,791,000, $2,398,000 and $5,538,000,
respectively. Included in the December 31, 1996 net loss reserves for these
policies are $13,154,000 of loss costs for claims incurred but not reported,
$4,282,000 of loss costs for reported claims and $10,328,000 of related
expenses. The number of outstanding claims related to these policies as of
December 31, 1996 and 1995 were 474 and 303. Additional claims reported during
the years 1996 and 1995 were 385 and 275, and claims closed or settled during
1996 and 1995 were 214 and 161. The average net paid loss for these claims was
$20,500 and $5,600 for the years 1996 and 1995.
7. Debentures, Notes, Term Loans and Short-Term Debt
Debentures and notes outstanding are as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
9% senior notes due 2000....................................................................... $ 400,000 $ 400,000
9 3/4% senior subordinated debentures due 2003................................................. 250,000 250,000
7.866% senior reset notes due 2000............................................................. 15,365 15,365
9.48% senior reset notes due 2000; ($25,000 principal amount,
less unamortized discount of $47 at December 31, 1995)...................................... - 24,953
------------ ------------
$ 665,365 $ 690,318
============ ============
At December 31, 1996, term loans and short-term debt aggregated $236,167,000 and
consisted of $230,488,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 3.0% to 9.6% and $5,679,000 of
short-term debt. The weighted average interest rate on term loans and short-term
debt was 6.0% and 6.6% at December 31, 1996 and 1995.
Maturities of term loans and short-term debt for each of the next five
years are as follows: $6,627,000 in 1997; $4,489,000 in 1998; $50,767,000
in 1999; $148,267,000 in 2000; and $1,467,000 in 2001. In addition,
$415,365,000 of debentures and notes mature in the year 2000.
Reliance Financial Services Corporation ("Reliance Financial") has a revolving
credit facility and term loan agreement with various banks ("Credit Facility").
In 1995, the Company extended its revolving credit facility through March 31,
2000 from December 31, 1998. In addition, the Company increased term loan
borrowings to $137,500,000 from $62,500,000 and extended the maturity dates of
the term loan borrowings through March 31, 2000. The additional $75,000,000 of
borrowings under the term loan were used, in part, to redeem $25,000,000 of the
7.866% senior reset notes and $25,000,000 of the 9.48% senior reset notes,
including $9,652,000 of notes held by Reliance Insurance Company. These
transactions resulted in an extraordinary loss of $3,363,000, net of income
taxes of $1,811,000, in 1995. In addition, all of the outstanding shares of
redeemable preferred stock of Reliance Insurance Company, which had a carrying
value of $20,740,000, were redeemed. The cost of the early redemption in excess
of the carrying value of the preferred stock, $3,029,000, was charged directly
to shareholders' equity in 1995. On November 8, 1996, the Company increased term
loan borrowings by an additional $25,000,000 to $162,500,000. The additional
borrowings were used to redeem all outstanding ($25,000,000 principal amount)
9.48% senior reset notes.
The revolving credit facility provides for aggregate maximum outstanding
borrowings of $100,000,000. At Reliance Financial's option, all borrowings under
the revolving credit facility will bear interest at a floating rate based on a
bank reference rate (or, if higher, the Federal Funds rate plus 1/2%) or at a
rate based on the Eurodollar rate. At December 31, 1996, borrowings aggregating
$35,000,000 were outstanding under this facility. All of the common stock of
Reliance Insurance Company, the principal subsidiary of Reliance Financial, has
been pledged to secure the Credit Facility and the senior reset notes.
The provisions of certain notes and debentures contain limitations on the
payment of dividends, including maintaining a minimum fixed charge coverage
ratio. At February 14, 1997, the Company could pay up to $41,400,000 in
dividends without violating the most restrictive provisions. The Company's
dividend paying capacity will increase to the extent that 50% of the Company's
cumulative net income (as defined) exceeds cumulative restricted payments
(primarily dividends). The Company does not expect to change its dividend
payment practices in the foreseeable future. See note 9 to the consolidated
financial statements.
47
8. 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, 1996
and 1995, reinsurance recoverables include $596,743,000 and $472,925,000 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:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------------- ------------ ------------ ------------ ------------ ------------
Direct........... $ 3,070,944 $ 2,894,096 $ 2,748,439 $ 2,707,978 $ 2,654,437 $ 2,630,549
Assumed.......... 329,318 356,489 325,226 350,636 330,261 345,398
Ceded............ (1,554,063) (1,449,731) (1,294,625) (1,284,023) (1,220,408) (1,198,629)
------------ ------------ ------------ ------------ ------------ ------------
Net premiums $ 1,846,199 $ 1,800,854 $ 1,779,040 $ 1,774,591 $ 1,764,290 $ 1,777,318
============ ============ ============ ============ ============= =============
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Gross........................................................................... $ 2,262,809 $ 1,987,055 $ 2,220,285
Reinsurance recoveries.......................................................... (912,472) (785,096) (923,192)
------------ ------------- ------------
Net policy claims and settlement expenses....................................... $ 1,350,337 $ 1,201,959 $ 1,297,093
============ ============= ============
For the year ended December 31, 1996, gross policy claims and settlement
expenses include a charge of $134,500,000 and net policy claims and settlement
expenses include a charge of $134,000,000 to increase property and casualty
insurance loss reserves for asbestos-related and environmental pollution claims
for business written in or before 1987.
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers. The Company is
not aware of any impairment of the creditworthiness of any of its significant
reinsurers.
Reliance Insurance Company's ten largest reinsurers, based on 1996 ceded
premiums, are as follows:
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
American Re-Insurance Company................................................................................. $ 133,324
Hertz International Reinsurance Ltd........................................................................... 63,259
Swiss Reinsurance America Corporation......................................................................... 56,455
Commercial Risk Re-Insurance Company.......................................................................... 46,512
Zurich Reinsurance Centre, Inc................................................................................ 45,954
General Reinsurance Corporation............................................................................... 45,280
Xxxxxx Reinsurance Company.................................................................................... 43,547
Everest Reinsurance Company................................................................................... 33,485
Lloyd's of London............................................................................................. 30,827
Cedar Hill Assurance Company.................................................................................. 30,755
The Company has entered into aggregate excess of loss reinsurance agreements.
These agreements indemnify the Company for ultimate net property and casualty
insurance losses in excess of a specified retention for the 1995 and 1996
accident years up to a maximum aggregate limit of $100,000,000 for each year. No
premiums or losses have been ceded under these agreements.
48
9. Dividends of Subsidiaries
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. Dividends from Reliance Financial are
subject to provisions of certain notes. These provisions are less restrictive
than the provisions in the Credit Facility of Reliance Financial which requires,
among other things, a minimum net worth requirement and a limitation of
indebtedness. At February 14, 1997, Reliance Financial could pay up to
$288,300,000 in cash dividends without violating the most restrictive
provisions. Dividend payments by Reliance Insurance Company, without prior
regulatory approval, are limited to the greater of 10% of the preceding year-end
policyholders' surplus or the preceding year's statutory net income, but in no
event to exceed the amount of unassigned funds. In accordance with these
regulatory restrictions, $118,500,000 is available for the payment of dividends
to Reliance Financial in 1997, subject to the broad discretionary powers of
insurance regulatory authorities to further limit dividend payments of insurance
companies.
10. Stock Options
The Company's Stock Option plans (the "Plans") provide for the granting of
incentive stock options and nonstatutory stock options to officers, non-employee
directors and key employees of the Company. Under the terms of the Plans,
options have a maximum term of 10 years. At December 31, 1996, there were no
options available for future grants; however, the Company plans to seek
shareholder approval in 1997 to increase the number of options available to
purchase its common stock.
A summary of the Plans' activity is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------------------------------------------
(Shares in thousands)
Balance, beginning of year.... 8,462 $ 4.48 8,129 $ 4.28 6,748 $ 3.92
Granted....................... 2,839 8.03 789 6.26 1,713 5.66
Exercised..................... 292 4.21 313 3.83 145 3.83
Cancelled..................... 104 5.52 143 4.57 187 4.20
----------- --------- ----------- --------- ----------- ---------
Balance, end of year.......... 10,905 $ 5.40 8,462 $ 4.48 8,129 $ 4.28
=========== ========= =========== ========= =========== ==========
Exercisable portion........... 6,196 $ 4.04 4,624 $ 3.96 3,142 $ 3.86
=========== ========= =========== ========= =========== =========
Weighted average fair value
of options granted during
the year................... $ 2.08 $ 1.64
========= =========
Summarized information about stock options outstanding at December 31, 1996 is
as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------------------
Number of Weighted Average Number of
Range of Shares Remaining Weighted Average Shares Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
(Shares in thousands)
$3.825 to $5.75 6,084 5.46 years $ 3.94 5,679 $ 3.86
$5.875 to $8.75 4,821 8.70 7.24 517 6.04
-------- ---- ----------- ----- -------
$3.825 to $8.75 10,905 6.89 years $ 5.40 6,196 $ 4.04
======== ==== =========== ===== =======
The Company has elected to follow APB 25 in accounting for its Plans. Since the
exercise price of the Company's stock options equals the market value of the
underlying stock on the grant date, no compensation cost has been recognized.
49
Pro forma information regarding net income and net income per-share is required
by FAS 123, and has been determined as if the Company had accounted for its
Plans under the fair value based method of FAS 123. The fair value of stock
options granted under the Company's Plans was estimated on the grant dates using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants in 1996 and 1995, respectively: dividend yields
of 4.0% and 5.1%, expected volatility of 27.3% and 33.7%, risk-free interest
rates of 6.4% and 6.5% and an expected life of 7 years for both years.
Pro forma information regarding net income and net income per-share is as
follows:
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Net income as reported........................................................ $ 48,207 $ 88,056
pro forma.......................................................... 47,724 87,956
Net income per-share as reported........................................................ .41 .73
pro forma.......................................................... .41 .73
11. Policy Acquisition Costs and Other Insurance Expenses
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Policy acquisition costs amortized during the year.............................. $ 414,636 $ 411,979 $ 387,924
------------ ------------- ------------
Other insurance expenses:
Salaries and commissions...................................................... 630,777 563,680 704,254
Taxes, other than income taxes................................................ 41,564 48,603 34,849
Rent.......................................................................... 61,305 55,848 54,863
Policyholders' dividends...................................................... 3,158 7,065 2,630
Other......................................................................... 175,866 150,967 163,308
------------ ------------- ------------
912,670 826,163 959,904
------------ ------------- ------------
$ 1,327,306 $ 1,238,142 $ 1,347,828
============ ============= ============
12. Postretirement Benefit Plans
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,430,300 shares of the Company's common stock.
Pension cost includes the following components:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost - benefits earned during the period................................ $ 11,146 $ 8,252 $ 10,559
Interest cost on projected benefit obligation................................... 16,500 15,112 14,309
Actual return on plan assets.................................................... (9,126) (33,552) 10,300
Net amortization and deferral................................................... (12,245) 15,849 (30,222)
------------ ------------- ------------
$ 6,275 $ 5,661 $ 4,946
============ ============= ============
50
A reconciliation of the funded status of the plans with the accrued pension cost
included in accounts payable and accrued expenses is as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligation:
Vested...................................................................................... $ 184,101 $ 177,353
Nonvested................................................................................... 7,685 10,150
------------ ------------
Accumulated benefit obligation................................................................. 191,786 187,503
Effect of anticipated future compensation levels............................................... 34,078 37,237
------------ ------------
Projected benefit obligation................................................................... 225,864 224,740
Plan assets at market value.................................................................... (199,954) (189,018)
------------ ------------
Projected benefit obligation in excess of plan assets.......................................... 25,910 35,722
Unrecognized net asset at date of adoption..................................................... 7,785 9,636
Unrecognized net loss.......................................................................... (14,526) (25,929)
------------ ------------
Accrued pension cost........................................................................... $ 19,169 $ 19,429
============ ============
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $6,535,000 and $3,391,000 in 1996 and 1994. No contributions
were made during 1995.
The assumptions used to measure the projected benefit obligation at December 31,
1996 and 1995 include a discount rate of 8.0% and 7.5% and a weighted average
rate of compensation increase of 4.0% and 4.5%. The expected long-term
investment rate of return on plan assets for the years ended December 31, 1996
and 1995 was 10.0% and 9.5%.
Contributions under the Company's defined contribution plans were $5,930,000,
$4,302,000 and $5,277,000 in 1996, 1995 and 1994, 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:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost - benefits earned during the period................................ $ 168 $ 167 $ 226
Interest cost on accumulated postretirement benefit obligation 622 713 715
Net amortization and deferral................................................... 754 624 790
------------ ------------- ------------
$ 1,544 $ 1,504 $ 1,731
============ ============= ============
The components of the accumulated postretirement benefit obligation are as
follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 5,020 $ 5,597
Other active plan participants.............................................................. 3,241 3,618
------------ ------------
Accumulated benefit obligation................................................................. 8,261 9,215
Unrecognized net gain.......................................................................... 671 92
Unrecognized transition obligation............................................................. (7,204) (7,963)
------------ ------------
Accrued postretirement benefit cost............................................................ $ 1,728 $ 1,344
============ ============
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1996 was 10.0% for 1997
decreasing until it reaches 6.0% 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, 1996 and the 1996 net postretirement health care cost by
approximately 3.0% and 1.8%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1996 and 1995 was
8.0% and 7.5%.
51
13. Statutory Information
Statutory net income is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Property and casualty insurance operations...................................... $ 121,665 $ 225,989 $ 123,970
Title insurance operations...................................................... 40,094 12,439 32,421
Statutory policyholders' surplus is as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Property and casualty insurance operations(1).................................................. $ 1,187,056 $ 1,128,336
Title insurance operations..................................................................... 199,587 182,167
(1) Includes Reliance Insurance Company's investment in title insurance
operations. Also reflects a reduction in statutory loss reserves of
$93,700,000 and $98,800,000 at December 31, 1996 and 1995, representing
discounts of workers' compensation reserves in excess of GAAP discounts.
14. Contingencies and Commitments
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation arising in
the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the consolidated financial statements of the Company.
In addition, the Company is subject to the litigation set forth below.
In March 1987, the Superintendent of Insurance of New York (the
"Superintendent"), as liquidator of Union Indemnity Insurance Company of New
York ("Union Indemnity"), formerly a wholly-owned subsidiary of Xxxxx X. Xxxx &
Co. Inc. ("Hall") which the Superintendent took possession of in 1985, commenced
an action in the Supreme Court of the State of New York seeking damages of not
less than $140,000,000 against Hall, various subsidiaries of Hall, Hall's and
Union Indemnity's independent auditors and certain individuals who were former
officers and directors of Union Indemnity. The Superintendent sought to hold the
defendants liable for the insolvency of Union Indemnity alleging, among other
claims, that Hall breached fiduciary and other duties owed to Union Indemnity
and violated provisions of the New York State Insurance Code, that Union
Indemnity did not have a separate operating identity, and that Hall and the Hall
subsidiaries named as defendants constituted a single enterprise which was
liable for Union Indemnity's obligations to its policyholders and other
creditors.
In July 1987, American Centennial Insurance Company, International Fidelity
Insurance Company, and Ranger Insurance Company (the "American Centennial
Plaintiffs") commenced an action in the Supreme Court of the State of New York
against Hall, two subsidiaries of Hall, and certain individuals who were former
officers and directors of Union Indemnity seeking to hold the defendants liable
for certain alleged reinsurance obligations of Union Indemnity, certain
misrepresentations concerning Union Indemnity's financial position and the
breach of certain duties owed to the American Centennial Plaintiffs. The
American Centennial Plaintiffs sought damages of at least $54,900,000 and
punitive damages against all defendants.
The action brought by the Superintendent was settled by an agreement, dated June
2, 1989, under which Hall, now known as Prometheus Funding Corp. ("Prometheus"),
will make an initial payment of $19,000,000 and additional payments aggregating
$29,000,000 over a ten-year period without interest as follows: $1,500,000 each
in years one and two; $2,000,000 each in years three and four; $5,000,000 in
year five; $4,500,000 each in years six and seven; $4,000,000 in year eight; and
$2,000,000 each in years nine and ten. The settlement agreement provides for the
entry of an order by the court barring other claims against Hall relating to
Union Indemnity, including the claims by the American Centennial Plaintiffs
described above. The settlement agreement was submitted to the court for
approval in October 1989 and objections were filed and continue to be pursued
by various parties. The Superintendent has informed Prometheus that he intends
to pursue court approval of the settlement. The settlement agreement will not
become effective until final approval by the court and there is no assurance
that such approval will be obtained. Prometheus has recorded a reserve of
$36,000,000 representing the initial payment of $19,000,000 and the present
value of the additional remaining annual payments over a ten-year period.
Prometheus has received an aggregate of $20,000,000 in insurance proceeds in
connection with this matter from its insurance carrier.
52
The Company is also subject to the litigation set forth below.
The Company is seeking a redetermination in the U.S. Tax Court of an asserted
tax deficiency for the year ended December 31, 1980, as set forth by the
Commissioner of Internal Revenue in a Notice of Deficiency dated June 27, 1994.
The Company intends to pursue the action vigorously. The Internal Revenue
Service ("IRS") seeks to disallow investment tax credits of approximately
$36,500,000 with respect to intermodal cargo containers leased to others by a
former subsidiary of the Company. The Company estimates that, if the IRS were to
prevail, the deficiency would result in an increase in tax of approximately
$31,000,000 for 1980, plus interest at the statutorily prescribed rates for the
periods since that year. On January 11, 1995, the U.S. Tax Court handed down a
decision in Norfolk Southern Corp. v. Commissioner, a case involving a taxpayer,
which, like the Company, had claimed investment tax credits in connection with
the leasing of intermodal cargo containers. In the decision, which is the first
pronouncement by the courts on this issue, the Tax Court articulated a standard,
different from that proposed by the IRS, which, if applied to the Company, would
result in the disallowance of a substantial percentage (although significantly
less than that sought by the IRS) of the investment tax credits claimed by the
Company. The Company believes that it has appropriately provided for this matter
in light of its exposure in the event a standard such as the one articulated in
Norfolk Southern is applied to the Company's facts and circumstances. On
February 22, 1995, the Tax Court granted the joint motion of the Company and the
Commissioner to postpone the trial of this matter until after the resolution of
appellate proceedings in Norfolk Southern. The Company does not believe that it
is probable that its additional liability, if any, in respect of this matter
will have a material adverse effect on its consolidated financial statements.
COMMITMENTS
A subsidiary of Reliance Insurance Company, Xxxx X. Xxxxxxxxx and other
executives of the Company are partners in a partnership which owns certain
real estate properties. At December 31, 1996, the partnership's total
outstanding debt was $172,167,000. As of December 31, 1996, Reliance Financial
guaranteed $38,000,000 of the partnership's outstanding debt which matures on
June 30, 1997. The Company believes that, to the extent such debt cannot be
fully refinanced at maturity, the partnership will seek additional financing
from other sources, which may include the Company. Reliance Financial receives a
fee of .5% per annum on the average outstanding debt covered by the guarantee.
The Company has issued a line of credit to the partnership in the amount of
$13,000,000. Borrowings under the line of credit mature on June 30, 2005 and
bear a fixed interest rate of 10%. At December 31, 1996, borrowings of
$9,829,000 were outstanding under the line of credit.
LEASE COMMITMENTS
The Company and its subsidiaries lease certain office facilities and equipment
under lease agreements that expire at various dates through 2011. Rent expense
for the years ended December 31, 1996, 1995 and 1994 was $97,300,000,
$95,900,000 and $96,000,000, respectively.
At December 31, 1996, future net minimum rental payments required under
noncancelable leases are as follows:
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
1997.......................................................................................................... $ 63,142
1998.......................................................................................................... 47,654
1999.......................................................................................................... 38,438
2000.......................................................................................................... 17,703
2001.......................................................................................................... 10,482
2002 and thereafter........................................................................................... 21,642
------------
$ 199,061
============
53
15. Business Segment Information
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Revenues:
Property and casualty insurance
Premiums earned.............................................................. $ 1,800,854 $ 1,774,591 $ 1,777,318
Net investment income........................................................ 257,133 247,343 232,299
Gain on sales of investments................................................. 49,264 27,381 8,851
------------ ------------- ------------
2,107,251 2,049,315 2,018,468
------------ ------------- ------------
Title insurance
Premiums earned.............................................................. 780,157 671,947 856,774
Net investment income........................................................ 30,455 27,946 26,613
Gain on sales of investments................................................. 346 1,729 516
------------ ------------- ------------
810,958 701,622 883,903
------------ ------------- ------------
Other........................................................................... 172,378 155,050 144,679
------------ ------------- ------------
$ 3,090,587 $ 2,905,987 $ 3,047,050
============ ============= ============
Income before income taxes and equity
in investee company:
Property and casualty insurance
Underwriting(1).............................................................. $ (172,387) $ (45,644) $ (97,343)
Net investment income........................................................ 257,133 247,343 232,299
Gain on sales of investments................................................. 49,264 27,381 8,851
------------ ------------- ------------
134,010 229,080 143,807
------------ ------------- ------------
Title insurance................................................................. 38,580 14,012 31,326
------------ ------------- ------------
Other........................................................................... (125,991) (122,568) (128,590)
------------ ------------- ------------
$ 46,599 $ 120,524 $ 46,543
============ ============= ============
Identifiable assets at year-end:
Property and casualty insurance................................................. $ 9,619,869 $ 9,077,897 $ 8,529,300
Title insurance................................................................. 590,137 547,510 547,000
Other........................................................................... 381,125 362,806 293,253
------------ ------------- ------------
$ 10,591,131 $ 9,988,213 $ 9,369,553
============ ============= ============
(1) The 1996 results include a charge of $134,000,000 to increase net loss
reserves for asbestos-related and environmental pollution claims for
business written in or before 1987.
Income 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. Income before income taxes and equity in investee
company by segment is before allocation of corporate overhead and corporate
interest expense, which relates primarily to the Company and its financing
subsidiary. Corporate overhead, corporate interest expense and the pre-tax
results of RCG International, Inc. (a subsidiary of the property and casualty
insurance operations) are included in Other.
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
54
16. Quarterly Financial Data (Unaudited)
1996 Quarter
----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues:
Premiums earned............................................... $ 609,867 $ 636,752 $ 661,980 $ 672,412
Net investment income......................................... 70,717 70,443 72,040 74,388
Gain on sales of investments.................................. 4,468 18,936 16,542 9,664
Other......................................................... 38,734 41,765 43,548 48,331
---------- ---------- ---------- ----------
$ 723,786 $ 767,896 $ 794,110 $ 804,795
========== ========== ========== ==========
Net income (loss)(1).......................................... $ 22,512 $ (47,701) $ 37,651 $ 35,745
========== ========== ========== ==========
Per-share information:
Net income (loss)(1),(2)...................................... $ .19 $ (.41) $ .32 $ .30
===== ====== ====== =====
Weighted average number of common and
common equivalent shares outstanding....................... 117,490 117,610 117,355 117,921
(1) Includes a second quarter after-tax charge of $87,100,000, or $.74
per-share, to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987.
(2) Net income (loss) per-share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income (loss)
per-share does not equal the total for the year.
1995 Quarter
----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per-share amounts)
Revenues:
Premiums earned............................................... $ 604,666 $ 599,957 $ 618,831 $ 623,084
Net investment income......................................... 69,378 66,362 68,727 70,822
Gain on sales of investments.................................. 8,286 7,669 8,454 2,968
Other......................................................... 38,976 42,189 38,103 37,515
---------- ---------- ---------- ----------
$ 721,306 $ 716,177 $ 734,115 $ 734,389
========== ========== ========== ==========
Income from continuing operations............................. $ 21,540 $ 26,438 $ 27,997 $ 19,941
Loss on disposal of discontinued operations
of investee company........................................ - - (4,497) -
---------- ---------- ---------- ----------
Income before extraordinary item.............................. 21,540 26,438 23,500 19,941
Extraordinary item - early extinguishment of debt............. - (3,363) - -
---------- ---------- ---------- ----------
Net income.................................................... $ 21,540 $ 23,075 $ 23,500 $ 19,941
========== ========== ========== ==========
Per-share information:
Income from continuing operations............................. $ .19 $ .23 $ .24 $ .17
Loss on disposal of discontinued operations
of investee company........................................ - - (.04) -
----- ------ ------ -----
Income before extraordinary item.............................. .19 .23 .20 .17
Extraordinary item - early extinguishment of debt............. - (.06) - -
------ ------ ----- ----
Net income.................................................... $ .19 $ .17 $ .20 $ .17
===== ====== ===== =====
Weighted average number of common and
common equivalent shares outstanding....................... 114,805 115,548 116,413 117,160
55
Independent Auditors' Report Reliance Group Holdings, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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 Group Holdings, Inc. and
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
NEW YORK, NEW YORK
FEBRUARY 14, 1997
56
REPORT OF MANAGEMENT Reliance Group Holdings, Inc. and Subsidiaries
--------------------------------------------------------------------------------
SCOPE OF RESPONSIBILITY
Management is responsible for the financial information included in this annual
report and for ascertaining that such information presents fairly the financial
position and operating results of the Company. The accompanying consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles. Such statements include informed estimates and judgments
of management for those transactions that are not yet complete or for which the
ultimate effects cannot be precisely determined. Financial information presented
elsewhere in this annual report is consistent with that in the financial
statements.
INTERNAL CONTROLS
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded against losses from
unauthorized use or disposition, that transactions are executed in accordance
with management's authorization and are recorded properly. Qualified personnel
throughout the organization maintain and monitor these internal accounting
controls on an ongoing basis. In addition, the Company's Internal Audit
Department systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon.
INDEPENDENT AUDITORS
The Company engages Deloitte & Touche LLP as independent auditors to audit its
financial statements and express their opinion thereon. They have full access to
each member of management in conducting their audits. Such audits are conducted
in accordance with generally accepted auditing standards and include a review
and evaluation of the system of internal accounting controls, tests of the
accounting records and other auditing procedures they consider necessary to
express their opinion on the consolidated financial statements.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised solely of
non-employee outside directors, and is responsible for overseeing and monitoring
the quality of the Company's accounting practices and internal controls. The
Committee meets regularly with management, the internal auditors and the
independent auditors to review the accounting practices employed by the Company
and to discuss auditing, internal control and financial reporting matters. Both
the internal and independent auditors have unrestricted access to the Audit
Committee, without members of management present.
XXXX X. XXXXXXXXX
Chairman of the Board and
Chief Executive Officer
XXXXXX X. XXXXX
Executive Vice President
and Controller
57
MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
--------------------------------------------------------------------------------
Reliance Group Holdings, Inc. and Subsidiaries
The Company's common stock, $.10 par value, is traded on the New York Stock
Exchange and the Pacific Stock Exchange under the symbol "REL". As of March 1,
1997, there were approximately 2,400 holders of record of the Company's common
stock. The high and low sales prices of the common stock, as reported by the New
York Stock Exchange, are as follows:
1996 1995
-------------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
-------------------------------------------------------------------------------------------------------------------
First ..................................................... 8 3/4 7 1/2 5 3/4 4 7/8
Second ..................................................... 8 3/4 7 1/8 6 3/4 5 1/4
Third ..................................................... 8 1/8 6 1/2 8 1/8 6 1/4
Fourth ..................................................... 9 1/8 7 5/8 9 1/4 7 1/8
Cash dividends for each share of the Company's common stock were $.08 for each
quarter in 1996 and 1995.
The provisions of certain notes and debentures of the Company contain
limitations on the payment of dividends, including maintaining a minimum fixed
charge coverage ratio. At February 14, 1997, the Company could pay up to
$41,400,000 in dividends without violating the most restrictive of these
provisions. The Company's dividend paying capacity will increase to the extent
that 50% of the Company's cumulative net income (as defined) exceeds cumulative
restricted payments (primarily dividends). The Company does not expect to change
its dividend payment practices in the foreseeable future. As a holding company,
the Company is dependent upon dividends, advances and net tax payments from its
wholly-owned subsidiaries to meet its debt service obligations, to pay its
expenses and to pay dividends to its shareholders. In addition to the terms of
certain notes and bank covenants limiting the payment of dividends by Reliance
Financial, dividends from the Company's principal operating subsidiaries are
subject to regulatory limitations.
58
DIRECTORS AND OFFICERS
--------------------------------------------------------------------------------
Reliance Group Holdings, Inc. and Subsidiaries
DIRECTORS
XXXXXX X. XXXXX(2),(5),(6),(7)
Corporate Director/Advisor
XXXXXX X. XXXXX(3)
Executive Vice President
and Controller
Reliance Group Holdings, Inc.
XXXXXX X. XXXXX
President and
Chief Executive Officer
Reliance National Insurance
Company
XXXXXX X. XXXXXXXX(3)
Senior Vice President and
Chief Financial Officer
Reliance Group Holdings, Inc.
XX. XXXXXX X. XXXXXXX(2),(7)
Xxxx of the Xxxxxxx School
University of Pennsylvania
XXXXXX XXXXXXX XXXXXX(3),(4),(6)
President, Xxxxxx Xxxxxxx
XxXxxx Associates
XXXXXX XXXXXXXXX(2),(6)
Executive Vice President
Helmsley-Spear, Inc.
XXXXXXX X. XXXXXXXX(1)
Chairman & CEO of Loral
Space & Communications Ltd.
and Chairman & CEO of
Globalstar
XXXXXXX X. XXXXXX(3),(7)
Chairman and
Chief Executive Officer
Golden Books Family
Entertainment, Inc.
XXXXXX X. XXXXXXX, XX.(2),(5)
Chairman Emeritus
National Westminster Bank NJ
XXXXXX X. XXXXXXXXX(1),(4)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
XXXX X. XXXXXXXXX(1),(4)
Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
XXXXX X. XXXXXXXXX
Senior Vice President
Investments
Reliance Group Holdings, Inc.
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation
Committee
(5) Special Compensation
Committee
(6) Stock Option Committee
(7) Nominating Committee
OFFICERS
XXXX X. XXXXXXXXX
Chairman of the Board and
Chief Executive Officer
XXXXXX X. XXXXXXXXX
President and
Chief Operating Officer
XXXXXX X. XXXXX
Executive Vice President
and Controller
XXXXXX X. XXXXXXXX
Senior Vice President and
Chief Financial Officer
XXXXXX X. X'XXXXX
Senior Vice President
Taxes
XXXXXX X. XXXXXXX
Senior Vice President and
Group Controller
XXXXX X. XXXXXXXX
Senior Vice President
Administration
XXXXXX X. XXXXXXXXX
Senior Vice President,
General Counsel and
Corporate Secretary
XXXXX X. XXXXXXXXX
Senior Vice President
Investments
XXXXXX X. XXXXXXXXX
Vice President and
Treasurer
XXXXXX X. XXXXX
Vice President
Administrative Services
XXXXXX X. XXXXXX
Vice President
Taxes
XXXXXX X. XXXXXXXXX, XX.
Vice President and
Chief Litigation Counsel
XXXXX X. XXXXX
Vice President and
Chief Credit Officer
XXXXXX X. XXXXXXXXXX
Vice President
Communications
XXXX X. XXXXXXX
Vice President
Human Resources
XXXXXX X. XXXXXXX
Vice President and
Assistant Controller
XXXX X. XXXXXX
Vice President,
Deputy General Counsel
and Assistant Secretary
OFFICERS OF
OPERATING UNITS
RELIANCE INSURANCE GROUP
XXXXXX X. XXXXXXXXX
Chairman and
Chief Executive Officer
XXXXXX X. XXXX
Senior Vice President
and Chief Financial Officer
XXXXXXX X. XXXXXXXX
Senior Vice President
and Chief Actuarial Officer
PROPERTY AND
CASUALTY INSURANCE
XXXXXX X. XXXXX
President and
Chief Executive Officer
Reliance National Insurance
Company
XXXXXX X. XXXXXX
President and
Chief Operating Officer
Reliance Insurance Company
XXXXXX X. XXXXXXX
President
Reliance Reinsurance Corp.
C. XXXXX XXXXXXX
President and
Chief Executive Officer
Reliance Surety Company
TITLE INSURANCE
XXXXXXX XXXXXX
Chairman and
Chief Executive Officer
Commonwealth Land Title
Insurance Company
RCG INFORMATION
TECHNOLOGY
XXXXXX X. XXXXXXXXXXX
President and
Chief Executive Officer
RCG Information Technology, Inc.
RELIANCE DEVELOPMENT
GROUP
XXXXX X. XXXXXXX
President and
Chief Executive Officer
Reliance Development Group, Inc.
59
CORPORATE DATA Reliance Group Holdings, Inc. & Subsidiaries
--------------------------------------------------------------------------------
Corporate Offices Common Stock Transfer Agent Form 10-K
Reliance Group Holdings, Inc. Xxxxx Xxxxxx Shareholder Services, L.L.C. A copy of the Company's Annual Report
Park Avenue Plaza P. O. Box 590 on Form 10-K to the Securities and
00 Xxxx 00xx Xxxxxx Xxxxxxxxxx Xxxx, XX 00000 Exchange Commission will be furnished
Xxx Xxxx, XX 00000 (000) 000-0000 to any security holder upon written
(000) 000-0000 request to Corporate Communications,
FAX (000) 000-0000 Independent Auditors Reliance Group Holdings, Inc., 55 East
Deloitte & Xxxxxx XXX 00xx Xxxxxx, Xxx Xxxx, XX 00000. This
New York, NY Report can also be obtained by calling
(888) REL-FACT or by visiting our
Internet web site at xxxx://xxx.xxx.xxx.
Annual Meeting
The annual meeting of shareholders
of Reliance Group Holdings, Inc.
will be held on Thursday, May 8, 1997
at 10:00 A.M. in the
Xxxxxxx X. Xxxxxxxxxx Museum,
0000 Xxxxx Xxxxxx, Xxx Xxxx, XX.
------------------------------------------------------------------------------------------
Listed Securities
Unless otherwise indicated, securities
are listed on the New York Stock
Exchange.
Reliance Group Holdings, Inc.
Common Stock (Symbol: REL; New York and
Pacific Stock Exchanges)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
Reliance Financial Services Corporation
7.866% Senior Reset Notes, due 2000
------------------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly
results, as well as Annual Reports on
Form 10-K, Form 10-Q, Annual Reports to
shareholders, dividend declarations and
other corporate information can be
obtained by calling (888) REL-FACT or
by visiting our Internet web site at
xxxx://xxx.xxx.xxx.
60
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