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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO .........
1-8278
COMMISSION FILE NUMBER ...............................
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3082071
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PARK AVENUE PLAZA
55 EAST 52ND STREET
NEW YORK, NEW YORK
(ADDRESS OF PRINCIPAL EXECUTIVE 10055
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(212) 909-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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New York Stock Exchange and Pacific
Common Stock, $.10 Par Value Exchange
9% Senior Notes, Due November 15, 2000 New York Stock Exchange
9 3/4% Senior Subordinated Debentures,
Due November 15, 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 27, 1998, 115,091,309 shares of the common stock of Reliance
Group Holdings, Inc. were outstanding, and the aggregate market value of the
voting stock held by nonaffiliates was approximately $1,068,200,525.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Reliance Group Holdings, Inc. 1997 Annual Report--Parts I, II and
IV.
(2) Reliance Group Holdings, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held May 14, 1998--Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Reliance Group Holdings, Inc. (the 'Company' or 'Reliance Group Holdings')
is a holding company whose principal business is the ownership of Reliance
Insurance Company and its property and casualty insurance subsidiaries (the
'Reliance Insurance Group'). The Reliance Insurance Group underwrites a broad
range of commercial lines of property and casualty insurance and also
underwrites personal automobile coverage. The Company also owns RCG Information
Technology, Inc. ('RCG Information Technology'), an information technology
consulting company.
On February 27, 1998, the Company completed the sale of its title insurance
companies, Commonwealth Land Title Insurance Company and Transnation Title
Insurance Company and their respective subsidiaries ('Commonwealth/Transnation
Title') to Lawyers Title Corporation, whose name was changed to LandAmerica
Financial Group, Inc. ('LandAmerica') on that date. As consideration for the
sale, the Company received $266.6 million in cash, 4,039,473 shares of
LandAmerica common stock and 2,200,000 shares of LandAmerica 7% cumulative
convertible preferred stock having a stated value of $110,000,000 and which is
initially convertible into 4,824,561 shares of LandAmerica common stock. Such
shares of common stock and preferred stock are subject to various terms,
conditions and restrictions with regard to sale, conversion and voting. The
Company owns approximately 27% of LandAmerica's outstanding common stock and, on
a diluted basis, 45% of LandAmerica's common stock, assuming the conversion of
the preferred stock, and has three representatives on LandAmerica's 14-member
board of directors. Accordingly, the Company will account for its investment in
LandAmerica by the equity method of accounting and will classify LandAmerica as
an investee company for periods subsequent to the sale date. The transaction
resulted in an after-tax gain of approximately $245 million, of which
approximately $135 million will be recognized in the first quarter of 1998. The
deferred gain of approximately $110 million will be recognized as the equity
securities received from LandAmerica are sold. Commonwealth/Transnation Title
accounted for $863.7 million (31%) of the 1997 net premiums earned by the
Reliance Insurance Group and Commonwealth/Transnation Title. See Note 2 to the
Company's consolidated financial statements (the 'Consolidated Financial
Statements') and 'Investee Companies'.
Reliance Insurance Company has conducted business since 1817, making it one
of the oldest property and casualty insurance companies in the United States.
The Reliance Insurance Group consists of four principal operations: Reliance
National, Reliance Insurance, Reliance Surety and Reliance Reinsurance. Reliance
National offers, through brokers and agents, a broad range of commercial
property and casualty insurance products and services for large companies and
specialty lines customers. Reliance National also offers, through agents,
non-standard automobile and smaller account workers' compensation insurance.
Reliance National selects market segments where it can provide specialized
coverages and services, and it conducts business nationwide and in certain
international markets. In 1997, Reliance National accounted for 48% of the net
premiums written by the Reliance Insurance Group. Reliance Insurance provides,
through 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
1997, Reliance Insurance accounted for 36% of the net premiums written by the
Reliance Insurance Group. Reliance Surety is a leading writer of surety bonds
and fidelity bonds in the United States and conducts its business through agents
and brokers. Reliance Reinsurance offers, primarily through brokers, treaty and
facultative reinsurance for small to medium sized regional and specialty
insurance companies located in the United States. The Reliance Insurance Group
accounted for $1.9 billion (69%) of the 1997 net premiums earned by the Reliance
Insurance Group and Commonwealth/Transnation Title.
RCG Information Technology provides computer-related professional services
to large corporate clients throughout the United States and had revenues of
$191.9 million in 1997.
1
Business segment information for the years ended December 31, 1997, 1996
and 1995 is set forth in Note 17 to the Consolidated Financial Statements. All
financial information in this Annual Report on Form 10-K is presented in
accordance with generally accepted accounting principles ('GAAP') unless
otherwise specified.
The Company owns all of the common stock of Reliance Financial Services
Corporation ('Reliance Financial') which in turn owns all of the common stock of
Reliance Insurance Company. The common stock of Reliance Insurance Company is
pledged to secure certain indebtedness. See Note 8 to the Consolidated Financial
Statements. Reliance Insurance Company owns all of the common stock of RCG
Information Technology.
OPERATING UNITS
Property and Casualty Insurance. The following table sets forth the amount
of net premiums written in each line of business for the years ended December
31, 1997, 1996 and 1995 by the Reliance Insurance Group's four principal
operations: Reliance National, Reliance Insurance, Reliance Surety and Reliance
Reinsurance.
1997 1996
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RELIANCE RELIANCE
RELIANCE RELIANCE SURETY/ RELIANCE RELIANCE SURETY/
NATIONAL INSURANCE REINSURANCE TOTAL NATIONAL INSURANCE REINSURANCE TOTAL
-------- --------- ------------ ------ -------- --------- ------------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
General Liability............. $311 $ 112 $ -- $ 423 $368 $ 99 $ -- $ 467
Commercial Automobile......... 97 198 -- 295 86 179 -- 265
Workers' Compensation......... 128 148 -- 276 127 123 -- 250
Multiple Peril................ 18 203 -- 221 20 192 -- 212
Ocean and Inland Marine....... 150 41 -- 191 83 46 -- 129
Surety........................ -- -- 177 177 -- -- 159 159
Reinsurance................... -- -- 159 159 -- -- 151 151
Non-Standard Automobile....... 98 -- -- 98 -- -- -- --
Accident and Health........... 92 -- -- 92 62 -- -- 62
Fire and Allied............... 20 26 -- 46 22 42 -- 64
Involuntary................... 23 11 -- 34 25 19 -- 44
Other......................... 50 4 -- 54 41 2 -- 43
--- --- --- ------ --- --- --- ------
Total........................ $987 $ 743 $336 $2,066 $834 $ 702 $310 $1,846
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
Percent of Total.............. 48% 36% 16% 100% 45% 38% 17% 100%
--- --- --- ------ --- --- --- ------
--- --- --- ------ --- --- --- ------
1995
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RELIANCE
RELIANCE RELIANCE SURETY/
NATIONAL INSURANCE REINSURANCE TOTAL
-------- --------- ------------ ------
General Liability............. $371 $ 98 $ -- $ 469
Commercial Automobile......... 88 152 -- 240
Workers' Compensation......... 141 125 -- 266
Multiple Peril................ 26 159 -- 185
Ocean and Inland Marine....... 66 53 -- 119
Surety........................ -- -- 139 139
Reinsurance................... -- -- 119 119
Non-Standard Automobile....... -- -- -- --
Accident and Health........... 58 -- -- 58
Fire and Allied............... 34 34 -- 68
Involuntary................... 53 28 -- 81
Other......................... 27 8 -- 35
--- --- --- ------
Total........................ $864 $ 657 $258 $1,779
--- --- --- ------
--- --- --- ------
Percent of Total.............. 49% 37% 14% 100%
--- --- --- ------
--- --- --- ------
2
The following table sets forth underwriting results for the Reliance
Insurance Group for the years ended December 31, 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
Net premiums written... $2,065.8 $1,846.2 $1,779.0
Underwriting loss(1)... (31.7) (38.4)(2) (45.6)
Combined ratio......... 100.9% 101.6%(2) 101.8%(3)
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(1) Includes catastrophe losses (net of reinsurance) for the years ended
December 31, 1997, 1996 and 1995 of $11.1 million, $19.9 million and $25.7
million, respectively.
(2) Excludes a 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 underwriting loss was
$172.4 million and the combined ratio was 109.0%.
(3) Excludes a charge of $4.0 million in 1995 pertaining to California's
Proposition 103.
The following table sets forth certain financial information of the
Reliance Insurance Group based upon statutory accounting practices and common
shareholder's equity of Reliance Insurance Company based upon GAAP (in
thousands):
STATUTORY ACCOUNTING GAAP
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NET TOTAL POLICY- COMMON
YEAR ENDED PREMIUMS UNEARNED LOSS ADMITTED TOTAL HOLDERS' SHAREHOLDER'S
DECEMBER 31, WRITTEN PREMIUMS RESERVES ASSETS LIABILITIES SURPLUS EQUITY
- ------------ ---------- -------- ---------- ---------- ----------- ---------- -------------
1997........ $2,081,991 $980,146 $3,172,266 $5,955,177 $ 4,652,687 $1,302,490 $ 1,704,256
1996........ 1,848,159 885,799 3,228,792 5,669,276 4,482,220 1,187,056 1,410,484
1995........ 1,769,064 841,127 3,102,688 5,538,533 4,410,197 1,128,336 1,404,781
The Reliance Insurance Group writes insurance in every state of the United
States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. In
1997, California, New York, Florida and Texas accounted for approximately 15%,
11%, 7% and 6%, respectively, of direct premiums written. No other state
accounted for more than 5% of direct premiums written by the Reliance Insurance
Group. The Reliance Insurance Group writes insurance primarily through agents
and brokers. No single insurance agent or broker accounts for 12% or more of the
direct premiums written by the Reliance Insurance Group. The Reliance Insurance
Group also underwrites personal lines automobile insurance utilizing the
Internet, direct mail and other direct marketing channels.
The Reliance Insurance Group also writes insurance in the European
Community through Reliance National offices in the United Kingdom, the
Netherlands, Sweden, Spain and Germany, in the Americas through Reliance
National offices in Canada, Mexico and Argentina and in the Pacific Rim through
a Reliance National office in Singapore. In early 1998, Reliance National opened
offices in Switzerland and in South Africa. Also, Reliance National established
a cooperation agreement with the Huatai Insurance Company in China in 1997 and a
joint venture insurance operation through Lippo Reliance Insurance Company Ltd.
in Hong Kong in early 1998.
A. M. Best & Company, Inc. ('Best'), publisher of Best's Insurance Reports,
Property-Casualty, has assigned an 'A- (Excellent)' rating to the Reliance
Insurance Group. Best's ratings are based on an analysis of the financial
condition and operations of an insurance company as they relate to the industry
in general. An 'A- (Excellent)' rating is assigned to those companies which have
demonstrated excellent overall performance when compared to the norms of the
property and casualty industry. Standard & Poor's ('S&P') has assigned an 'A'
rating to the claims-paying ability of the Reliance Insurance Group. S&P's
ratings are based on a quantitative and qualitative analysis, including
consideration of ownership and support factors, if applicable. An 'A' rating is
assigned to those companies which have good financial security, but capacity to
meet policyholder obligations is somewhat susceptible to adverse economic and
underwriting conditions. The Best and S&P ratings are not designed for the
protection of investors and do
3
not constitute recommendations to buy, sell or hold any security. Although the
Best and S&P ratings of the Reliance Insurance Group are not as high as many of
the insurance companies with which the Reliance Insurance Group competes,
management believes that the current ratings are adequate to enable the Reliance
Insurance Group to compete successfully.
Reliance National. Reliance National offers a broad range of commercial
insurance products and services with a focus on large accounts and specialty
lines customers. Reliance National selects market segments where it can provide
specialized coverages, such as directors and officers liability insurance, or
specialized services, such as providing captive insurance arrangements to the
alternative risk markets. In addition, Reliance National provides non-standard
personal automobile insurance and traditional commercial insurance products,
including guaranteed cost workers' compensation insurance. In 1997, Reliance
National accounted for 48% of the net premiums written by the Reliance Insurance
Group. Reliance National, which conducts business nationwide, is headquartered
in New York City and has offices in nineteen states. Reliance National also
conducts business in the European Community, the Americas and the Pacific Rim.
In early 1998, Reliance National opened offices in Switzerland and in South
Africa. Also, Reliance National established a cooperation agreement with the
Huatai Insurance Company in China in 1997 and a joint venture insurance
operation through Lippo Reliance Insurance Company Ltd. in Hong Kong in early
1998. Reliance National distributes its products through insurance brokers and
agents. Net premiums written by Reliance National were $987.3 million, $833.7
million and $864.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Reliance National is organized into eight major divisions. Each division is
comprised of one or more departments which focus on a particular type of
business, program or market segment. Each department makes use of underwriters,
actuaries and other professionals to market, structure and price its products.
Reliance National's eight major divisions are:
o Casualty Risk Services, Reliance National's largest division, provides
workers' compensation, commercial automobile and general liability
coverages to Fortune 1,000 companies, multinationals and the construction
and transportation industries. These coverages are provided on a large
deductible basis and to the alternative risk markets through captive
reinsurance arrangements. This division also provides environmental
pollution coverages (primarily on a claims-made basis) for consultants,
contractors, transporters and certain other insureds. In early 1997, this
division began providing comprehensive insurance coverages for public and
private entities engaged in the development of infrastructure projects
outside of North America. This division in 1997 also introduced
CyberComp, which permits Reliance National to utilize the Internet to
write, through agents, single-state guaranteed cost workers' compensation
coverages for smaller accounts.
o International writes predominantly commercial casualty and property
insurance products, including specialized coverages such as excess
casualty, directors and officers liability insurance, fidelity insurance
and accident and health coverage in certain international markets. This
division also provides ocean marine coverages in domestic and certain
international markets.
o Excess and Surplus Lines primarily provides professional liability
insurance to architects, engineers, lawyers, healthcare providers and
other professionals, and excess and umbrella coverages.
o International Reinsurance and Special Risk provides aviation and space
satellite risk coverages, as well as certain non-traditional insurance
products, both on a primary and on a reinsurance basis, in domestic and
certain international markets.
o Property/Custom Casualty primarily provides commercial property, casualty
and inland marine coverages focusing on excess and specialty commercial
accounts.
o Financial Products provides directors and officers liability insurance,
errors and omissions insurance, employment practices liability insurance
and fidelity and fiduciary coverages in the domestic market.
o Accident and Health provides high limit disability, group accident,
blanket special risk and medical excess of loss programs.
4
o Non-Standard Automobile primarily provides non-standard personal
automobile insurance for drivers unable to obtain insurance in the
standard automobile insurance market.
Reliance National attempts to limit its exposure to losses through the use
of claims-made policies, policies written on a large deductible basis and
reinsurance. Policies written on a 'claims-made' basis accounted for
approximately 23%, 26% and 22% of Reliance National's net premiums written
during 1997, 1996 and 1995, respectively. Policies written on a 'claims-made'
basis provide coverage only for claims reported during the policy period or
within an established reporting period, as opposed to 'occurrence' basis
policies which provide coverage for events that occur during the policy period
without regard for when the claim is reported. Claims-made policies mitigate the
'long tail' nature of the risks insured. Policies written on a large deductible
basis accounted for approximately 9%, 14% and 9% of Reliance National's net
premiums written during 1997, 1996 and 1995, respectively. Under policies
written on a large deductible basis, the insured pays for all of its losses up
to the deductible amount. The use of large deductible policies results in lower
premiums and losses for Reliance National as payments for losses made by an
insured under a large deductible policy are not considered premiums or losses to
an insurer. With large deductible policies, Reliance National provides insurance
and loss control management services while reducing its underwriting risk.
Reliance National assumes a credit risk in connection with large deductible
policies and, therefore, insureds with such policies undergo extensive credit
analysis by a centralized credit department that is independent from the
underwriting process. Collateral in the form of bank letters of credit, trust
accounts or cash is generally provided by the insured to cover a significant
portion of Reliance National's credit exposure.
To further limit exposures, a substantial majority of Reliance National's
net premiums written during 1997 were for policies with net retentions equal to
or lower than $1.5 million per risk. By reinsuring a large proportion of its
business, Reliance National seeks to limit its exposure to losses on each line
of business it writes.
Reliance Insurance. Reliance Insurance offers commercial lines property
and casualty insurance products, primarily focusing on the diverse needs of
mid-sized companies nationwide. Reliance Insurance conducts business through 36
offices and distributes its products through approximately 2,600 agents and
brokers. Reliance Insurance's insureds are primarily closely held companies with
100 to 1,000 employees and annual sales of $5 million to $300 million. Reliance
Insurance underwrites a variety of commercial insurance coverages, including
multiple peril, general liability, commercial automobile and workers'
compensation. In 1997, Reliance Insurance accounted for 36% of the net premiums
written by the Reliance Insurance Group. Reliance Insurance is headquartered in
Philadelphia and operates in 50 states, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands. Net premiums written by Reliance Insurance were
$743.1 million, $702.2 million and $656.4 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Reliance Insurance is organized into the following three operating
divisions:
o The Commercial Accounts division focuses on accounts with annual premiums
of up to $1 million. This division offers a broad range of traditional
commercial coverages, primarily written on a guaranteed cost basis.
o The Specialty division provides underwriting for industry segments with
special exposures and in 1997 targeted specific business segments:
transportation, manufacturing, contracting, public entities, social
services and special properties. This division also provides property and
liability insurance programs to homogeneous groups of insureds with
particular insurance needs.
o The Large Accounts division focuses on casualty exposures of accounts
with annual premiums in excess of $1 million where it is able to offer
more flexible coverages through the use of large deductible and
retrospectively rated policies. With retrospectively rated policies, the
insured effectively pays for a large portion or, in many cases, all of
its losses. The Large Accounts division primarily provides workers'
compensation insurance and approximately 51% of its business was written
on a large deductible and retrospectively rated basis. Accounts with
large deductible and retrospectively rated policies undergo extensive
credit analysis by a centralized credit department
5
that is independent from the underwriting process. Collateral in the form
of bank letters of credit, trust accounts or cash is generally provided
by the insured to cover a significant portion of Reliance Insurance's
credit exposure.
The Commercial Accounts division and the Large Accounts division provide
their products and services through a decentralized network of regional and
branch offices. This organization allows the Commercial Accounts division and
the Large Accounts division to place major responsibility and accountability for
underwriting, sales and customer service close to the insured. The Specialty
division has three regional offices. Reliance Insurance manages its claims
through a decentralized network of regional and branch offices, which allows the
point of service to be close to the insured.
Reliance Surety. Reliance Surety is a leading writer of surety and
fidelity bonds in the United States. Reliance Surety concentrates on writing
performance and payment bonds for contractors of public works projects,
commercial real estate and multi-family housing. It also writes commercial
surety, financial institution and commercial fidelity bonds. Reliance Surety
performs extensive credit analysis on its clients and actively manages claims to
minimize losses and maximize recoveries. Reliance Surety has enjoyed long
relationships with a large majority of the contractors and accounts it has
insured. Reliance Surety's Firemark and Express Surety operations target smaller
contractors and accounts, a market traditionally less fully serviced by national
surety companies. Reliance Surety is headquartered in Philadelphia and conducts
business nationwide through 33 branch offices and distributes its products
through approximately 2,250 agents and brokers. In addition, in 1997 Reliance
Surety established a presence in London. Net premiums written by Reliance Surety
were $176.5 million, $159.2 million and $139.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
Surety bonds guarantee the payment or performance of one party (called the
principal) to another party (called the obligee). This guarantee is typically
evidenced by a written agreement by the surety (e.g., Reliance Surety) to
discharge the payment or performance obligations of the principal pursuant to
the underlying contract between the obligee and the principal. Fidelity bonds
insure against losses arising from employee dishonesty. Financial institution
fidelity bonds insure against losses arising from employee dishonesty and other
specifically named theft and fraud perils.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance
on both a treaty (blocks of risk) and facultative (individual risks) basis and,
to a lesser extent, property reinsurance on a treaty basis. The business of
Reliance Reinsurance is primarily conducted on a treaty basis. All treaty
business is marketed through reinsurance brokers who negotiate contracts of
reinsurance on behalf of the primary insurer or ceding reinsurer, while
facultative business is produced both directly and through reinsurance brokers.
While Reliance Reinsurance's treaty clients include all types and sizes of
insurers, Reliance Reinsurance typically targets treaty reinsurance for small to
medium sized regional and specialty insurance companies, as well as captives,
risk retention groups and other alternative risk markets, providing both pro
rata and excess of loss coverage. Reliance Reinsurance believes that this market
is subject to less competition and provides Reliance Reinsurance with an
opportunity to develop and market innovative programs where pricing is not the
key competitive factor. Reliance Reinsurance typically avoids participating in
large capacity reinsurance treaties where price is the predominant competitive
factor. It generally writes reinsurance in the 'lower layers,' the first $1
million of primary coverage, where losses are more predictable and quantifiable.
Reliance Reinsurance conducts its business nationwide and is headquartered in
Philadelphia. In 1997, Reliance Reinsurance established an Agriculture division
reinsuring insurers whose products include crop insurance and other products for
agricultural-related risks. Net premiums written by Reliance Reinsurance were
$159.0 million, $151.1 million and $119.0 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Information Technology Consulting Services. RCG Information Technology
provides a full range of information technology services to large corporate
clients in the United States including clients in the following sectors:
banking, brokerage, insurance, electronics, telecommunications, petroleum,
chemical, retail, transportation, manufacturing and travel. Such services
include providing supplemental computer professional staffing, Year 2000
solutions, software outsourcing, computer programming and development services
and other computer consulting services. RCG Information Technology conducts
operations through
6
17 offices in the United States. RCG Information Technology recruits programmers
both in the United States and internationally to meet demands for its services,
and has established recruiting capabilities in India, Ireland, the Philippines
and South Africa. RCG Information Technology had revenues of $191.9 million,
$136.7 million and $106.4 million for the years ended December 31, 1997, 1996
and 1995, respectively, and its pretax operating income was $4.8 million, $2.3
million and $5.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase
reinsurance to limit the Company's exposure to losses. The ceding of insurance
does not discharge an insurer from its primary legal liability to a
policyholder, even though the reinsuring company assumes a related liability.
The Reliance Insurance Group enters into reinsurance arrangements that are both
facultative (individual risks) and treaty (blocks of risk). Limits and
retentions, which may change from time to time, are based on a number of
factors, including the previous loss history of the operating unit, policy
limits and exposure data, industry studies as to potential severity, and market
terms, conditions and capacity. Where appropriate, the Reliance Insurance Group
limits its exposure to individual risks by purchasing excess of loss and quota
share reinsurance, with treaty structures and net retentions varying with the
specific requirements of the line of business or program being reinsured. In
many cases, the Reliance Insurance Group purchases additional facultative
reinsurance to further reduce its retentions below treaty levels.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance
Insurance Group to reinsurers were $1.9 billion and $1.6 billion in 1997 and
1996, respectively. The Reliance Insurance Group is subject to credit risk with
respect to its reinsurers, as the ceding of risk to reinsurers does not relieve
the Reliance Insurance Group of its liability to insureds. At December 31, 1997,
the Reliance Insurance Group had reinsurance recoverables of $4.2 billion,
representing estimated amounts recoverable from reinsurers pertaining to paid
claims, unpaid claims, claims incurred but not reported and unearned premiums.
In order to minimize losses from uncollectible reinsurance, the Reliance
Insurance Group places its reinsurance with a number of different reinsurers,
and utilizes a security committee and a staff of analysts to approve in advance
the reinsurers which meet its standards of financial strength and are acceptable
for use by the Reliance Insurance Group. The Reliance Insurance Group holds
substantial amounts of collateral, consisting of letters of credit, trust
accounts and cash to secure recoverables from unauthorized reinsurers. The
Company had $6.4 million reserved for potentially unrecoverable reinsurance at
December 31, 1997. The Company is not aware of any impairment of the
creditworthiness of any of the Reliance Insurance Group's significant
reinsurers.
In 1997, the Reliance Insurance Group did not cede more than 5.0% of direct
premiums to any one reinsurer and only one reinsurer accounted for more than
4.0% of total ceded premiums. The Reliance Insurance Group's ten largest
reinsurers, based on 1997 ceded premiums, are as follows:
1997
CEDED BEST
PREMIUM RATING
------------- ------
(IN MILLIONS)
American Re-Insurance Company..................... $ 171.1 A+
General Reinsurance Corporation................... 70.3 A++
Hertz International Reinsurance Ltd............... 60.4 (1)
Commercial Risk Re-Insurance Company.............. 60.2 A
Kemper Reinsurance Company........................ 58.6 A
Swiss Reinsurance America Corporation............. 57.0 A
Everest Reinsurance Company....................... 56.3 A
Zurich Reinsurance (North America), Inc........... 49.7 A
Employers Reinsurance Group....................... 41.4 A++
SCOR Reinsurance Company.......................... 38.4 A+
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(1) An unrated captive reinsurer that is not affiliated with the Company.
Recoverables from such reinsurer are fully collateralized.
7
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance
agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively
rated reinsurance agreements which may not meet relevant accounting standards
for risk transfer and under which the reinsured must pay additional premiums in
subsequent years if losses in the current year exceed levels specified in the
reinsurance agreement.
PROPERTY AND CASUALTY LOSS RESERVES
The Reliance Insurance Group's staff of over 100 actuaries regularly
performs comprehensive analyses of reserves and reviews the pricing and
reserving methodologies of the Reliance Insurance Group. Although the Company
believes, in light of present facts and current legal interpretations, that the
Reliance Insurance Group's overall property and casualty reserve levels are
adequate to meet its obligations under existing policies, due to the inherent
uncertainty and complexity of the reserving process, the ultimate liability may
be more or less than such reserves.
The following tables present information relating to the liability for
unpaid claims and related expenses ('loss reserves') for the Reliance Insurance
Group. The table below provides a reconciliation of the beginning to ending
liability balances for the years ended December 31, 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Loss reserves, beginning of year........ $6,136,420 $5,764,352 $5,517,483
Less reinsurance recoverables........... 2,824,814 2,584,917 2,389,702
---------- ---------- ----------
Net loss reserves, beginning of year.... 3,311,606 3,179,435 3,127,781
---------- ---------- ----------
Provision for policy claims and related
expenses:
Provision for insured events of the
current year....................... 1,299,066 1,211,672 1,163,447
Increase (decrease) in provision
for insured events
of prior years................... (35,980) 138,665(1) 38,512
---------- ---------- ----------
Total provision.................. 1,263,086 1,350,337 1,201,959
---------- ---------- ----------
Payments for policy claims and related
expenses:
Attributable to insured events of
the current year................... 367,763 298,838 271,915
Attributable to insured events of
prior years........................ 963,135 926,996 868,622
---------- ---------- ----------
Total payments................... 1,330,898 1,225,834 1,140,537
---------- ---------- ----------
Foreign currency translation............ (1,476) 7,668 (9,768)
---------- ---------- ----------
Net loss reserves, end of year.......... 3,242,318 3,311,606 3,179,435
Plus reinsurance recoverables........... 3,427,190 2,824,814 2,584,917
---------- ---------- ----------
Loss reserves, end of year.............. $6,669,508 $6,136,420 $5,764,352
---------- ---------- ----------
---------- ---------- ----------
- ------------------
(1) The 1996 increase in provision for insured events of prior years included a
pretax charge of $134.0 million to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987.
The provision for policy claims and related expenses for 1997 includes
favorable development in workers' compensation partially offset by adverse
development in the commercial automobile line. The redundancy in workers'
compensation is due, in part, to favorable development in retrospectively rated
policies, which was more than offset by a corresponding reduction in premiums
earned. The provision for insured events of prior years for 1996 and 1995
included adverse development related to asbestos-related and environmental
pollution claims, which primarily affected general liability, multiple peril and
reinsurance lines of business, and included 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
included adverse development in the commercial automobile line, offset by
favorable
8
development in workers' compensation. The 1995 provision also included adverse
development in other general liability, commercial automobile and reinsurance
lines, partially offset by favorable development in workers' compensation.
The table below summarizes the development of the estimated liability for
loss reserves (net of reinsurance recoverables) as of December 31 of each of the
prior ten years. The amounts shown on the top line of the table represent the
estimated liability for loss reserves (net of reinsurance recoverables) for
claims that are unpaid at the particular balance sheet date, including losses
that had been incurred but not reported to the Reliance Insurance Group. The
upper portion of the table indicates the loss reserves as they are reestimated
in subsequent periods as a percentage of the originally recorded reserves. These
estimates change as losses are paid and more accurate information becomes
available about remaining loss reserves. A redundancy exists when the original
loss reserve estimate is greater, and a deficiency exists when the original loss
reserve estimate is less, than the reestimated loss reserve at December 31,
1997. A redundancy or deficiency indicates the cumulative percentage change, as
of December 31, 1997, of originally recorded loss reserves. The lower portion of
the table indicates the cumulative amounts paid as of successive periods as a
percentage of the original loss reserve liability. In calculating the percentage
of cumulative paid losses to the loss reserve liability in each year, unpaid
losses of General Casualty Company of Wisconsin, a former wholly-owned
subsidiary, and its subsidiaries ('General Casualty') at April 30, 1990 (the
date of sale of General Casualty), relating to 1987 through 1989, were deducted
from the original liability in each year. Each amount in the following table
includes the effects of all changes in amounts for prior periods. The table does
not present accident or policy year development data. For the years 1987 through
1995, the Company has experienced deficiencies in its estimated liability for
loss reserves and for 1996 the Company experienced a redundancy. The table
includes provisions specifically made to strengthen prior-years' loss reserves
of $134.0 million in 1996 and $156.0 million in 1991. The Company's loss
reserves during this period had been adversely affected by a number of factors
beyond the Company's control as follows: (i) significant increases in claim
settlements reflecting, among other things, inflation in medical costs; (ii)
increases in the costs of settling claims, particularly legal expenses; (iii)
more frequent resort to litigation in connection with claims; and (iv) a
widening interpretation of what constitutes a covered claim.
DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $3,242,318 $3,311,606 $3,179,435 $3,127,781 $2,931,528 $2,702,992 $2,375,235 $1,893,421
Net liability reestimated
as of:
One year later........... -- 98.9% 104.4% 101.2% 100.8% 101.5% 101.3% 114.4%
Two years later.......... -- -- 104.4% 104.8% 101.7% 103.1% 104.4% 115.2%
Three years later........ -- -- -- 103.6% 104.2% 104.0% 105.7% 119.6%
Four years later......... -- -- -- -- 103.0% 107.2% 106.7% 120.7%
Five years later......... -- -- -- -- -- 106.2% 110.5% 122.0%
Six years later.......... -- -- -- -- -- -- 109.7% 127.0%
Seven years later........ -- -- -- -- -- -- -- 126.2%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
Redundancy (Deficiency)... -- 1.1% (4.4%) (3.6%) (3.0%) (6.2%) (9.7%) (26.2%)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) as of:
One year later........... -- 29.1% 29.2% 27.8% 26.6% 28.7% 29.0% 36.6%
Two years later.......... -- -- 48.7% 46.8% 44.9% 48.0% 48.6% 57.9%
Three years later........ -- -- -- 59.8% 58.4% 61.1% 62.1% 72.8%
Four years later......... -- -- -- -- 67.3% 70.5% 71.6% 83.0%
Five years later......... -- -- -- -- -- 76.5% 78.1% 90.3%
Six years later.......... -- -- -- -- -- -- 82.7% 95.5%
Seven years later........ -- -- -- -- -- -- -- 99.2%
Eight years later........ -- -- -- -- -- -- -- --
Nine years later......... -- -- -- -- -- -- -- --
Ten years later.......... -- -- -- -- -- -- -- --
1989 1988 1987
---------- ---------- ----------
Net liability for unpaid
claims and related
expenses (loss
reserves)(1)............. $1,962,822 $1,644,057 $1,494,227
Net liability reestimated
as of:
One year later........... 104.8% 104.8% 107.8%
Two years later.......... 117.0% 113.5% 112.0%
Three years later........ 118.2% 121.8% 118.5%
Four years later......... 120.9% 123.2% 125.0%
Five years later......... 122.2% 127.8% 126.7%
Six years later.......... 123.8% 128.7% 131.8%
Seven years later........ 129.1% 130.7% 133.1%
Eight years later........ 128.5% 138.0% 135.4%
Nine years later......... -- 137.7% 143.9%
Ten years later.......... -- -- 143.3%
Redundancy (Deficiency)... (28.5%) (37.7%) (43.3%)
---------- ---------- ----------
Paid (cumulative) as of:
One year later........... 40.7% 41.6% 38.6%
Two years later.......... 65.4% 71.6% 65.8%
Three years later........ 82.2% 86.4% 88.2%
Four years later......... 91.3% 97.2% 99.5%
Five years later......... 97.8% 103.0% 106.2%
Six years later.......... 103.1% 107.3% 110.7%
Seven years later........ 106.8% 111.5% 113.9%
Eight years later........ 109.9% 114.3% 117.4%
Nine years later......... -- 117.2% 119.7%
Ten years later.......... -- -- 122.1%
- ------------------
(1) The gross liability for unpaid claims and related expenses was $6.7 billion
at December 31, 1997. The gross liability for unpaid claims and related
expenses for years 1996 and prior was redundant by $36.6 million at December
31, 1997.
9
The difference between the property and casualty liability for loss
reserves at December 31, 1997 and 1996 reported in the Company's consolidated
financial statements (net of reinsurance recoverables) and the liability which
would be reported in accordance with statutory accounting practices is as
follows:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Net liability reported under statutory accounting
practices....................................... $3,172,266 $3,228,792
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (9,325) (10,925)
Additional discount of workers' compensation
reserves........................................ 79,377 93,739
---------- ----------
Net liability reported on a GAAP basis............ $3,242,318 $3,311,606
---------- ----------
---------- ----------
The difference between the property and casualty liability for gross loss
reserves at December 31, 1997 and 1996 reported in the Company's consolidated
financial statements and the liability which would be reported in accordance
with statutory accounting practices is as follows:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Liability reported under statutory accounting
practices....................................... $6,496,144 $5,968,395
Adjustment for GAAP basis accrual of estimated
salvage and subrogation recoveries.............. (13,884) (13,884)
Additional discount of workers' compensation
reserves........................................ 187,248 181,909
---------- ----------
Liability reported on a GAAP basis................ $6,669,508 $6,136,420
---------- ----------
---------- ----------
Property and casualty loss reserves are based on an evaluation of reported
claims, in addition to statistical projections of claims incurred but not
reported and loss adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability for unpaid claims. Also considered are other factors
such as the promptness with which claims are reported, the history of the
ultimate liability for such claims compared with initial and intermediate
estimates, the type of insurance coverage involved, the experience of the
property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Reliance Insurance Group
applies a variety of generally accepted actuarial techniques to determine the
estimates of ultimate liability. The techniques recognize, among other factors,
the Reliance Insurance Group's and the industry's experience with similar
business, historical trends in reserving patterns and loss payments, pending
level of unpaid claims, the cost of claim settlements, the Reliance Insurance
Group's product mix 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 establishment
of loss reserves makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for extraordinary future
emergence of new classes of losses not sufficiently represented in the Reliance
Insurance Group's data base, or which are not yet able to be quantified. The
Reliance Insurance Group regularly analyzes its reserves and reviews its pricing
and reserving methodologies, using Reliance Insurance Group actuaries, so that
future adjustments to prior year reserves can be minimized. From time to time,
the Reliance Insurance Group consults with independent actuarial firms
concerning reserving practices and levels. The subsidiaries of the Reliance
Insurance Group are required by state insurance regulators to file, along with
their statutory reports, an actuarial reserve opinion setting forth an actuary's
assessment of its reserve status. Since 1992, the Reliance Insurance Group has
used an independent actuarial firm to meet such requirements. 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 Reliance Insurance Group attempts to
reduce
10
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
Reliance Insurance Group also limits the potential loss from a single event
through the extensive use of reinsurance.
In calculating the liability for loss reserves, the Reliance Insurance
Group discounts workers' compensation pension claims which are expected to have
regular, periodic payment patterns. These claims are discounted for mortality
and for interest using statutory annual rates ranging from 3.5% to 6%. In
addition, the reserves for claims assumed through the participation of the
Reliance Insurance Group in workers' compensation reinsurance pools are
discounted. The discounting of all claims (net of reinsurance recoverables)
resulted in a decrease in the liability for loss reserves of $216.7 million,
$230.0 million and $235.7 million at December 31, 1997, 1996 and 1995,
respectively. The discount in 1997 was decreased by $0.5 million, in addition to
discount amortization of $12.8 million, resulting in a decrease in pre-tax
income of $13.3 million. The discount in 1996 was increased by $5.4 million,
which was more than offset by discount amortization of $11.1 million, resulting
in a reduction in pre-tax income of $5.7 million. The discount in 1995 was
increased by $1.8 million, which was more than offset by discount amortization
of $11.8 million, resulting in a reduction in pre-tax income of $10.0 million.
The liability for loss reserves includes provisions for inflation in
several ways, depending on how the reserve is established. An explicit provision
for inflation is used where estimates of ultimate loss are based on pricing. A
provision for inflation is also included for certain discounted workers'
compensation claims. In these cases, the provision for inflation is based on
factors supplied by the respective workers' compensation rating bureaus which
have jurisdiction for states which provide for cost-of-living increases in
indemnity benefits. In other reserves, the analysis reflects the effect of
inflationary trends as part of the overall effect on claim costs, as well as
changes in marketing, underwriting, reporting and processing systems, claims
settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1997 are $211.5
million ($192.9 million net of reinsurance recoverables) of loss reserves
pertaining to asbestos-related and environmental pollution claims for business
written in or before 1987. The following table presents information relating to
the net loss reserves pertaining to asbestos-related and environmental pollution
claims for business written in or before 1987 for the years ended December 31,
1997, 1996 and 1995:
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Net loss reserves, beginning of year............................. $213,047 $101,008 $100,404
Provision for policy claims and related expenses................. -- 135,801 23,547
Payments for policy claims and related expenses.................. (20,114) (23,762) (22,943)
-------- -------- --------
Net loss reserves, end of year................................... $192,933 $213,047 $101,008
-------- -------- --------
-------- -------- --------
The 1996 provision for policy claims and related expenses includes a pretax
charge of $134.0 million 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, 1997 net loss reserves pertaining to
asbestos-related and environmental pollution claims for business written in or
before 1987 are $69.1 million of loss costs for claims incurred but not
reported, $43.9 million of loss costs for reported claims and $79.9 million of
related expenses.
11
The following table presents information related to the number of insureds
with asbestos-related and environmental pollution claims outstanding for
business written in or before 1987:
DECEMBER 31,
------------
1997 1996
---- ----
Number of insureds with outstanding claims, beginning of year........................... 402 447
Additional insureds with claims during the year......................................... 168 207
Insureds with closed or settled claims during the year.................................. (225) (252)
---- ----
Number of insureds with outstanding claims, end of year................................. 345 402
---- ----
---- ----
The average net paid loss per insured for asbestos-related and
environmental pollution claims for business written in or before 1987 was
$44,200 and $50,200 for the years 1997 and 1996, respectively.
The Company continues to receive claims asserting injuries from hazardous
materials and alleged damages to cover various clean-up costs. Asbestos-related
and environmental pollution claims primarily affect the Company's general
liability, multiple peril and reinsurance lines of business. For business
written in or before 1987, coverage and claim settlement issues, such as the
determination that coverage exists and the definition of an occurrence, may
cause the actual loss development for asbestos-related and environmental
pollution claims to exhibit more variation than the remainder of the Company's
book of business.
Since 1987, the Company has generally excluded coverage for most types of
asbestos-related and environmental pollution claims from its general liability
policies, other than policies specifically intended to provide environmental
pollution and asbestos removal coverages. Policies written by the Company after
1987 ('post-1987 A&E business') which specifically intend to provide
environmental pollution coverages are written primarily on a claims-made basis
and those which specifically intend to provide asbestos removal coverages are
written on an occurrence basis, generally with liability limits of $1.1 million
(net of reinsurance), including defense costs.
The liability for loss reserves at December 31, 1997 also included $29.6
million ($20.2 million net of reinsurance recoverables) of loss reserves
pertaining to post-1987 A&E business. The following table presents information
relating to the net loss reserves pertaining to claims for post-1987 A&E
business for the years ended December 31, 1997, 1996 and 1995:
DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Net loss reserves, beginning of year................................. $16,554 $15,829 $14,929
Provision for policy claims and related expenses..................... 6,758 4,053 1,891
Payments for policy claims and related expenses...................... (3,119) (3,328) (991)
------- ------- -------
Net loss reserves, end of year....................................... $20,193 $16,554 $15,829
------- ------- -------
------- ------- -------
The December 31, 1997 net loss reserves pertaining to claims for post-1987
A&E business include $13.6 million of loss costs for claims incurred but not
reported, $2.3 million of loss costs for reported claims and $4.3 million of
related expenses.
The following table presents information related to the number of insureds
with claims outstanding for post-1987 A&E business:
DECEMBER 31,
--------------
1997 1996
---- ----
Number of insureds with outstanding claims, beginning of year.......................... 86 88
Additional insureds with claims during the year........................................ 155 44
Insureds with closed or settled claims during the year................................. (74) (46)
---- ----
Number of insureds with outstanding claims, end of year................................ 167 86
---- ----
---- ----
The average net paid loss per insured for claims for post-1987 A&E business
was $24,000 and $56,800 for the years 1997 and 1996, respectively.
Although the Company believes, in light of present facts and current legal
interpretations, that the overall loss reserves of the Reliance Insurance Group
are adequate to meet their obligations under existing policies, due to the
inherent uncertainty and complexity of the reserving process, the ultimate
liability may be more or less than such reserves.
12
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment
objectives of safety and liquidity, while seeking to maximize total return, can
be achieved by active portfolio management and intensive monitoring of
investments. Reference is made to 'Financial Review--Property and Casualty
Insurance Investment Portfolio' on page 27 of the Company's 1997 Annual Report
and Note 3 to the Consolidated Financial Statements.
At December 31, 1997, the Reliance Insurance Group's investment portfolio
was $3.8 billion (at cost) with 90% in fixed maturities and short-term
securities (including redeemable preferred stock and cash) and 10% in equity
securities, approximately 25% of which were convertible preferred stock. The
following table details the distribution of the Reliance Insurance Group's
investments at December 31, 1997:
AMORTIZED MARKET CARRYING
COST VALUE VALUE
---------- ---------- ----------
(IN THOUSANDS)
Fixed maturities available for sale:
Bonds and notes:
United States government and
government agencies and
authorities...................... $ 438,885 $ 443,032 $ 443,032
States, municipalities and
political subdivisions........... 130,922 139,473 139,473
Foreign-government................. 68,766 72,403 72,403
Foreign-other...................... 20,150 22,665 22,665
Public utilities................... 340,477 351,680 351,680
Convertibles and bonds with
warrants attached................ 60,736 69,450 69,450
All other corporate bonds and
notes............................ 730,416 755,206 755,206
Redeemable preferred stocks........... 424,611 463,764 463,764
---------- ---------- ----------
2,214,963 2,317,673 2,317,673
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and
political subdivisions........... 6,796 6,752 6,796
Foreign-government................. 129,571 137,544 129,571
Foreign-other...................... 17,218 18,432 17,218
Public utilities................... 249,202 257,434 249,202
All other corporate bonds and
notes............................ 141,620 147,211 141,620
Redeemable preferred stocks........... 91,712 96,371 91,712
---------- ---------- ----------
636,119 663,744 636,119
---------- ---------- ----------
Total fixed maturities........... 2,851,082 2,981,417 2,953,792
---------- ---------- ----------
Equity securities (1):
Common stocks:
Public utilities................... 11,142 13,214 13,214
Banks, trusts and insurance
companies........................ 19,435 38,067 38,067
Industrial and other............... 213,325 491,437 491,437
Nonredeemable preferred stocks........ 132,163 165,845 165,845
---------- ---------- ----------
376,065 708,563 708,563
---------- ---------- ----------
Short-term investments (2)............ 527,367 527,367 527,367
---------- ---------- ----------
Total investment portfolio....... $3,754,514 $4,217,347 $4,189,722
---------- ---------- ----------
---------- ---------- ----------
COST AND CARRYING
VALUE
-----------------
(IN THOUSANDS)
Mortgage Loans (3)............ $ 3,686
Investments in real estate.... 126,800
- ------------------
(1) Does not include investment in Zenith National Insurance Corp. which, as of
December 31, 1997, had a carrying value of $166.7 million and a market value
of $169.3 million. See 'Investee Companies.'
(2) Includes cash of $39.8 million.
(3) In the Consolidated Financial Statements, mortgage loans are included in
premiums and other receivables.
13
The Company seeks to maintain a diversified and balanced fixed maturity
portfolio representing a broad spectrum of industries and types of securities.
The Company holds virtually no investments in commercial real estate mortgages
and has no exposure to derivative securities (other than through its ownership
of any option, warrant or convertible security with an exercise or conversion
price related to an equity security). Purchases of fixed maturity securities are
researched individually based on in-depth analysis and objective predetermined
investment criteria and are managed to achieve a proper balance of safety,
liquidity and investment yields. The Reliance Insurance Group primarily invests
in investment grade securities (those rated 'BBB' or better by S&P), and, to a
lesser extent, non-investment grade and non-rated securities.
At December 31, 1997, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have
been rated by S&P in the following categories or are non-rated were as follows:
PERCENT
CARRYING MARKET OF MARKET
VALUE VALUE VALUE
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
AAA to A...................... $1,641,451 $1,659,480 56%
BBB........................... 591,839 601,386 20
---------- ---------- ---
Total investment grade... 2,233,290 2,260,866 76
---------- ---------- ---
BB to B....................... 527,941 527,992 18
CCC to D...................... 11,701 11,701 --
Non-rated..................... 180,860 180,858 6
---------- ---------- ---
Total.................... $2,953,792 $2,981,417 100%
---------- ---------- ---
---------- ---------- ---
Substantially all of the non-investment grade and non-rated fixed
maturities are classified as 'available for sale' and, accordingly, are carried
at quoted market value. All publicly traded investment grade securities are
priced using the Merrill Lynch Matrix Pricing model, which model is one of the
standard methods of pricing such securities in the industry. All publicly traded
non-investment grade securities, except as indicated below, are priced from
broker-dealers who make markets in these and other similar securities. For fixed
maturities not publicly traded, prices are estimated based on values obtained
from independent third parties or quoted market prices of comparable
instruments. Upon sale, such prices may not be realized when the size of a
particular investment in an issue is significant in relation to the total size
of such issue. Non-investment grade securities that are thinly traded are priced
using internally developed calculations. Such securities represent less than 1%
of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after an in-depth analysis of individual
company's fundamentals by the Reliance Insurance Group's staff of investment
professionals. They seek to identify equities of companies with strong growth
prospects and equities that appear to be undervalued relative to the issuer's
business fundamentals, such as earnings, cash flows, balance sheet and future
prospects. Subsequent to purchase, the business fundamentals of each equity
investment are carefully monitored.
As of February 27, 1998, the Reliance Insurance Group owned 5,367,951
shares of common stock of Symbol Technologies, Inc. ('Symbol'), representing
13.7% of the then outstanding common stock of Symbol. Symbol is the nation's
largest manufacturer of bar code-based data capture systems. As of February 27,
1998, the market value of the Reliance Insurance Group's investment in Symbol
was $274,101,000 (based upon the closing price of Symbol common stock on such
date as reported by the NYSE), with a cost basis of $27,252,000. Certain
executive officers of the Company serve, at the Company's request, as directors
of Symbol.
At December 31, 1997, the Company's real estate operations had holdings
with a carrying value of $126.8 million, which includes office buildings and
other commercial properties with an aggregate carrying value of $91.8 million,
and undeveloped land with a carrying value of $35.0 million.
14
The following table presents the investment results of the Reliance
Insurance Group's investment portfolio (including Commonwealth/Transnation's
investment portfolio) for each of the years ended December 31, 1997, 1996 and
1995:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Fixed Maturities:
Average investments (1)................. $3,764,220 $3,625,144 $3,394,988
Net investment income................... 267,895 260,275 243,268
Realized gains (losses)................. 476 (5,686) 10,521
Increase (decrease) in unrealized
gains................................. 103,992 (68,739) 329,457
Average annual yield:
Net investment income.............. 7.12% 7.18% 7.17%
Realized gains (losses)............ 0.01 (0.15) 0.31
Increase (decrease) in unrealized
gains............................ 2.76 (1.90) 9.70
---------- ---------- ----------
Return on fixed maturities.............. 9.89% 5.13% 17.18%
---------- ---------- ----------
---------- ---------- ----------
Equity Securities (2):
Average investments (1)................. $ 727,287 $ 703,121 $ 600,206
Net investment income................... 11,017 12,425 19,317
Realized gains.......................... 55,666 58,296 23,811
Increase in unrealized gains............ 51,945 15,939 182,507
Average annual yield:
Net investment income.............. 1.51% 1.77% 3.22%
Realized gains..................... 7.66 8.29 3.97
Increase in unrealized gains....... 7.14 2.27 30.40
---------- ---------- ----------
Return on equity securities............. 16.31% 12.33% 37.59%
---------- ---------- ----------
---------- ---------- ----------
Total weighted average return on fixed
maturities and equity securities
(3)................................... 10.93% 6.30% 20.25%
---------- ---------- ----------
---------- ---------- ----------
- ------------------
(1) The average is computed by dividing the total market value of investments at
the beginning of the period plus the individual quarter-end balances by five
for the years ended December 31, 1997, 1996 and 1995.
(2) Does not include investment in Zenith National Insurance Corp. See 'Investee
Companies.'
(3) The impact on the overall rate of return of a one percent increase or
decrease in the December 31, 1997 fixed maturity portfolio market value
would be approximately 0.74%.
The carrying value and market value at December 31, 1997 of fixed
maturities for which interest is payable on a deferred basis was $115.1 million.
15
INVESTEE COMPANIES
As of February 27, 1998, the Reliance Insurance Group owned 6,574,445
shares of common stock of Zenith National Insurance Corp. ('Zenith'),
representing 38.9% of the outstanding common stock of Zenith, a California-based
insurance company with significant workers' compensation and standard commercial
and personal lines business. As of February 27, 1998 the market value of the
Reliance Insurance Group's investment in Zenith was $179,565,000 (based upon the
closing price of Zenith common stock on such date as reported by the NYSE), with
a carrying value of $166,673,000. Certain executive officers of the Company
serve, at the Company's request, as directors of Zenith. The Company's
investment in Zenith is accounted for by the equity method. See Note 4 to the
Consolidated Financial Statements.
As of February 27, 1998, the date of the completion of the Title Sale, the
Reliance Insurance Group owned 4,039,473 shares of common stock of LandAmerica,
representing 26.8% of the outstanding common stock of LandAmerica, a
Viginia-based title insurance company which is the largest title insurer in the
United States based on the combined revenues of LandAmerica and
Commonwealth/Transnation Title, and owned 2,200,000 shares of the 7% preferred
stock of LandAmerica having an aggregate stated value of $110,000,000 and
initially convertible into 4,824,561 shares of LandAmerica common stock. As of
February 27, 1998 the market value and carrying value of the Reliance Insurance
Group's investment in LandAmerica was $395,512,000 (based upon the average price
of LandAmerica common stock on such date as reported by the NYSE and upon an
investment banker's valuation of the preferred stock). Certain executive
officers of the Company serve, at the Company's request, as directors of
LandAmerica. The Company's investment in LandAmerica for periods subsequent to
the sale of Commonwealth/Transnation Title will be accounted for by the equity
method. See Note 2 to the Consolidated Financial Statements.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These include the licensing of companies
and agents to transact business, the imposition of monetary penalties for rules
violations, varying degrees of control over premium rates, the forms of policies
offered to customers, financial statements, periodic reporting, permissible
investments and adherence to financial standards relating to surplus, dividends
and other criteria of solvency intended to assure the satisfaction of
obligations to policyholders. Other legislation obliges the Reliance Insurance
Group to offer policies or assume risks in various markets which it would not
seek if it were acting solely in its own interest. While such regulation and
legislation is sometimes burdensome, inasmuch as all insurance companies
similarly situated are subject to such controls, the Company does not believe
that the competitive position of the Reliance Insurance Group is affected
adversely.
State holding company acts also regulate changes of control in insurance
holding companies and transactions and dividends between an insurance company
and its parent or affiliates. Although the specific provisions vary, the holding
company acts generally prohibit a person from acquiring a controlling interest
in an insurer incorporated in the state promulgating the act or in any other
controlling person of such insurer unless the insurance authority has approved
the proposed acquisition in accordance with the applicable regulations. In many
states, including Pennsylvania, where Reliance Insurance Company is domiciled,
'control' is presumed to exist if 10% or more of the voting securities of the
insurer are owned or controlled by a party, although the insurance authority may
find that 'control' in fact does or does not exist where a person owns or
controls either a lesser or a greater amount of securities. The holding company
acts also impose standards on certain transactions with related companies, which
generally include, among other requirements, that all transactions be fair and
reasonable and that certain types of transactions receive prior regulatory
approval either in all instances or when certain regulatory thresholds have been
exceeded.
The Insurance Law of Pennsylvania limits the maximum amount of dividends
which may be paid without approval by the Pennsylvania Insurance Department.
Under such law, Reliance Insurance Company
16
may pay dividends during the year equal to the greater of (a) 10% of the
preceding year-end policyholders' surplus or (b) the preceding year's statutory
net income, but in no event to exceed the amount of unassigned funds, which are
defined as 'undistributed, accumulated surplus including net income and
unrealized gains since the organization of the insurer.' In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the insurance company's reinsurance and the adequacy of the
insurance 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. 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 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.
The total amount of common stock dividends paid by Reliance Insurance
Company during 1997, 1996 and 1995 was $114.6 million, $111.5 million and $111.5
million, respectively. During 1998, $130.1 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 operating cash
needs. On March 5, 1998, Reliance Insurance Company obtained the approval of the
Pennsylvania Insurance Department to pay an extraordinary dividend in the amount
of an additional $135.0 million, representing a portion of the gain from the
sale of Commonwealth/Transnation Title. The Company plans to use funds provided
by the dividend to purchase approximately $125 million of its outstanding debt.
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 National Association of Insurance Commissioners (the 'NAIC') 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.
Reliance Insurance Company had values which in 1997 fell outside of the
usual range for two NAIC financial ratio ranges. Both financial ratio ranges are
intended to permit the NAIC to monitor insurance companies' performance with
respect to such ranges. With respect to the first test, Liabilities to Liquid
Assets, investments in affiliates are excluded from the definition of liquid
assets. Reliance Insurance Company is the parent company of all of the property
and casualty companies of the Reliance Insurance Group and therefore the results
for this test consistently fall outside the usual range. The Company believes
that it has sufficient marketable assets on hand to make timely payment of
claims and to meet other operating requirements. With respect to the second
test, Estimated Current Reserve Deficiency to Surplus, Reliance Insurance
Company's growth in earned premiums in 1997, in conjunction with a change in the
mix
17
of business to more short-tailed lines, caused test results to fall outside of
the usual range. The Company believes that its value for this range is not
reflective of the adequacy of Reliance Insurance Company's current reserves.
From time to time, states have adopted or considered adopting legislation
or regulations which could adversely affect the manner in which the Company sets
rates for policies of insurance, particularly as they relate to personal lines.
In 1988, California approved an initiative statute designated as Proposition
103. Proposition 103 contained, among others, provisions relating to the
rollback of rates for property and casualty insurance policies issued or renewed
between November 8, 1988 and November 7, 1989 (the 'Rollback Year') to levels
which were at least 20% less than rates for the same coverage which were in
effect on November 8, 1987. On January 31, 1996, the Company reached a
settlement with the California Department of Insurance resolving the Company's
total liability under Proposition 103 with respect to the Rollback Year. No
assurance can be given as to what effect the adoption of similar legislation or
regulations in the future would have on the ability of the Company to raise its
rates.
COMPETITION
The markets in which the Company's businesses compete are highly
competitive. The property and casualty insurance business is fragmented and no
single company dominates any of the markets in which the Company operates. The
Reliance Insurance Group competes with individual companies and with groups of
affiliated companies with greater financial resources, larger sales forces and
more widespread agency and broker relationships. Competition in the property and
casualty insurance industry is based primarily on price, product design and
service. In addition, because the Reliance Insurance Group sells policies
primarily through agents and insurance brokers who are not obligated to choose
the policies of the Reliance Insurance Group over those of another insurer, the
Reliance Insurance Group must compete for agents and brokers and for the
business they control. Such competition is based upon price, product design,
policyholder service, commissions and service to agents and brokers.
RCG Information Technology competes with other national mid-size
information technology services companies, as well as smaller computer
professional supplemental staffing firms. Competition in the information
technology consulting business is based primarily on price, service, quality of
the solutions provided and the availability of qualified computer professionals.
SALE OF SUBSIDIARY
On December 31, 1997, the Company sold all of the issued and outstanding
common stock of its subsidiary, Prometheus Funding Corp. ('Prometheus'),
formerly known as Frank B. Hall & Co. Inc. ('Hall'), an insurance broker.
Prometheus had previously sold substantially all of its operating assets and
insurance brokerage, employee benefits consulting and related services
businesses.
ITEM 2. PROPERTIES
The Company and its consolidated subsidiaries own and lease offices in
various locations primarily in the United States. None of these properties is
material to the Company's business. At December 31, 1997, the Company and its
consolidated subsidiaries (excluding Commonwealth/Transnation) employed
approximately 5,850 persons in approximately 150 offices.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation arising
in the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
action pending 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.
In addition, the Company is subject to the litigation set forth in Note 15
to the Consolidated Financial Statements.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age and position of each of the executive
officers of the Company:
NAME AND AGE POSITION
- ------------------------------- -----------------------------------------------
Saul P. Steinberg (58)......... Chairman of the Board and Chief Executive
Officer
Robert M. Steinberg (55)....... President, Chief Operating Officer and Director
George E. Bello (62)........... Executive Vice President, Controller and
Director
Lowell C. Freiberg (58)........ Senior Vice President, Chief Financial Officer
and Director
Henry A. Lambert (62).......... Senior Vice President--Real Estate Investments
and Operations
Dennis J. O'Leary (50)......... Senior Vice President--Taxes
Philip S. Sherman (49)......... Senior Vice President--Group Controller
Bruce L. Sokoloff (49)......... Senior Vice President--Administration
Howard E. Steinberg (53)....... Senior Vice President, General Counsel and
Corporate Secretary
James E. Yacobucci (46)........ Senior Vice President--Investments and Director
The association between the Company and each of its executive officers is
described below.
Saul P. Steinberg founded and has been the Chief Executive Officer and a
Director of the Company and predecessors of the Company since 1961. Mr.
Steinberg is a Director of Symbol Technologies, Inc. and Zenith National
Insurance Corp. He is Chairman of the Executive Committee and the Regular
Compensation Committee of the Board of Directors. He is the brother of Robert M.
Steinberg and the brother-in-law of Bruce L. Sokoloff.
Robert M. Steinberg became a Director of the Company in 1981 and President
and Chief Operating Officer in 1982. He has held various positions with
predecessors of the Company since 1965. In October 1984, Mr. Steinberg was
elected Chairman of the Board and Chief Executive Officer of Reliance Insurance
Company. He is a Director of LandAmerica Financial Group, Inc. and Zenith
National Insurance Corp. Mr. Steinberg is a member of the Executive Committee
and the Regular Compensation Committee of the Board of Directors. Mr. Steinberg
is the brother of Saul P. Steinberg and the brother-in-law of Bruce L. Sokoloff.
George E. Bello became Executive Vice President and Controller and a
Director of the Company in 1982. He has held various positions with predecessors
of the Company since 1968. He is a Director of Horizon Health Corporation,
LandAmerica Financial Group, Inc., United Dental Care, Inc. and Zenith National
Insurance Corp. Mr. Bello is a member of the Finance Committee of the Board of
Directors.
Lowell C. Freiberg became Senior Vice President and a Director of the
Company in 1982 and Chief Financial Officer in 1985. He also served as Treasurer
of the Company from 1982 until March 1994. Mr. Freiberg has held various
positions with predecessors of the Company since 1969. He is a Director of
19
LandAmerica Financial Group, Inc. and Symbol Technologies, Inc. Mr. Freiberg is
a member of the Finance Committee of the Board of Directors.
Henry A. Lambert was elected Senior Vice President--Real Estate Investments
and Operations of the Company in 1982. He has held various positions with
predecessors of the Company since 1977. He is President and Chief Executive
Officer of Reliance Development Group, Inc., the real estate management
subsidiary of the Company.
Dennis J. O'Leary joined the Company in 1985 as Vice President--Director of
Taxes. Prior thereto, he was a partner at the accounting firm of Deloitte &
Touche LLP (formerly Touche Ross & Co.) since 1980 and was associated with the
firm since 1975. In 1987 he was elected Senior Vice President--Taxes.
Philip S. Sherman was elected Vice President--Group Controller of the
Company in l984 and in 1987 he was elected Senior Vice President--Group
Controller. He has held various positions with predecessors of the Company since
l980.
Bruce L. Sokoloff was elected Senior Vice President--Administration of the
Company in 1982. He has held various positions with predecessors of the Company
since 1973. He is a Director of Individual Investor Group, Inc. Mr. Sokoloff is
the brother-in-law of Messrs. Saul P. Steinberg and Robert M. Steinberg.
Howard E. Steinberg, Esq. joined the Company in March 1983, as Senior Vice
President, General Counsel and Corporate Secretary. Prior thereto, he was a
partner in the law firm of Dewey, Ballantine, Bushby, Palmer & Wood. Mr.
Steinberg also serves as the Chairman of the New York State Thruway Authority,
an unpaid position to which he was appointed in January 1996.
James E. Yacobucci became a Director of the Company and Senior Vice
President--Investments of Reliance Insurance Company in May 1989. He became
Senior Vice President--Investments of the Company in December 1990.
Officers are not elected for a fixed term of office but serve at the
discretion of the Board of Directors. Certain executive officers have employment
agreements with the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the information in 'Market and Dividend Information for Common Stock'
on page 60 of the Reliance Group Holdings 1997 Annual Report, which information
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Selected Financial Data' on pages 21 and 22 of the Reliance Group Holdings 1997
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the information in 'Reliance Group Holdings, Inc. & Subsidiaries
Financial Review' on pages 24 through 30 of the Reliance Group Holdings 1997
Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries,
included on pages 31 through 57 of the Reliance Group Holdings 1997 Annual
Report, which information is incorporated herein by reference, are listed in
Item 14 below.
20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included in
Part I of this report under the caption 'Executive Officers of the Registrant.'
Information regarding the directors of the Company is incorporated herein
by reference from its Proxy Statement for the Annual Meeting of Stockholders to
be held May 14, 1998, under the caption 'Proposal 1--Election of Directors.'
ITEM 11. EXECUTIVE COMPENSATION.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 14, 1998, under the caption 'Executive
Compensation,' which information (other than the information under the captions
'Executive Compensation--Report of Compensation Committees of the Board' and
'Executive Compensation--Performance Graph') is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 14, 1998, under the caption 'Security Ownership
of Certain Beneficial Owners and Management,' which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held May 14, 1998, under the captions 'Executive
Compensation--Compensation Committee Interlocks and Insider Participation' and
'Related Party Transactions,' which information is incorporated herein by
reference.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Group Holdings, Inc. and
Subsidiaries, which appear on pages 31 through 57 of the Reliance Group Holdings
1997 Annual Report, are incorporated herein by reference.
PAGE REFERENCE
-------------------
1997
ANNUAL
FORM 10-K REPORT
--------- ------
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................ A-1 58
Consolidated Financial Statements at December 31, 1997
and 1996 and for the three years ended December 31,
1997:
Statement of Income................................ 31
Balance Sheet...................................... 32
Statement of Changes in Shareholders' Equity....... 33
Statement of Cash Flows............................ 34
Notes to Financial Statements (1-18)............... 35-57
2. FINANCIAL STATEMENT SCHEDULES.
I -- Summary of Investments of Insurance Subsidiaries --
Other Than Investments in Related Parties.......... A-2
II -- Condensed Financial Information of the Registrant at
December 31, 1997 and 1996 and for the three years
ended December 31, 1997:
Statement of Income................................. A-3
Balance Sheet....................................... A-4
Statement of Cash Flows............................. A-5
III -- Supplementary Insurance Information................ A-6
IV -- Reinsurance......................................... A-7
VI -- Supplemental Information Concerning Property and
Casualty Insurance Operations...................... A-8
Pursuant to Rule 1-02(w) of Regulation S-X, Reliance Insurance Group's
investment in Zenith National Insurance Corp. met the definition of a
'significant subsidiary' in 1996. Zenith National Insurance Corp. files
financial statements with the Securities and Exchange Commission which should be
referred to for additional information.
3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended (incorporated by
reference to Exhibit 3.3 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1991).
22
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and the Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and
Robert M. Steinberg as having employment agreements identical in all
respects to Exhibit 10.1 other than as specified in such schedule)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Saul P. Steinberg, dated as of
February 15, 1996 (and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as
having amendments to their employment agreements identical in all
respects to Exhibit 10.2 other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing Robert M. Steinberg as having an employment agreement
identical in all respects to Exhibit 10.3) (incorporated by
reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Bruce L. Sokoloff, dated as of
May 15, 1996.
+10.6 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1990).
+10.7 Amended and Restated 1994 Stock Option Plan for Non-Employee
Directors.
+10.8 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
+10.9 The Reliance Group Holdings, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
+10.10 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
23
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
+10.11 The Reliance Group Holdings, Inc. Key Employee Share Option Plan.
+10.12 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated
by reference to Exhibit 10.3 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.13 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.15 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1995).
+10.14 The 1996 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.19 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.15 The Executive Bonus Plan for James E. Yacobucci, Senior Vice
President-Investments, of Reliance Group Holdings (incorporated by
reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.16 Reliance National Risk Specialists 1988 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.17 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.18 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.19 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.20 Reliance National Risk Specialists 1995 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.25 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.21 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995)
(incorporated by reference to Exhibit 10.26 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.22 Reliance National Risk Specialists 1996 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.27 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.23 Reliance National Risk Specialists 1997 Key Management Incentive
Plan.
+10.24 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31,
1988).
10.25 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
- ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
24
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
10.26 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.27 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.28 Amendment, dated November 2, 1992, to Exhibit 10.25 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.29 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.)(incorporated herein
by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report
on Form 10-Q for the quarter ended June 30, 1989).
10.30 Amendment No. 1, dated April 21, 1997, to Exhibit 10.29
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1997).
10.31 Stock Purchase Agreement, dated as of December 31, 1997, among Bear
Stearns Acquisition Corp. XVI, Reliance National (U.K.) Ltd. and
Reliance Insurance Company.
10.32 Amended and Restated Stock Purchase Agreement, dated as of December
11, 1997 by and among Reliance Insurance Company, LandAmerica and
Lawyers Title Insurance Corporation (incorporated by reference to
Appendix A to LandAmerica's definitive Proxy Statement filed with
the Securities and Exchange Commission on January 29, 1998).
10.33 Voting and Standstill Agreement, dated as of February 27, 1998, by
and among LandAmerica, Reliance Group Holdings and Reliance
Insurance Company (incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year ended December
31, 1997).
10.34 Registration Rights Agreement, dated as of February 27, 1998, by and
among LandAmerica and Reliance Insurance Company (incorporated by
reference to Exhibit 10.27 to LandAmerica's Annual Report on Form
10-K for the year ended December 31, 1997).
10.35 Articles of Amendment to LandAmerica's Articles of Incorporation
(incorporated by reference to Exhibit 4.2 to LandAmerica's Form 8-A
filed with the Securities and Exchange Commission on February 27,
1998).
13.1 Reliance Group Holdings 1997 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1997.
- ------------------
** To be filed by Amendment.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three months ended December
31, 1997.
25
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF
MARCH, 1998.
RELIANCE GROUP HOLDINGS, INC.
BY: /s/ SAUL P. STEINBERG
-----------------------------
SAUL P. STEINBERG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- --------------
/s/ SAUL P. STEINBERG Chairman of the Board, March 30, 1998
- ------------------------
SAUL P. STEINBERG Principal Executive Officer
and Director
/s/ GEORGE E. BELLO Principal Accounting March 30, 1998
- ------------------------
GEORGE E. BELLO Officer and Director
/s/ LOWELL C. FREIBERG Principal Financial March 30, 1998
- ------------------------
LOWELL C. FREIBERG Officer and Director
/s/ GEORGE R. BAKER Director March 30, 1998
- ------------------------
GEORGE R. BAKER
/s/ DENNIS A. BUSTI Director March 30, 1998
- ------------------------
DENNIS A. BUSTI
/s/ THOMAS P. GERRITY Director March 30, 1998
- ------------------------
THOMAS P. GERRITY
26
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------------- --------------
/s/ JEWELL J. MCCABE Director March 30, 1998
- ------------------------
JEWELL J. MCCABE
/s/ IRVING SCHNEIDER Director March 30, 1998
- ------------------------
IRVING SCHNEIDER
/s/ BERNARD L. SCHWARTZ Director March 30, 1998
- ------------------------
BERNARD L. SCHWARTZ
/s/ RICHARD E. SNYDER Director March 30, 1998
- ------------------------
RICHARD E. SNYDER
/s/ ROBERT M. STEINBERG Director March 30, 1998
- ------------------------
ROBERT M. STEINBERG
/s/ JAMES E. YACOBUCCI Director March 30, 1998
- ------------------------
JAMES E. YACOBUCCI
27
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the consolidated financial statements of Reliance Group
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 13, 1998, except as to notes 1 and 2, as to which
the date is February 27, 1998 and note 10, as to which the date is March 5,
1998, which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the adoption of Emerging Issues Task Force Issue No.
97-13, 'Accounting for Costs Incurred in Connection with a Consulting Contract
or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation'; such consolidated financial statements
and report are included in the 1997 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of Reliance Group Holdings, Inc. listed in Item 14. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
February 13, 1998, except as to notes 1
and 2 of the consolidated financial statements,
as to which the date is February 27, 1998,
and note 10 of the consolidated financial statements,
as to which the date is March 5, 1998
A-1
SCHEDULE I
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OF INSURANCE SUBSIDIARIES -- OTHER THAN INVESTMENTS IN
RELATED PARTIES
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- -----------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH
SHOWN IN
THE
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Fixed maturities available for sale:
Bonds and notes:
United States government and government agencies
and authorities..................................................... $ 438,885 $ 443,032 $ 443,032
States, municipalities and political subdivisions..................... 130,922 139,473 139,473
Foreign -- government................................................. 68,766 72,403 72,403
Foreign -- other...................................................... 20,150 22,665 22,665
Public utilities...................................................... 340,477 351,680 351,680
Convertibles and bonds with warrants attached......................... 60,736 69,450 69,450
All other corporate bonds and notes................................... 730,416 755,206 755,206
Redeemable preferred stocks.............................................. 424,611 463,764 463,764
---------- ---------- ----------
2,214,963 2,317,673 2,317,673
---------- ---------- ----------
Fixed maturities held for investment:
Bonds and notes:
States, municipalities and political subdivisions..................... 6,796 6,752 6,796
Foreign -- government................................................. 129,571 137,544 129,571
Foreign -- other...................................................... 17,218 18,432 17,218
Public utilities...................................................... 249,202 257,434 249,202
All other corporate bonds and notes................................... 141,620 147,211 141,620
Redeemable preferred stocks.............................................. 91,712 96,371 91,712
---------- ---------- ----------
636,119 663,744 636,119
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities...................................................... 11,142 13,214 13,214
Banks, trusts and insurance companies................................. 19,435 38,067 38,067
Industrial and other.................................................. 213,325 491,437 491,437
Nonredeemable preferred stocks........................................... 132,163 165,845 165,845
---------- ---------- ----------
376,065 708,563 708,563
---------- ---------- ----------
Short-term investments..................................................... 487,614 487,614 487,614
---------- ---------- ----------
Cash....................................................................... 39,753 39,753 39,753
---------- ---------- ----------
$4,217,347
----------
----------
Mortgage loans(1).......................................................... 3,686 3,686
Investments in real estate(2).............................................. 114,223 114,223
---------- ----------
$3,872,423 $4,307,631
---------- ----------
---------- ----------
(1) In the consolidated financial statements, mortgage loans are included in
premiums and other receivables.
(2) Excludes investments in real estate held by non-insurance subsidiaries with
a cost and carrying value of $12,599,000.
A-2
SCHEDULE II
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------
(In thousands)
REVENUES:
Dividends from subsidiaries........... $315,272 $110,000 $110,000
Interest (including $4,598, $6,415 and
$5,543 from subsidiaries)........... 5,214 7,246 6,153
---------- ---------- ----------
320,486 117,246 116,153
---------- ---------- ----------
EXPENSES:
Interest (including $8,032, $21,212
and $20,408 to subsidiaries)........ 76,032 89,220 88,391
General and administrative............ 42,268 36,081 35,600
---------- ---------- ----------
118,300 125,301 123,991
---------- ---------- ----------
202,186 (8,055) (7,838)
Income tax benefit.................... 40,219 42,488 49,699
---------- ---------- ----------
INCOME BEFORE EQUITY IN SUBSIDIARIES
AND INVESTEE COMPANY................ 242,405 34,433 41,861
Equity in subsidiaries (net income
less dividends received)............ (12,907) 4,866 46,263
Equity in investee company............ 7,675 8,908 7,792
Loss on sale of discontinued
operation........................... (1,312) -- --
Loss on disposal of discontinued
operations of investee company...... -- -- (4,497)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.............................. 235,861 48,207 91,419
Extraordinary item--early
extinguishment of subsidiary debt... -- -- (3,363)
Cumulative effect of change in
accounting for subsidiaries' process
reengineering costs................. (6,442) -- --
---------- ---------- ----------
NET INCOME............................ $ 229,419 $ 48,207 $88,056
---------- ---------- ----------
---------- ---------- ----------
A-3
SCHEDULE II
ITEM 14(a)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEET
ASSETS
DECEMBER 31 1997 1996
- ----------------------------------------------------------------
(In thousands, except per share
amount)
Cash.................................. $ 147 $ 184
Investments in subsidiaries........... 1,618,853 1,576,719
Due from subsidiaries................. 80,849 101,529
Excess of cost over fair value of net
assets acquired, less accumulated
amortization........................ 26,873 27,982
Other assets.......................... 41,353 30,719
---------- ----------
$1,768,075 $1,737,133
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------
Accounts payable and accrued
expenses............................ $ 46,772 $ 46,981
Federal income taxes, including
deferred taxes...................... 94,346 87,752
Debentures............................ 650,000 650,000
Due to subsidiaries................... 14,442 275,720
---------- ----------
805,560 1,060,453
---------- ----------
Contingencies and commitments
Shareholders' equity:
Common stock, par value $.10 per
share, 225,000 shares authorized,
114,857 and 114,282 shares issued
and outstanding.................. 11,486 11,428
Additional paid-in capital.......... 542,049 540,465
Retained earnings (deficit)
(including undistributed net income
of subsidiaries of $376,752 and
$388,426)........................ 142,701 (50,012)
Net unrealized gain on investments
of subsidiaries.................. 292,081 198,786
Net unrealized loss on foreign
currency translation of
subsidiaries..................... (25,802) (23,987)
---------- ----------
962,515 676,680
---------- ----------
$1,768,075 $1,737,133
---------- ----------
---------- ----------
A-4
SCHEDULE II
ITEM 14(a)2
RELIANCE GROUP HOLDINGS, INC.
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 229,419 $ 48,207 $ 88,056
Equity in undistributed net income of
subsidiaries and investee company... (190,598) (13,774) (46,195)
Other--net............................ 9,982 (5,354) 4,583
---------- ---------- ----------
48,803 29,079 46,444
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other--net............................ (8,386) (555) (290)
---------- ---------- ----------
(8,386) (555) (290)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amounts due
to/from subsidiaries--net........... (6,199) 2,160 (11,325)
Issuance of common stock.............. 2,451 5,838 1,196
Dividends............................. (36,706) (36,525) (36,242)
---------- ---------- ----------
(40,454) (28,527) (46,371)
---------- ---------- ----------
Decrease in cash...................... (37) (3) (217)
Cash, beginning of year............... 184 187 404
---------- ---------- ----------
Cash, end of year..................... $ 147 $ 184 $ 187
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1997, investments in subsidiaries and due to subsidiaries were reduced by
$202,272,000 to reflect a non-cash dividend from subsidiaries. Also in 1997,
investments in subsidiaries, due to subsidiaries and due from subsidiaries were
reduced to reflect the elimination of intercompany balances of a dormant
subsidiary.
In 1995, investments in subsidiaries and due to susidiaries were reduced by
$41,167,000 to reflect the elimination of intercompany balances of certain
dormant subsidiaries.
A-5
SCHEDULE III
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
- -------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED UNPAID POLICY
POLICY CLAIMS AND NET CLAIMS AND
ACQUISITION RELATED UNEARNED PREMIUMS INVESTMENT SETTLEMENT
SEGMENT COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
YEAR ENDED DECEMBER 31, 1997:
Property and casualty.......... $ 248,572 $6,669,508 $1,722,258 $1,947,016 $263,981 $1,263,086
Title.......................... -- 272,792 -- 863,746 30,990 41,473
----------- ---------- ---------- ---------- ---------- ----------
$ 248,572 $6,942,300 $1,722,258 $2,810,762 $294,971 $1,304,559
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1996:
Property and casualty.......... $ 215,438 $6,136,420 $1,468,299 $1,800,854 $257,133 $1,350,337
Title.......................... -- 264,838 -- 780,157 30,455 61,116
----------- ---------- ---------- ---------- ---------- ----------
$ 215,438 $6,401,258 $1,468,299 $2,581,011 $287,588 $1,411,453
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1995:
Property and casualty.......... $ 194,648 $5,764,352 $1,299,465 $1,774,591 $247,343 $1,201,959
Title.......................... -- 240,777 -- 671,947 27,946 58,486
----------- ---------- ---------- ---------- ---------- ----------
$ 194,648 $6,005,129 $1,299,465 $2,446,538 $275,289 $1,260,445
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
- --------------------------------------------------------------------------
COLUMN A COLUMN H COLUMN I COLUMN J
- ---------------------------------------------------------------------------
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION INSURANCE PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
- ---------------------------------------------------------------------------
(In thousands)
YEAR ENDED DECEMBER 31, 1997:
Property and casualty.......... $487,432 $ 219,698 $2,065,847
----------
----------
Title.......................... -- 789,853
------------ ----------
$487,432 $1,009,551
------------ ----------
------------ ----------
Year Ended December 31, 1996:
Property and casualty.......... $414,636 $ 201,485 $1,846,199
----------
----------
Title.......................... -- 711,185
------------ ----------
$414,636 $ 912,670
------------ ----------
------------ ----------
Year Ended December 31, 1995:
Property and casualty.......... $411,979 $ 197,112 $1,779,040
----------
----------
Title.......................... -- 629,051
------------ ----------
$411,979 $ 826,163
------------ ----------
------------ ----------
A-6
SCHEDULE IV
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
- ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997:
Premiums:
Property and casualty............................. $3,232,403 $1,733,311 $447,924 $1,947,016 23.01%
Title............................................. 862,499 1,338 2,585 863,746 0.30
---------- ---------- -------- ----------
$4,094,902 $1,734,649 $450,509 $2,810,762 16.03
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Year Ended December 31, 1996:
Premiums:
Property and casualty............................. $2,894,096 $1,449,731 $356,489 $1,800,854 19.80
Title............................................. 779,318 1,406 2,245 780,157 0.29
---------- ---------- -------- ----------
$3,673,414 $1,451,137 $358,734 $2,581,011 13.90
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Year Ended December 31, 1995:
Premiums:
Property and casualty............................. $2,707,978 $1,284,023 $350,636 $1,774,591 19.76
Title............................................. 671,222 1,649 2,374 671,947 .35
---------- ---------- -------- ----------
$3,379,200 $1,285,672 $353,010 $2,446,538 14.43
---------- ---------- -------- ----------
---------- ---------- -------- ----------
A-7
SCHEDULE VI
ITEM 14(A)2
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- ----------------------------------------------------------------------------------------------------------------------------
CLAIMS AND
UNPAID SETTLEMENT EXPENSES
DEFERRED CLAIMS (REDUNDANCY)
AFFILIATION POLICY AND DISCOUNT NET INCURRED RELATED TO
WITH ACQUISITION RELATED DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C(A) PREMIUMS PREMIUMS INCOME YEAR YEARS
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1997.... $ 248,572 $6,669,508 $216,704 $1,722,258 $1,947,016 $263,981 $1,299,066 ($35,980)
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
Year Ended
December 31, 1996.... $ 215,438 $6,136,420 $229,963 $1,468,299 $1,800,854 $257,133 $1,211,672 $138,665
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
Year Ended
December 31, 1995.... $ 194,648 $5,764,352 $235,664 $1,299,465 $1,774,591 $247,343 $1,163,447 $38,512
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
----------- ---------- ------------ ---------- ---------- ---------- ---------- --------
- ------------------------------------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
- ------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED CLAIMS
AFFILIATION POLICY AND
WITH ACQUISITION SETTLEMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- -------------------------------------------------------------
(In thousands)
Consolidated
subsidiaries:
YEAR ENDED
DECEMBER 31, 1997.... $487,432 $1,330,898 $2,065,847
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1996.... $414,636 $1,225,834 $1,846,199
------------ ---------- ----------
------------ ---------- ----------
Year Ended
December 31, 1995.... $411,979 $1,140,537 $1,779,040
------------ ---------- ----------
------------ ---------- ----------
(a) Liabilities for unpaid claims and related expenses for short-duration
contracts which are expected to have fixed, periodic payment patterns are
discounted to present values using statutory annual rates ranging from
3 1/2% to 6%. Discount shown relates to net liabilities for unpaid claims
and related expenses for short-duration contracts which are expected to have
fixed, periodic payment patterns.
A-8
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1997 1-8278
RELIANCE GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
3.1 Reliance Group Holdings' Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3(a) to Registration Statement
No. 2-77043).
3.2 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on July 22, 1986 (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-7493).
3.3 Reliance Group Holdings' By-Laws, as amended (incorporated by
reference to Exhibit 3.3 to Reliance Group Holdings' Annual Report
on Form 10-K for the year ended December 31, 1991).
3.4 Amendment to Exhibit 3.1, as filed with the Secretary of State of
the State of Delaware on May 27, 1993 (incorporated by reference to
Exhibit 4.5 to Registration Statement No. 33-67396).
*4.
+10.1 Employment Agreement between Reliance Group Holdings and Saul P.
Steinberg, dated as of February 15, 1996 (and the Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing George E. Bello, Lowell C. Freiberg, Howard E. Steinberg and
Robert M. Steinberg as having employment agreements identical in all
respects to Exhibit 10.1 other than as specified in such schedule)
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
+10.2 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Saul P. Steinberg, dated as of
February 15, 1996 (and the Schedule attached thereto pursuant to
Instruction 2 to Item 601 of Regulation S-K listing George E. Bello,
Lowell C. Freiberg, Howard E. Steinberg and Robert M. Steinberg as
having amendments to their employment agreements identical in all
respects to Exhibit 10.2 other than as specified in such schedule).
+10.3 Employment Agreement between Reliance Insurance Company and Saul P.
Steinberg, dated as of February 15, 1996 (and Schedule attached
thereto pursuant to Instruction 2 to Item 601 of Regulation S-K
listing Robert M. Steinberg as having an employment agreement
identical in all respects to Exhibit 10.3) (incorporated by
reference to Exhibit 10.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996).
+10.4 Employment Agreement between Reliance Group Holdings and Bruce L.
Sokoloff, dated as of May 15, 1996 (incorporated by reference to
Exhibit 10.1 to Reliance Group Holdings' Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
+10.5 Amendment, dated as of December 29, 1997, to Employment Agreement
between Reliance Group Holdings and Bruce L. Sokoloff, dated as of
May 15, 1996.
+10.6 1986 Stock Option Plan of Reliance Group Holdings, as amended
(incorporated by reference to Exhibit 19.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1990).
+10.7 Amended and Restated 1994 Stock Option Plan for Non-Employee
Directors.
+10.8 The Reliance Group Holdings, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
+10.9 The Reliance Group Holdings, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
+10.10 The Reliance Group Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
- ------------------
* Neither Reliance Group Holdings nor its subsidiaries is a party to any
instrument relating to long-term debt under which the securities authorized
exceed 10% of the total consolidated assets of Reliance Group Holdings and its
subsidiaries. Copies of instruments relating to long-term debt of lesser
amounts will be provided to the Securities and Exchange Commission upon
request.
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
+10.11 The Reliance Group Holdings, Inc. Key Employee Share Option Plan.
+10.12 The Reliance Group Holdings, Inc. Executive Bonus Plan (incorporated
by reference to Exhibit 10.3 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.13 The 1995 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.15 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1995).
+10.14 The 1996 Amendment to The Reliance Group Holdings, Inc. Executive
Bonus Plan (incorporated by reference to Exhibit 10.19 to Reliance
Group Holdings' Annual Report on Form 10-K for the year ended
December 31, 1996).
+10.15 The Executive Bonus Plan for James E. Yacobucci, Senior Vice
President-Investments, of Reliance Group Holdings (incorporated by
reference to Exhibit 10.4 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
+10.16 Reliance National Risk Specialists 1988 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
+10.17 Reliance National Risk Specialists 1992 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.9 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.18 Reliance National Risk Specialists 1993 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.10 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
+10.19 Reliance National Risk Specialists 1994 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.14 to Reliance
Insurance Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
+10.20 Reliance National Risk Specialists 1995 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.25 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.21 Reliance National Risk Specialists Supplemental Key Management
Incentive Plan (effective for policy years 1993, 1994 and 1995)
(incorporated by reference to Exhibit 10.26 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.22 Reliance National Risk Specialists 1996 Key Management Incentive
Plan (incorporated by reference to Exhibit 10.27 to Reliance Group
Holdings' Annual Report on Form 10-K for the year ended December 31,
1996).
+10.23 Reliance National Risk Specialists 1997 Key Management Incentive
Plan.
+10.24 Memorandum, dated February 8, 1989, summarizing employment
arrangements between Reliance Insurance Company and Dennis Busti
(incorporated by reference to Exhibit 10.8 to Reliance Insurance
Company's Annual Report on Form 10-K for the year ended December 31,
1988).
10.25 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall
& Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
- ------------------
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
10.26 Agreement and Plan of Merger, dated as of July 24, 1992, among
Reliance Group Holdings, Hall and Prometheus Liquidating Corp.
(incorporated by reference to Exhibit 2.2 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.27 Employee Benefit Agreement, dated July 24, 1992, among Reliance
Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to
Reliance Group Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992).
10.28 Amendment, dated November 2, 1992, to Exhibit 10.25 (incorporated by
reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992).
10.29 Settlement Agreement and Release, dated June 2, 1989, between James
P. Corcoran, Superintendent of Insurance of the State of New York,
as Liquidator of Union Indemnity Insurance Company of New York, Inc.
and Hall (now known as Prometheus Funding Corp.)(incorporated herein
by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report
on Form 10-Q for the quarter ended June 30, 1989).
10.30 Amendment No. 1, dated April 21, 1997, to Exhibit 10.29
(incorporated by reference to Exhibit 10.1 to Reliance Group
Holdings' Quarterly Report on Form 10-Q for the quarter ended March
31, 1997).
10.31 Stock Purchase Agreement, dated as of December 31, 1997, among Bear
Stearns Acquisition Corp. XVI, Reliance National, (U.K.) Ltd. and
Reliance Insurance Company.
10.32 Amended and Restated Stock Purchase Agreement, dated as of December
11, 1997 by and among Reliance Insurance Company, LandAmerica and
Lawyers Title Insurance Corporation (incorporated by reference to
Appendix A to LandAmerica's definitive Proxy Statement filed with
the Securities and Exchange Commission on January 29, 1998).
10.33 Voting and Standstill Agreement, dated as of February 27, 1998, by
and among LandAmerica, Reliance Group Holdings and Reliance
Insurance Company (incorporated by reference to Exhibit 10.26 to
LandAmerica's Annual Report on Form 10-K for the year ended December
31, 1997).
10.34 Registration Rights Agreement, dated as of February 27, 1998, by and
among LandAmerica and Reliance Insurance Company (incorporated by
reference to Exhibit 10.27 to LandAmerica's Annual Report on Form
10-K for the year ended December 31, 1997).
10.35 Articles of Amendment to LandAmerica's Articles of Incorporation
(incorporated by reference to Exhibit 4.2 to LandAmerica's Form 8-A
filed with the Securities and Exchange Commission on February 27,
1998).
13.1 Reliance Group Holdings 1997 Annual Report.
21.1 List of Subsidiaries of Reliance Group Holdings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
**99.1 Annual Report on Form 11-K of Reliance Insurance Company Savings
Incentive Plan for the year ended December 31, 1997.
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** To be filed by Amendment.