RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
Cover Photo: Starry night with comet in sky and semitransparent oval image,
in upper right hand corner, of Reliance's logo - fire hydrant
wrapped with firehose and year 1817 underneath.
Text: Reliance
How can we be so old and move so fast?
Lower Left: Reliance logo
Along Right Side: RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
About the Company
Reliance Group Holdings, Inc. is a leading property and casualty insurer with
specialized capabilities and coverages. In addition to its core property and
casualty business, Reliance has an information technology consulting operation.
In 1997, Reliance achieved:
o Record operating income and net income
o Record property and casualty insurance premiums and operating income
o Record revenues and improved margins in the information technology
consulting business
o Record shareholders' equity
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 1
financial highlights
in thousands, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Revenues $ 3,442,636 $ 3,090,587 $ 2,905,987
Income from continuing operations
before gain on sales of investments 127,033 103,061(1) 76,431
Net income 229,419 135,307(1) 88,056
Diluted per share information:
Income from continuing operations
before gain on sales of investments 1.07 .89(1) .66
Net income 1.94 1.16(1) .74
Assets 11,332,486 10,143,692 9,612,808
Shareholders' equity 962,515 676,680 678,348
Shareholders' equity per share 8.38 5.92 5.98
Pro forma shareholders' equity 1,089,913(2) -- --
Pro forma shareholders' equity per share 9.49(2) -- --
(1) 1996 excludes an after-tax charge of $87.1 million, or $ .75 per
diluted share, to strengthen net loss reserves for asbestos-related
and environmental pollution claims.
(2) Pro forma 1997 shareholders' equity includes $135 million after-tax
recognized gain from February 27, 1998, title insurance transaction.
(Bar Charts)
Operating Income
Dollars in Millions
- -------------------------------
1995 76.4
1996 103.1(1)
1997 127.0
Shareholders' Equity
Dollars in Millions
- -------------------------------
1995 678.3
1996 676.7
1997 962.5
1997 Pro forma 1,090 (2)
Assets
Dollars in Billions
- -------------------------------
1995 9.6
1996 10.1
1997 11.3
Statutory Surplus
Dollars in Millions
- -------------------------------
1995 1,128
1996 1,187
1997 1,302
2 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
Reliance at a Glance
Reliance National
Market Focus
- --------------------------------------------------------------------------------
Operates in the U.S. and selected international markets with a broad
range of specialized property and casualty insurance coverages and risk
management services for Fortune 1,000 companies.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance National
Combined Ratio
Percent
(Bar Chart)
1995 99.1
1996 101.7
1997 102.0
1997 Highlights
- --------------------------------------------------------------------------------
o Strong operating results even as investments in new businesses increased
the combined ratio more than two points.
o Reliant, the nonstandard auto insurance unit, wrote $98 million in premiums
during its first full year of operation.
o Created CyberComp and became the first insurer to sell workers'
compensation insurance over the Internet.
o Expanded international presence by forming a strategic alliance with the
Huatai Insurance Company of China.
Looking Ahead
- --------------------------------------------------------------------------------
International expansion will continue with new presences in Hong Kong,
Johannesburg, Munich, Sao Paulo and Zurich. Further growth expected in
nonstandard auto, workers' compensation and casualty risk management areas.
Reliance Insurance
Market Focus
- --------------------------------------------------------------------------------
Provides traditional and innovative coverages for the more complex risks
of middle-market commercial customers, typically companies with up to
1,000 employees and revenues from $5 million to $300 million.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance Insurance
Combined Ratio
Percent
(Bar Chart)
1995 106.3
1996 104.9*
1997 103.7
1997 Highlights
- --------------------------------------------------------------------------------
o Continued to increase average account size by offering customized casualty
insurance solutions.
o Reliance Specialty targeted specific business segments: transportation,
manufacturing, contracting, public entities, social services and special
properties.
o Nine new claims offices opened nationwide, and dedicated claims units
formed to serve Reliance Specialty customers.
Looking Ahead
- --------------------------------------------------------------------------------
New Large Account capabilities will be established in Boston, Kansas City
and San Francisco. Reliance Insurance will continue to meet the needs of
the middle market with outstanding products and superior claims
management and customer service delivered through a strong local network.
Percent of Net Property and Casualty
Premiums Written
(Pie Chart)
Reliance National 48%
Reliance Insurance 36%
Reliance Surety 8%
Reliance Reinsurance 8%
Total net written premiums $2.07 billion
Consolidated
Combined Ratio
Percent
(Bar Chart)
1995 101.8
1996 101.6*
1997 100.9
The combined ratio is the ratio of claims and expenses to earned premiums--the
lower the ratio, the better the performance.
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 3
Reliance Surety
Market Focus
- --------------------------------------------------------------------------------
A leader in the contract surety bond market and a major underwriter of
commercial surety bonds and fidelity bonds.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance Surety
Combined Ratio
Percent
(Bar Chart)
1995 65.6
1996 75.5
1997 77.0
1997 Highlights
- --------------------------------------------------------------------------------
o Achieved excellent results, with 11% premium growth and continued
outstanding underwriting.
o Successfully served midsize contractors and broadened customer base with
Small Contractor Bond Program, offered through 33 offices nationwide, and
Express Surety (cost-efficient distribution of small, high-volume
commercial bonds).
o Expanded to London to take advantage of international growth opportunities.
Looking Ahead
- --------------------------------------------------------------------------------
Additional market penetration with the Small Contractor Bond Program and
Express Surety. Fidelity bonds and other commercial bond products to
contribute to profitable growth.
Reliance Reinsurance
Market Focus
- --------------------------------------------------------------------------------
Specializing in treaty and facultative casualty reinsurance for midsize insurers
and for the specialty divisions of larger insurers.
Vital Statistics
- --------------------------------------------------------------------------------
Reliance
Reinsurance
Combined Ratio
Percent
(Bar Chart)
1995 114.9
1996 102.7*
1997 101.8
1997 Highlights
- --------------------------------------------------------------------------------
o Maintained casualty reinsurance focus and expanded into ocean marine and
general aviation markets.
o Enhanced service capabilities with electronic data interchange (EDI)
technology, improving the flow of information to brokers and clients.
o Created and utilized sophisticated interactive modeling systems to analyze
risks and assist clients in optimizing the amount of reinsurance and
capital on their balance sheets.
Looking Ahead
- --------------------------------------------------------------------------------
Focus on building business by delivering exceptional value and developing
custom-tailored reinsurance solutions. Pursue growth opportunities in
select liability coverages and agricultural reinsurance, as well as in
capital planning and reinsurance for mutual insurance companies.
RCG Information Technology
Market Focus
- --------------------------------------------------------------------------------
A full-service information technology company with expertise in software
programming, client-server technologies, supplemental staffing and Year 2000
conversions.
Vital Statistics
- --------------------------------------------------------------------------------
RCG Information Technology
Revenue and Pretax
Operating Income
Dollars in Millions
(Bar Chart)
Revenue Pretax Operating
Income
1995 106.4 5.4
1996 136.7 2.3
1997 191.9 4.8
1997 Highlights
- --------------------------------------------------------------------------------
o One of the fastest-growing information technology companies; revenues up
40% in 1997.
o Acquired Integrated Systems Resources, Inc. of Hartford, a systems
consulting firm specializing in testing and quality assurance.
o Established in-country recruiting capabilities in India, Ireland, the
Philippines and South Africa. Significant investments made in personnel and
training.
Looking Ahead
- --------------------------------------------------------------------------------
Escalating demand for programming, outsourcing services and
technology-based solutions will fuel future growth. RCG Information
Technology has the full-service computer consulting capabilities that
public and private entities will require into the next millennium.
* 1996 excludes $134 million pretax charge for increasing reserves for
asbestos-related and environmental pollution claims. Including this reserve
addition, Reliance's 1996 consolidated property and casualty combined ratio
was 109.0%, the combined ratio for Reliance Insurance was 121.9%, and the
combined ratio for Reliance Reinsurance was 115.5%.
4 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
[PHOTO]
Photo of Reliance Executives
Seated, left to right:
George H. Roberts, C. Brian Schmalz
Standing, left to right:
Robert P. Buttacavoli, Robert C. Olsman, Dennis A. Busti, Saul P. Steinberg,
Robert M. Steinberg
(Photo Caption)
Seated, left to right:
George H. Roberts, President, Reliance Reinsurance
C. Brian Schmalz, President, Reliance Surety
Standing, left to right:
Robert P. Buttacavoli, President,
RCG Information Technology
Robert C. Olsman, President, Reliance Insurance
Dennis A. Busti, President, Reliance National
Saul P. Steinberg, Chairman and Chief Executive Officer,
Reliance Group Holdings, Inc.
Robert M. Steinberg, President and Chief Operating Officer,
Reliance Group Holdings, Inc.
To Our Shareholders
Reliance Group's results in 1997 were outstanding. We achieved every one of our
goals for building shareholder value.
You may recall these goals from last
year's letter:
o Continued profitable growth in our core business
o Growth in earnings per share
o A return on equity of at least 15%
o Reductions in financial leverage
Here's what we accomplished in 1997:
o Operating income was a record $127.0 million, or $1.07 per diluted share.
Net income was a record $229.4 million, or $1.94 per diluted share.
o Our return on equity was excellent -- 16.2% based on operating income.
o Shareholders' equity increased by 42% to $962.5 million, and book value per
share reached $8.38.
o Our debt to total capitalization was 48% on December 31, 1997, a
significant improvement compared with 57% a year earlier.
We also are very pleased that shareholders of Reliance received a total
return of 58.3% in 1997, outpacing the S&P 500 and exceeding the average
return of property and casualty insurance companies.
With a five-year average annual return of 23.3%, Reliance ranked fourth
out of 24 property and casualty insurers in a Wall Street Journal
shareholder scoreboard of total returns to investors.
Once again, Reliance Group delivered on its promises and demonstrated that it
can succeed -- even in a soft market -- with fast-moving, focused and
disciplined management.
A MORE VALUABLE TITLE INVESTMENT
One of the highlights of 1997 was our landmark title transaction, which is a
prime example of our ability to identify and take bold strategic action to
benefit our shareholders.
Our title insurance results were excellent in 1997. Reliance's title premiums
rose to $863.7 million from $780.2 million in 1996. Pretax operating income was
$63.4 million, compared with $38.2 million in 1996. While these were very strong
results, we recognized that the way to maximize the value of our investment, in
an industry where critical mass is a key to success, was to consolidate.
The combination of our title operations, Commonwealth Land Title and Transnation
Title, with Lawyers Title creates the largest title insurer in the U.S., based
on combined revenues. The company, renamed LandAmerica Financial Group, Inc.,
will benefit from dramatic synergies. Specifically identified cost savings total
approximately $40 million per year. With the largest capital base in the
industry, a broad distribution network, strong geographic diversification,
improved market position and product breadth, LandAmerica is a
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 5
leader in the residential title business and number one in the highly profitable
commercial sector.
Reliance owns 45% of LandAmerica on a diluted basis, comprised of 4.039 million
shares of LandAmerica common stock and 7% preferred stock convertible into 4.825
million common shares. At closing on February 27, 1998, these securities had a
market value of $395.5 million. In addition, Reliance received $266.6 million in
cash, for a total value to Reliance of $662.1 million.
The transaction resulted in an after-tax gain for Reliance Group of
approximately $245 million, or $2.07 per diluted share. Of this total, $135
million, or $1.14 per diluted share, will be recognized immediately. The
balance, a deferred gain of $110 million, or $ .93 per diluted share, is
recognized as Reliance sells its LandAmerica securities.
The transaction boosts year-end book value to $9.49 per share on a pro forma
basis, and to $10.45 per share taking into account the deferred gain.
Furthermore, we are significantly accelerating Reliance's deleveraging process.
We plan to use part of the cash proceeds to reduce debt by $125 million. This
would improve our debt to total capitalization to 42% on a pro forma basis, from
48% at year-end 1997 -- a level much closer to the range that would enable us to
obtain further upgrades from the various rating agencies.
PROPERTY AND CASUALTY SUCCESS
The title transaction also benefits Reliance by enabling us to commit
more resources to our successful and growing core business -- property
and casualty insurance.
Property and casualty pretax operating income grew to a record $232.3
million in 1997, and our combined ratio was 100.9%. We have achieved
these excellent results while investing to ensure continued growth.
- --------------------------------------------------------------------------------
Fast-moving, focused and disciplined
Reliance is a fundamentally different kind of insurance company.
- --------------------------------------------------------------------------------
In 1997, net written premiums grew 12%. Because we are quick to identify
promising new opportunities and lay the necessary groundwork for them, Reliance
has achieved growth that surpasses the industry average even as we reduce
exposures to unattractive lines of business.
Each of our four property and casualty profit centers has a successful track
record building profitable new business.
Reliance recognizes that innovation and creativity in the insurance business
mean more than simply developing new coverages. We develop unconventional
capabilities for our customers where we can be rewarded with above-average
returns. We tailor individualized solutions for our customers. We build market-
and client-focused organizations that better understand customer requirements
and risks.
We manage risks prudently. One example is our extensive use of reinsurance to
limit exposures and maximize risk-adjusted returns under all market conditions.
Instead of focusing on processes, our claims organization works toward optimal
outcomes that benefit our customers and, ultimately, our shareholders. We are
more agile than larger companies, yet we provide a broader range of capabilities
than smaller insurers can offer. In short, we believe Reliance has the right
capabilities, people and culture to be the best in property and casualty
insurance.
- --------------------------------------------------------------------------------
"In our view, the title transaction with Lawyers Title is a win-win,
providing financial strength and flexibility...a key accomplishment in
the company's overall strategic plan."
Advest, Inc., February 1998
- --------------------------------------------------------------------------------
"A lengthening track record of consistent earnings
growth."
CIBC Oppenheimer Corp.
November 1997
- --------------------------------------------------------------------------------
6 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Bold strategic action
The title transaction is a prime example of how we've built value for our
shareholders.
- --------------------------------------------------------------------------------
RCG INFORMATION TECHNOLOGY
Another way we are working to create value is through RCG Information
Technology. We serve clients in areas where demand for computer-based solutions
is greatest, such as software outsourcing, supplemental staffing, client-server
technologies and Year 2000 solutions.
Business growth is strong. Revenues in 1997 were up 40% over 1996. We are
starting to achieve improved margins and profits, after making large business
development expenditures over the past several years. We believe this business
is worth well in excess of its carrying value and intend to make it an even more
valuable asset for our shareholders.
OUTLOOK FOR GROWTH
As we write this letter, the property and casualty market is increasingly
competitive. In a soft market, some companies will pursue premium growth at the
expense of their shareholders' interests. Not Reliance. We will stay focused on
the bottom line. Accordingly, growth in most of our lines will be modest.
However, we do have opportunities to grow profitably in several targeted areas
of promise where we have been assiduously planting the seeds of our future
success.
Our international operations have had a good deal of success, but we have only
begun to tap the potential in overseas markets. In 1990, we had virtually no
foreign-sourced premiums. Today, they exceed $270 million. Reliance now conducts
business in 50 countries, through direct operations, joint ventures and
alliances. By offering specialized expertise and capabilities, Reliance can add
value and prosper even in markets with entrenched local competitors.
Reliant, our nonstandard auto insurance company, began operations in 1996 and,
during 1997, wrote $98 million in premiums. We have built a topflight management
team and organization to serve the huge -- $22 billion and growing --
nonstandard market.
Reliance is utilizing new technology in its CyberComp unit -- the first company
to quote and bind workers' compensation policies on the Internet. CyberComp is
an efficient writer of single-state policies for smaller companies through a
select group of independent agents. These agents and their customers appreciate
the fast response and transaction simplicity that CyberComp's technology
affords. From a start-up earlier in the year, CyberComp generated more than $30
million in business in 1997.
Technology is also playing a role as we enter the standard and preferred
personal auto insurance market. Reliance has begun selling auto insurance
utilizing an Internet web site, direct mail and other direct marketing channels.
We plan to expand sales by offering coverage through Intuit's Quicken and other
web-based systems. With our low-cost structure, we should be able to offer
savings to consumers and carve out a niche in the largest insurance line in the
United States.
We also expect to thrive by taking advantage of economies of scale. For example,
we see opportunities for making more productive and profitable use of our
nationwide network serving the property and casualty needs of the middle market.
We are already achieving good underwriting results. Continued growth would
enable us to lower the expense ratio and generate higher profits. We are
developing new capabilities and seeking additional opportunities to accelerate
our progress.
- --------------------------------------------------------------------------------
"Reliance Group has undergone broad-based and far-reaching positive
change...Today, Reliance is a specialty markets insurer with a much
strengthened balance sheet and highly favorable prospects."
Credit Suisse
First Boston Corporation
January 1998
- --------------------------------------------------------------------------------
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 7
Reliance Surety, a leader in contract surety for midsize contractors, is working
to replicate that success among small contractors. We are serving small
contractors through each of our 33 Surety offices nationwide and have more than
$30 million in small contractor surety premiums.
These are just a few of the businesses where Reliance is investing to build
tomorrow's success. Within each profit center and line, we identify what we
should be doing new, different and better for our customers in order to be
rewarded with attractive risk-adjusted returns for our shareholders.
We follow a proven formula that begins by recruiting and cultivating the best
people to lead our efforts. We free them from the straitjacket of large
corporate bureaucracies and allow them to build an organization with the right
structure, culture and resources for their specific line of business. We incent
and reward their long-term success. And we always set standards to ensure
disciplined underwriting and quality service.
REMEMBERING TOM STANTON
On a sad note, we mourn the loss of our esteemed director, Thomas J. Stanton,
Jr., who died in January 1998. For more than 30 years, he faithfully and
diligently shared his knowledge and wisdom with our company. His enormous talent
will be sorely missed.
CONCLUSION
In our advertising we ask the question, how can Reliance, founded in 1817, "be
so OLD and move so FAST?" We'd like to conclude by answering that question.
We built an organization, unique in the insurance industry, that combines an
entrepreneurial culture with disciplined management intent on minimizing risks
and capitalizing on opportunities. We stay focused on the marketplace and are
driven by the goal of building shareholder value. We manage with the commitment
and responsibility that owners bring to their business.
- --------------------------------------------------------------------------------
The right people, culture and capabilities
Reliance has what it takes to be the best in property and casualty insurance.
- --------------------------------------------------------------------------------
The marketplace is beginning to share our conviction that Reliance is a
fundamentally different kind of insurance company. The people of Reliance are
determined to stand above the industry, make further progress toward our stated
goals and deliver exceptional results for our customers and shareholders.
/s/ Saul P. Steinberg
SAUL P. STEINBERG
Chairman and Chief Executive Officer
/s/Robert M. Steinberg
ROBERT M. STEINBERG
President and Chief Operating Officer
8 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Market-Driven
One hundred and eighty years young.
Reliance is thriving. We are fast and agile when it comes to identifying and
seizing new opportunities, and we never stop finding new ways to enhance the
value of our franchise for our customers, our shareholders and our employees.
- --------------------------------------------------------------------------------
Reliance Group Ad - Photo in center of page, copy on left side
Photo: Dog sitting; close up of dog's face
Headline: WHEN YOUR CORPORATE LOGO IS A FIRE
HYDRANT YOU CAN'T SIT STILL FOR A MINUTE.
Text:
Reliance began in 1817. And we've never looked back. We've been too busy
hounding our competition.
Today, we're an $11 billion group of companies in worldwide property and
casualty insurance.
We're old, established, big. And anything but staid.
In fact, it's our unusually innovative approach to insurance that's helping us
grow at twice the rate of the rest of the industry.
It might sound self-serving for us to tell you we're regarded as the most
dynamic and creative company in insurance today. Yet ask our customers about
us--many of whom are Fortune 500 companies--and they'll likely agree.
In any event, should you come across the Reliance fireplug on a letterhead, an
annual report, a business card, or a building, you can at least be certain of
one thing.
Nobody's parked there.
1-800-241-4487
http://www.rgh.com
(Copyright) Reliance Group Holdings, Inc., 1997
Bottom Center: Reliance Group Holdings, Inc. [LOGO]
Reliance Logo - Fire hydrant wrapped with fire hose and year 1817 underneath
HOW CAN WE BE SO OLD AND MOVE SO FAST? (Service Mark)
Lower Right: Reliance National
Reliance Insurance
Reliance Surety
Reliance Reinsurance
10 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Reliance on the move
[Photo: Dog Running]
- --------------------------------------------------------------------------------
Reliance National
Specialty Leader
If Reliance is the industry's most youthful 180-year-old, then Reliance National
certainly can be regarded as insurance's most mature 10-year-old.
Reliance National has grown from a start-up business in 1987 to become
Reliance's largest property and casualty profit center, accounting for about
half of net premiums written in 1997.
Reliance National is composed of several highly focused business units that
provide specialized commercial property and casualty insurance coverages and
risk management services to Fortune 1,000 companies and other major corporations
throughout the world.
In 1997, premiums grew 18%, and Reliance National's combined ratio was 102.0%.
In today's challenging environment, success requires underwriting discipline and
swift response to the marketplace's opportunities and risks.
Alternative risk transfer represents an area where Reliance National cultivated
skills beyond those of traditional carriers and became a market leader by
offering unbundled risk management services to support loss-sensitive,
high-deductible and captive insurance arrangements. Ideally suited for
commercial general liability, workers' compensation and commercial automobile
liability coverages, this business has produced a solid rate of return.
Other lines that have performed exceptionally well include accident and health,
directors and officers liability, aviation and marine insurance.
Over the last decade, Reliance National has developed extraordinary expertise in
each of the coverages it writes. Integrated underwriting, actuarial, claims and
loss control teams are vital to Reliance National's success in meeting the
diverse needs of the clients and brokers it serves.
The entrepreneurial spirit that founded Reliance National is a driving force
behind custom-tailored products and services and innovations, including
underwriting coverage for the first captive insurance company domiciled in New
York and a newly created online workers' compensation initiative, known as
CyberComp.
With CyberComp, Reliance National became the first commercial property and
casualty insurer to sell workers' compensation insurance over the Internet.
CyberComp enables authorized independent agents to obtain quotes and bind
single-state workers' compensation coverage for small to midsize accounts
quickly and easily, 24 hours a day, via a dedicated web site. Reliance National
has gained a competitive advantage by utilizing advanced technology to maximize
cost savings and boost efficiency in the delivery of this product. CyberComp
expects strong premium growth in 1998.
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 11
- --------------------------------------------------------------------------------
Insuring Global Infrastructure
Trillions of dollars will be spent on international infrastructure in the next
decade. To capitalize on this opportunity, Reliance National created a Global
Infrastructure Division. Major development initiatives, such as ports, power
plants and roadways, have complex coverage requirements, and Reliance National
is the only insurer with a single unit that provides multiline insurance and
risk management solutions for the consortia that build and finance these
projects in rapidly industrializing nations throughout the world.
- --------------------------------------------------------------------------------
Reliant, Reliance National's nonstandard automobile insurance operation,
generated $98 million in premiums in 1997. Working through independent agents in
11 states, Reliant has grown selectively in the most attractive markets. The
focus is on building an infrastructure and quality systems to support future
premium growth. Reliant has a tremendous opportunity to carve out a niche in the
profitable $22 billion U.S. nonstandard auto insurance market.
Internationally, Reliance National conducts business through direct operations,
joint ventures and alliances in 50 countries. Foreign-sourced premiums grew 39%
in 1997 and now represent more than 25% of Reliance National's book of business.
In 1997, Reliance National entered into an agreement to provide the Huatai
Insurance Company of China with product development assistance and reinsurance
support. This market offers enormous long-term growth potential.
In 1997 and early 1998, Reliance National opened additional offices in both
Germany and Mexico, and its first office in Switzerland. By year-end, it expects
to have new presences in Brazil, Hong Kong and South Africa.
Reliance National will continue to pursue growth domestically as well as abroad,
while underwriting and pricing risk to ensure profitability.
- --------------------------------------------------------------------------------
Reliance Insurance
Middle-Market Success
Continuing improvements in underwriting results at Reliance Insurance reflect
the transformation that has taken place within this profit center over the past
several years.
Today, Reliance Insurance is focused on insuring midsize companies, typically
those with up to 1,000 employees and annual revenues of up to $300 million. A
shift toward larger, middle-market accounts has enabled Reliance Insurance to
grow selectively in areas where its expertise is valued and the premium
potential is greater. Unlike small, regional insurers, Reliance Insurance has
the capabilities to meet virtually all the property and casualty insurance needs
of middle-market businesses.
With a broad spectrum of products and services and a nationwide network of 40
offices, Reliance Insurance provides a high level of personalized service.
Producers and middle-market customers value Reliance Insurance's strong, local
presence and customized coverages.
In 1997, Reliance Insurance's Large Accounts Division, which serves accounts
with annual premiums in excess of $1 million, grew by expanding its casualty
offerings to include construction wrap-ups, domestic and offshore captives,
fronting services, finite risk arrangements and loss portfolio transfer
contracts.
continued on page 14
Reliance Group Ad - photo is center of page, copy on left side
Photo: Volcano erupting
Headline: 1817:
DISASTER FOLLOWS VOLCANIC
ERUPTION IN INDONESIA,
THE FIRST SEMINOLE UPRISING BEGINS,
JEAN LAFFITE RESUMES PIRACY,
AND OTHER OPPORTUNITIES FOR A
BRIGHT NEW INSURANCE COMPANY.
Text:
You can still see our distinctive "fire hydrant" logo emblazoned on Independence
Hall in Philadelphia. We covered it against fire back in the early days.
Since then we've grown to an $11 billion group of companies that provides
property and casualty insurance for many of the world's best known companies.
If someone needs insurance we don't have, we'll even invent it.
No doubt you've heard talk about sexual harassment in the workplace. We're the
ones who did something about it. We created insurance that covers and audits
companies for their employee practices.
This is the kind of innovation that makes us a standout in insurance today. It's
also one of the reasons we've been growing at twice the rate of the rest of the
industry.
How long can we keep it up? Hard to say. We've been at it for 180 years and
probably couldn't figure out how to stop.
1-800-241-4487
http://www.rgh.com
(Copyright) Reliance Group Holdings, Inc., 1997
Bottom Center: Reliance Group Holdings, Inc. [LOGO]
Reliance Logo - Fire hydrant wrapped with fire hose and year 1817 underneath
HOW CAN WE BE SO OLD AND MOVE SO FAST?(Service Mark)
Lower Right: Reliance National
Reliance Insurance
Reliance Surety
Reliance Reinsurance
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 13
- --------------------------------------------------------------------------------
Accountable
Reliance has built an organization that has withstood the test of time and
continues to flourish today as the industry's entrepreneurial insurance company.
Shareholder-driven and customer-focused, Reliance remains a source of strength,
stability and superior service.
- --------------------------------------------------------------------------------
14 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
Reliance Insurance
continued from page 11
In 1998, Reliance Insurance offices in Boston, Kansas City and San Francisco
will have new capabilities to serve this market.
Additional producers were appointed throughout the country this year, and the
Specialty Division developed new business by emphasizing its insurance expertise
in six key areas: contracting, manufacturing, transportation, public entities,
social services and special properties. Specialty claims units are aligned with
underwriting teams to support customers in each of these industry segments.
Reliance Insurance's ability to serve customers at the local level also was
enhanced by the opening of new claims offices in Kansas City, Louisville,
Minneapolis, New Orleans, Philadelphia, San Diego, San Francisco, St. Louis and
West Palm Beach.
Reliance Insurance has an innovative, outcome-driven approach to claims
management. Instead of focusing narrowly on processes, claim professionals have
the resources and incentives to produce optimal results for policyholders as
well as for the company. For example, enhancing the quality of investigations or
improving litigation management can lead to lower losses for Reliance and help
control customers' insurance costs. Similarly, a higher standard of medical care
can improve disability claims outcomes by enabling injured workers to return to
their jobs stronger and sooner.
Throughout Reliance Group, results are a determining factor in compensation. At
Reliance Insurance, a growing number of employees -- currently about half of the
total staff -- participate in incentive plans, which reward results that
contribute to operating income and balance premium growth with improvements in
the company's combined ratio.
Premiums grew 5% in 1997. Growth was achieved even as Reliance Insurance made
greater use of reinsurance and discontinued certain program business that was
not producing an adequate rate of return.
Reliance Insurance maintained its underwriting integrity and commitment to the
fundamentals while achieving a combined ratio of 103.7%. Progress will
continue as Reliance Insurance leverages producer relationships, adheres
firmly to underwriting standards and builds business on the basis of
outstanding service.
- --------------------------------------------------------------------------------
Reliance Surety
Best in the Business
A leader in serving midsize contractors, Reliance Surety has been widely
recognized for many years as the nation's top surety operation in terms of
profitability, overall performance and customer service.
Reliance Surety offers a full range of performance and payment bonds for the
construction industry; license, permit and probate bonds; bonds for public
officials; and fidelity bonds for financial institutions and other commercial
enterprises.
- --------------------------------------------------------------------------------
Service with a difference
[Photo]
Photo Description: Firemark - plaque with imprint of fire hydrant wrapped with
fire hose and the letter "F" on the left side of the hydrant and the letter "A"
on the right side of the hydrant. The firemark was the symbol of The Fire
Association of Philadelphia, founded in 1817, which later became Reliance
Insurance Company.
- --------------------------------------------------------------------------------
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 15
Reliance Surety's track record is outstanding. Over the past five years,
Reliance Surety has posted average premium growth of 13% and an average combined
ratio of 74.6%. In 1997, Reliance Surety achieved both good premium growth of
11% and an excellent combined ratio of 77.0%. Consistent profitability and low
loss levels are reflective of strict underwriting controls, rigorous credit
analyses and close management of the claims function.
Contributing to superb results this year was the Reliance Small Contractor Bond
Program. Premiums grew 36% this year as all 33 of Reliance Surety's branch
offices actively marketed contract surety bonds and bonds guaranteed by the
Small Business Administration to producers with small contractor accounts.
Additional penetration of the small business sector was achieved through Express
Surety, which expedites the issuance of low-risk surety and fidelity bonds for
smaller commercial accounts. Advanced technology streamlines bond processing,
ensuring quick turnaround for producers and customers, and making it more
cost-effective to manage a high volume of small bonds.
At Reliance Surety, success is definitely a team effort. Underwriters, claims
personnel, actuaries and loss control specialists work together to provide
seamless service and creative solutions. In-house experts in the areas of
finance, law, accounting and engineering consult on each account,
troubleshooting and sharing the benefit of their experience with producers and
clients.
The focus is on building relationships and keeping them strong. A branch office
system is an important part of this strategy. By keeping in close contact with
producers and customers, Reliance Surety gains an in-depth understanding of
their needs and is able to respond with customized bond programs. When a client
faces a difficult situation, Reliance Surety has the knowledge necessary to
react quickly and resolve the problem.
New customers have been attracted by the offering of workers' compensation
program bonds, coal reclamation bonds for mining companies and bonding for
complex risks, such as environmental remediation projects and design-build
operations.
To take advantage of overseas opportunities, Reliance Surety in 1997 opened for
business in London -- a gateway to international markets.
Reliance Surety will continue to pursue profitable growth in the contract surety
and commercial bond business. Relationships established now will generate
greater returns in the future as customers grow and succeed, and as they count
on Reliance Surety to fulfill their expanded bond requirements.
Underwriting excellence will remain a company benchmark, integral to Reliance
Surety's industry leadership and success.
- --------------------------------------------------------------------------------
Claims Management at its Best
Since 1817, we have delivered on our promises to our customers by responding
promptly when a loss occurs and managing claims effectively. Now Reliance is
taking claims service to a new level. It's not about following a manual or
processing paperwork; it's about finding the right solution for any given
situation. This may involve litigation experts or settlement conferences, fraud
investigation, subrogation, medical consultations, return-to-work programs or
even placing a Reliance claims specialist at a customer's location. We've
lowered caseloads, so our claims professionals can devote more time to each
claim and produce better results. They do whatever it takes to achieve the
optimal outcome for insureds, for Reliance and for our shareholders.
- --------------------------------------------------------------------------------
16 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Entrepreneurial
The difference is our people. Talented and experienced individuals perform at
the top of their profession in an environment that fosters creativity and
rewards success. A vital, dynamic organization, Reliance stands out as a company
committed to innovation and service excellence.
- --------------------------------------------------------------------------------
Reliance Group Ad - photo in center of page, copy on left side
Photo: City skyline at night showing silhouette of large office building with
lights on in three floors of building.
Headline: IN A BUSINESS
FAMOUS FOR
SLEEPING GIANTS,
THERE IS AN ALARM CLOCK.
Text:
Even though Reliance Group Holdings is an $11 billion corporation in property
and casualty insurance, we're not one of the industry's giants.
Not in size and not in the way we do business.
Talk to some big insurance companies and if you want what they've got, you can
get it. But if you want something new and unheard of, or a program that's a
little differently tailored, they'd rather not bother.
We'd rather bother. Even though our roots go all the way back to 1817, we
haven't gotten hardening of the policies. We've built a successful business by
giving companies the coverage they want and need, even if it isn't off the
shelf.
This is one of the reasons why we're working with some of the biggest names in
business, worldwide. And growing twice as fast as the rest of the industry.
So we're burning some midnight oil. We like to think it's our competitors who
are losing the sleep.
1-212-838-4239
http://www.rgh.com
(Copyright) Reliance Group Holdings, Inc., 1997
Bottom Center: Reliance Group Holdings, Inc. [LOGO]
Reliance Logo - Fire hydrant wrapped with fire hose and year 1817 underneath
HOW CAN WE BE SO OLD AND MOVE SO FAST?(Service Mark)
Lower Right: Reliance National
Reliance Insurance
Reliance Surety
Reliance Reinsurance
18 RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
An industry wake-up call
[Photo - Alarm Clock]
- --------------------------------------------------------------------------------
Reliance Reinsurance
Service and Solutions
Insurance companies seek to maintain close ties with reinsurers that understand
their needs and are responsive. Insurers and reinsurance brokers count on
Reliance Reinsurance for underwriting acumen, security, superior claims service
and custom-tailored solutions.
Reliance Reinsurance has long-standing relationships with a broad range of
clients, including small and midsize insurers, the specialty divisions of larger
insurance companies, captive insurers, risk retention groups and other
alternative facilities. Reliance Reinsurance focuses primarily on reinsuring in
the lower layers -- the first $1 million of primary coverage -- where risk is
more actuarially predictable and there is less volatility.
While continuing to emphasize casualty reinsurance, Reliance Reinsurance also
has established itself in the ocean marine and general aviation markets.
Reliance Reinsurance's combined ratio was 101.8% in 1997. In a reinsurance
market where there has been a tendency toward more relaxed underwriting
standards, Reliance Reinsurance has redoubled its commitment to disciplined
underwriting.
Before entering a new market, Reliance Reinsurance utilizes sophisticated
modeling techniques and actuarial analysis to thoroughly evaluate and manage
risk effectively. For example, Reliance Reinsurance developed proprietary
interactive computer models using extensive data on crop yields to evaluate
geographic concentrations before it began writing agricultural reinsurance.
To ensure quality underwriting and help clients achieve their objectives,
Reliance Reinsurance reviews each client's underwriting, claims, financial and
actuarial operations before accounts are bound. Reliance Reinsurance's
underwriting and actuarial teams draw on their extensive experience to structure
optimal reinsurance arrangements, including finite risk programs and other risk
transfer alternatives. Strategic alliances with offshore reinsurers enable
Reliance Reinsurance to offer cost-effective liability coverages.
Client service is a top priority, and electronic data interchange speeds and
simplifies communication between Reliance Reinsurance, brokers and insurers.
Reliance Reinsurance will continue to identify profitable niches and pursue
growth opportunities in specialty liability lines. Reliance Reinsurance also has
positioned itself as a resource for mutual insurance companies that need
capital-planning and reinsurance support.
RELIANCE GROUP HOLDINGS, INC. 1997 ANNUAL REPORT 19
- --------------------------------------------------------------------------------
At Reliance, there's no such thing as business as usual.
When you think like owners, you're constantly motivated to come up with new
ideas and fresh approaches for satisfying customers and staying ahead of the
competition. Employees at every level have equity investments in the company
through various plans and incentives to own Reliance stock. Management's
interests are totally aligned with those of shareholders, as top management has
a substantial equity investment in the company, and compensation plans for key
managers are structured to reward long-term underwriting profitability.
- --------------------------------------------------------------------------------
RCG Information
Technology
Creating Value
Heavy demand for technology-driven solutions has made RCG Information Technology
(RCG IT) one of the nation's fastest-growing computer consulting companies.
From programming, project management and consulting to supplemental staffing,
systems analysis, design and integration, and end-to-end Year 2000 compliance,
RCG IT provides a full range of highly customized services to help organizations
operate more efficiently.
RCG IT serves clients in various business sectors, including banking, brokerage,
insurance, electronics, telecommunications, petroleum, chemicals, retail,
transportation, manufacturing and the travel industry. RCG IT's clients also
include government and not-for-profit entities.
In 1997, revenues rose to $191.9 million, from $136.7 million in 1996. Pretax
income was $4.8 million in 1997, up from $2.3 million in 1996. Profit margins
increased significantly in the latter part of 1997.
Progress was impressive this year as substantial investments made in building
the business and creating an infrastructure with the right management and
technical staff produced positive returns.
RCG IT enhanced its capabilities by acquiring Integrated Systems Resources, Inc.
of Hartford, an information systems consulting firm specializing in testing and
quality assurance.
While unprecedented demand for information technology services is fueling RCG
IT's growth, it has created an industry-wide shortage of computer programming
talent. To meet demand and continue to grow, RCG IT is recruiting heavily
internationally, as well as in the United States. Professional staffing has
increased 58% in the past two years. In 1997, RCG IT expanded its network to 17
offices in 11 states and established recruiting capabilities in India, Ireland,
the Philippines and South Africa. In 1998, RCG IT plans to open offices in
Boston and San Francisco.
The Year 2000 problem has presented RCG IT with a unique opportunity to expand
its client base and demonstrate its extensive capabilities. RCG IT is well
positioned to help leading public and private entities tackle the Year 2000
problem and other challenges they face now and in the next millennium.
Success in meeting clients' diverse needs is a key to growing profitably and
succeeding as a full-service provider of comprehensive information technology
solutions.
20
Financial Information
21 Selected Financial Data
24 Financial Review
31 Consolidated Financial Statements
35 Notes to Consolidated Financial Statements
58 Independent Auditors' Report
59 Report of Management
60 Market and Dividend Information
61 Directors and Officers
62 Corporate Data
Reliance Group Holdings, Inc. and Subsidiaries 21
Selected Financial Data
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------- ----------------------------
(In thousands, except per share amounts)
Income Statement Data:
Revenues:
Property and casualty insurance
Premiums earned $1,947,016 $1,800,854 $1,774,591 $1,777,318 $1,571,539
Net investment income 263,981 257,133 247,343 232,299 216,432
Gain on sales of investments 71,501 49,264 27,381 8,851 129,018
----------------------------------------------------------------------------------
2,282,498 2,107,251 2,049,315 2,018,468 1,916,989
Title insurance(1) 896,332 810,958 701,622 883,903 922,432
Other 263,806 172,378 155,050 144,679 123,398
----------------------------------------------------------------------------------
$3,442,636 $3,090,587 $2,905,987 $3,047,050 $2,962,819
==================================================================================
Income (loss) from continuing operations
before gain on sales of investments,
income taxes and equity in investee company:
Property and casualty insurance $ 232,259 $ 218,746 $ 201,699 $ 134,956 $ 41,212
Asbestos and environmental loss
reserve increase(2) - (134,000)(2) - - -
----------------------------------------------------------------------------------
232,259 84,746 201,699 134,956 41,212
Title insurance(1) 63,367 38,234 12,283 30,810 55,180
Corporate interest expense (74,407) (74,253) (76,230) (75,619) (89,517)
Corporate overhead and other (53,095) (51,738) (47,184) (51,371) (56,584)
----------------------------------------------------------------------------------
168,124 (3,011) 90,568 38,776 (49,709)
Income tax (provision) benefit (48,766) 10,064 (21,929) (9,464) 35,831
Equity in investee company 7,675 8,908 7,792 9,478 12,441
----------------------------------------------------------------------------------
Income (loss) from continuing operations
before gain on sales of investments 127,033 15,961(2) 76,431 38,790 (1,437)
After-tax gain on sales of investments 47,463 32,246 19,485 5,031 86,973
----------------------------------------------------------------------------------
Income from continuing operations 174,496 48,207(2) 95,916 43,821 85,536
Gain on sale of discontinued operation 68,865 - - - -
Other-net (13,942) - (7,860) - (12,011)
----------------------------------------------------------------------------------
Net income $ 229,419 $ 48,207 $ 88,056 $ 43,821 $ 73,525
==================================================================================
Diluted per share information:
Income (loss) from continuing operations
before gain on sales of investments $1.07 $.14(2) $.66 $.34 $(.02)
After-tax gain on sales of investments .40 .27 .17 .04 .95
----------------------------------------------------------------------------------
Income from continuing operations $1.47 $.41(2) $.83 $.38 $ .93
==================================================================================
Net income $1.94 $.41 $.74 $.38 $ .80
==================================================================================
Weighted average number of
diluted shares outstanding 118,363 116,281 115,054 114,306 91,708
Cash dividends per common share $ .32 $.32 $.32 $.32 $ .32
22 Reliance Group Holdings, Inc. and Subsidiaries
Selected Financial Data
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except ratios)
Other Operating Data(3):
Underwriting loss $ (31,722) $ (38,387)(4) $ (45,644) $ (97,343) $ (175,220)
Loss and loss expense ratio 64.8% 67.6%(4) 67.7% 73.0% 78.6%
Underwriting expense ratio 36.1 34.0 34.1 31.4 32.2
----------------------------------------------------------------------------------
Combined ratio(5) 100.9% 101.6%(4) 101.8% 104.4% 110.8%
==================================================================================
December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Balance Sheet Data:
Assets $11,332,486 $10,143,692 $9,612,808 $9,011,198 $8,496,596
Marketable securities 4,149,969 3,991,627 3,876,551 3,394,068 3,398,779
Excess of cost over fair value of net
assets acquired 229,484 239,047 248,610 258,173 267,736
Debt outstanding 903,083 901,532 878,419 892,579 911,071
Shareholders' equity 962,515 676,680 678,348 386,750 518,626
Shareholders' equity per common share 8.38 5.92 5.98 3.42 4.65
Statutory policyholders' surplus
of property and casualty
insurance subsidiaries 1,302,490 1,187,056 1,128,336 908,538 902,290
(1) On February 27, 1998, the Company completed the sale of its title insurance
operations to LandAmerica Financial Group, Inc. See note 2 to the
consolidated financial statements.
(2) The 1996 results included a charge of $134.0 million ($87.1 million
after-tax, or $.75 per diluted share) to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987. Excluding this charge, 1996 income from continuing
operations, before gains on sales of investments, would have been $103.1
million, or $.89 per diluted share.
(3) The data relate to the property and casualty insurance subsidiaries.
Underwriting results include policyholders' dividends and other income and
expense.
(4) The 1996 data excluded the charge of $134.0 million (7.4 combined ratio
points) to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. The
actual 1996 underwriting loss was $172.4 million, the loss and loss expense
ratio was 75.0% and the combined ratio was 109.0%.
(5) In 1995 and 1994, the combined ratio excluded the effect of the $4.0
million and $11.6 million charge pertaining to California's Proposition
103.
Reliance Group Holdings, Inc. and Subsidiaries 23
Property and Casualty Insurance Operations
Net premiums written for each line of property and casualty insurance are as
follows:
Year Ended December 31 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
General Liability $ 423,278 $ 466,636 $ 468,951 $ 423,377 $ 369,895
Commercial Automobile 295,014 265,206 239,819 244,000 260,180
Workers' Compensation 275,898 249,638 265,882 312,808 377,592
Multiple Peril 221,021 211,857 184,600 180,074 187,438
Ocean and Inland Marine 191,055 129,148 118,757 103,865 105,254
Surety 176,500 159,183 139,298 117,989 106,664
Reinsurance 159,032 151,099 118,969 125,597 123,742
Non-Standard Automobile 97,939 - - - -
Accident and Health 91,714 61,873 58,426 51,976 35,649
Fire and Allied 46,339 64,250 68,118 49,977 40,372
Involuntary 33,729 44,229 81,006 113,483 113,498
Other 54,328 43,080 35,214 41,144 50,313
----------------------------------------------------------------------------------
$2,065,847 $1,846,199 $1,779,040 $1,764,290 $1,770,597
==================================================================================
Combined ratios (on a GAAP basis), after policyholders' dividends, for each
line of property and casualty insurance are as
follows:
Year Ended December 31 1997 1996(2) 1995(3) 1994(3) 1993
- ----------------------------------------------------------------------------------------------------------------------------------
General Liability 100.0% 95.5% 102.4% 106.0% 105.0%
Commercial Automobile 115.1 123.7 126.3 116.6 125.5
Workers' Compensation 93.0 94.1 79.1 95.3 96.5
Multiple Peril 100.9 107.0 117.3 114.8 121.6
Ocean and Inland Marine 92.1 100.3 96.0 124.9 113.9
Surety 77.0 75.5 65.6 74.3 81.0
Reinsurance 101.8 102.7 114.9 111.3 104.8
Non-Standard Automobile 140.8(1) - - - -
Accident and Health 97.3 96.0 81.2 88.9 94.2
Fire and Allied 121.4 100.9 117.4 75.5 158.4
Involuntary 96.7 98.8 94.6 100.3 133.6
Other 127.5 156.6 155.7 120.7 187.8
------------------------------------------------------------------------------
100.9% 101.6% 101.8% 104.4% 110.8%
==============================================================================
(1) Includes administrative expenses associated with building an infrastructure
and quality control systems to support future premium growth of this
start-up operation.
(2) Excluded the effect of the $134.0 million increase in net loss reserves for
asbestos-related and environmental pollution claims for business written in
or before 1987. This charge impacted the general liability, commercial
automobile, multiple peril and reinsurance lines of business. Including
this charge, the total combined ratio was 109.0%, while the combined ratios
of the general liability, commercial automobile, multiple peril and
reinsurance lines of business were 113.8%, 124.5%, 123.9% and 115.5%,
respectively.
(3) Excluded the effect of the $4.0 million and $11.6 million charge pertaining
to California's Proposition 103 in 1995 and 1994.
24 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review
Sale of Title Insurance Operations
On February 27, 1998, the Company completed the sale of its title insurance
operations 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 of 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
convertible into 4,824,561 shares of LandAmerica common stock. Such shares of
common 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, and has three representatives on its
14 member board of directors. Accordingly, the Company will account for its
investment in LandAmerica by the equity method of accounting for periods
subsequent to the sale date. The sale 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 balance of the gain will be
recognized as the equity securities of LandAmerica are sold. The Company intends
to use a portion of the cash proceeds from the sale to purchase approximately
$125 million of its debt.
Overview
The Company had income from continuing operations, before gains on sales of
investments, of $127.0 million ($1.07 per diluted share) in 1997, compared to
$16.0 million ($.14 per diluted share) in 1996 and $76.4 million ($.66 per
diluted share) in 1995. The 1996 operating results included an after-tax charge
of $87.1 million ($.75 per diluted share) to increase property and casualty
insurance net loss reserves for asbestos-related and environmental pollution
claims for business written in or before 1987. Excluding the effects of this
charge, 1996 operating income, before gains on sales of investments, was $103.1
million ($.89 per diluted share). The improved results in 1997 and 1996 resulted
from increased profitability in both property and casualty and title insurance
operations. After-tax gains on sales of investments were $47.5 million ($.40 per
diluted share), $32.2 million ($.27 per diluted share) and $19.5 million ($.17
per diluted share) in 1997, 1996 and 1995, respectively.
Net income in 1997 was $229.4 million ($1.94 per diluted share) which
includes an after-tax gain of $68.9 million ($.58 per diluted share) resulting
from a tax benefit realized from the sale of all the issued and outstanding
common stock of Prometheus Funding Corp. ("Prometheus"), formerly Frank B. Hall
& Co. Inc., a subsidiary previously classified as discontinued, and an after-tax
charge of $7.5 million ($.06 per diluted share) for a litigation settlement
pertaining to Prometheus. Net income in 1997 also includes an after-tax charge
of $6.4 million ($.05 per diluted share) representing the cumulative effect of
adopting Emerging Issues Task Force Issue No. 97-13, which prohibits
capitalization of process reengineering costs. Net income in 1996 was $48.2
million ($.41 per diluted share) and $88.1 million ($.74 per diluted share) in
1995. Excluding the effects of the charge to strengthen asbestos and
environmental net loss reserves, net income in 1996 was $135.3 million ($1.16
per diluted share). Net income in 1995 included a loss of $4.5 million on the
disposal of discontinued life insurance operations by Zenith National Insurance
Corp. ("Zenith"), an investee company, and an extraordinary loss of $3.4 million
from the early extinguishment of debt.
Property and Casualty Insurance Operations
Property and casualty insurance pretax operating income, before gains on sales
of investments, increased to $232.3 million in 1997, from $218.7 million in 1996
(which excludes the $134.0 million pretax charge to strengthen asbestos-related
and environmental pollution claims net loss reserves), and $201.7 million in
1995. These increases reflect continued strong underwriting results and higher
levels of net investment income. Pretax gains on sales of investments were $71.5
million, $49.3 million and $27.4 million in 1997, 1996 and 1995, respectively.
Reliance Group Holdings, Inc. and Subsidiaries 25
Net premiums written and premiums earned for each line of property and casualty
insurance are as follows:
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Net Net Net Net Net Net
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
General Liability $ 423,278 $ 420,645 $ 466,636 $ 437,634 $ 468,951 $ 451,867
Commercial Automobile 295,014 275,467 265,206 260,735 239,819 236,592
Workers' Compensation 275,898 249,135 249,638 276,938 265,882 290,241
Multiple Peril 221,021 207,369 211,857 200,301 184,600 180,166
Ocean and Inland Marine 191,055 188,001 129,148 123,352 118,757 115,590
Surety 176,500 167,251 159,183 147,416 139,298 127,355
Reinsurance 159,032 152,754 151,099 140,334 118,969 119,921
Non-Standard Automobile 97,939 53,512 - - - -
Accident and Health 91,714 87,196 61,873 60,394 58,426 58,636
Fire and Allied 46,339 55,336 64,250 63,020 68,118 61,430
Involuntary 33,729 38,955 44,229 50,489 81,006 88,734
Other 54,328 51,395 43,080 40,241 35,214 44,059
------------------------------------------------------------------------------------
$2,065,847 $1,947,016 $1,846,199 $1,800,854 $1,779,040 $1,774,591
====================================================================================
The increase in net premiums written and premiums earned in 1997 resulted from
continued growth in both domestic and international operations and reflect
premiums generated from the start-up of the Company's non-standard automobile
line. Premiums from the non-standard automobile business are expected to
continue to grow throughout 1998. The increase in 1997 premiums also reflect
growth in the commercial automobile, ocean and inland marine, surety and
accident and health lines of business. Net premiums written and premiums earned
in 1996 benefitted from increased writings in the multiple peril, commercial
automobile and reinsurance lines of business. Net premiums written and premiums
earned in 1996 also benefitted from growth in surety premiums, resulting from a
higher level of construction activity by insureds and growth in small contractor
business.
The underwriting losses in 1997, 1996 and 1995 were $31.7 million, $38.4
million and $45.6 million, respectively, and the combined ratios (calculated on
a GAAP basis), after policyholders' dividends, were 100.9%, 101.6% and 101.8%,
in 1997, 1996 and 1995, respectively. The 1996 underwriting results exclude the
pretax charge of $134.0 million to increase asbestos-related and environmental
pollution claims net loss reserves. Including the effects of this charge, the
1996 underwriting loss and combined ratio were $172.4 million and 109.0%. The
low level of underwriting losses in 1997 and 1996 reflect strong underwriting
results in most of the Company's lines of business, including workers'
compensation which has benefitted from various state reforms and lower medical
costs, general liability, ocean and inland marine, surety, reinsurance and
accident and health lines. The 1997 underwriting results also benefitted from
lower underwriting losses in the multiple peril and the commercial automobile
lines. The favorable underwriting results in 1997 were partially offset by
start-up costs associated with the Company's non-standard automobile line, which
has adversely impacted the underwriting expense ratio. The Company's
underwriting results have also benefitted from a relatively low level of
catastrophe losses, which were $11.1 million, $19.9 million and $25.7 million in
1997, 1996 and 1995, respectively.
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. The Company's aggregate reinsurance recoverables
were $4.24 billion at December 31, 1997, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but not
reported, unearned premiums and paid claims. The Company is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers does
not relieve the Company of its liability to insureds. In order to minimize
potential losses from uncollectible reinsurance, the Company
26 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review continued
places its reinsurance with a number of different reinsurers and utilizes a
security committee to approve, in advance, the reinsurers which meet its
standards of financial strength. The Company holds substantial amounts of
collateral to secure recoverables from unauthorized reinsurers. See note 9 to
the consolidated financial statements.
Policy claims and settlement expenses for 1997 include favorable development
of $36.0 million pertaining to insured events of prior years. This redundancy
reflects 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. Policy claims and settlement expenses for 1996 and
1995 included a provision for insured events of prior years of $138.7 million
and $38.5 million, respectively. The provision for 1996 and 1995 included
adverse development related to prior year 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 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 Company records involuntary assessments when such assessments are billed
by the respective state insurance facilities. These assessments are subject to
large variations in timing and amount and, accordingly, the Company cannot
reasonably estimate a minimum amount of liability prior to billing. While the
amount of any involuntary assessments cannot be predicted with certainty, the
Company believes that future assessments will not have a material effect on its
liquidity or capital resources.
The liability for property and casualty insurance loss reserves at December
31, 1997 was $6.67 billion compared to $6.14 billion at December 31, 1996. This
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.
Reinsurance recoverables of $3.43 billion and $2.82 billion at December 31, 1997
and 1996, respectively, are included in the liability.
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new data
are included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The 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 Company's
historical data base, or which are not yet able to be quantified. The Company
regularly analyzes its reserves and reviews its pricing and reserving
methodologies so that future adjustments to prior years reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be more or less than such
estimates indicate. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail claims may not
become apparent for a number of years, and a relatively higher proportion of
ultimate losses are considered incurred but not reported. As a result, variation
in loss development is more likely in long tail lines of business. The Company
attempts to reduce these variations in certain of its long tail lines, primarily
directors and officers liability and
Reliance Group Holdings, Inc. and Subsidiaries 27
professional liability, by writing policies on a claims-made basis which
mitigates the long tail nature of the risks. The Company also limits the
potential loss from a single event through the extensive use of reinsurance.
Property and Casualty Insurance Investment Results
Net investment income of the property and casualty insurance operations
increased to $264.0 million in 1997 from $257.1 million in 1996 and $247.3
million in 1995. These increases reflect growth in the size of the fixed
maturity investment portfolio, partially offset, in 1997, by the effect of lower
interest rates.
Gains on sales of investments were $71.5 million in 1997 compared to $49.3
million in 1996 and $27.4 million in 1995. Gains on sales of investments in 1997
and 1996 primarily resulted from sales of equity securities. Gains on sales of
investments in 1997 also included gains of $42.8 million resulting from sales of
shopping centers, and an office building in Glendale, California. These real
estate gains were partially offset by a $25.9 million write-down of undeveloped
land which is zoned for mixed use development.
Property and Casualty Insurance Investment Portfolio
At December 31, 1997, the Company's property and casualty insurance investment
portfolio aggregated $3.75 billion (at cost), of which 10% was invested in
equity securities. The Company seeks to maintain a diversified and balanced
fixed maturity portfolio representing a broad spectrum of industries and types
of securities. At December 31, 1997, no one issuer comprised more than 3.5% of
the fixed maturity and short-term investment portfolio. The portfolio is managed
to achieve a proper balance of safety, liquidity and investment yields.
The property and casualty insurance fixed maturity portfolio consists of
investment grade securities (those rated "BBB" or better by Standard and Poor's)
and, to a lesser extent, non-investment grade securities and non-rated
securities. The risk of default is generally considered to be greater for
non-investment grade securities, when compared to investment grade securities,
since these issues may be more susceptible to severe economic downturns. At
December 31, 1997, the carrying values of non-investment grade securities and
securities not rated by Standard & Poor's were $539.6 million (16% of the fixed
income portfolio) and $181.3 million (5% of the fixed income portfolio),
respectively. Substantially all of the Company's non-investment grade and
non-rated securities are classified as available for sale and, accordingly, are
carried at market value. See note 3 to the consolidated financial statements.
At December 31, 1997, approximately 28% of the property and casualty
insurance fixed maturity and short-term investment portfolio was comprised of
securities issued by utilities, the vast majority of which are rated investment
grade and are first mortgage or senior secured bonds. The utility portfolio is
widely diversified among various geographic regions in the United States and is
not dependent on the economic stability of any one particular region. No other
industry group comprises more than 10% of the fixed maturity and short-term
investment portfolio.
Title Insurance Operations
On February 27, 1998, the Company completed the sale of its title insurance
operations. See "Sale of Title Insurance Operations" for further discussion. The
title insurance operations reported pretax income, before gains on sales of
investments, of $63.4 million in 1997, $38.2 million in 1996 and $12.3 million
in 1995.
Premiums and fees were $863.7 million in 1997, $780.2 million in 1996 and
$671.9 million in 1995. The increase in premiums and fees in 1997 and 1996
resulted from an increase in residential resales and refinancings and commercial
real estate activity, reflecting a strong economy and favorable mortgage
interest rates.
Agency commissions represent the portion of premiums retained by agents
pursuant to the terms of their agency contracts and are the title insurance
operations' single largest expense. Agency
28 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review continued
commissions, which fluctuate in direct relation to agency premiums, were
$379.7 million in 1997, compared to $355.8 million in 1996 and $310.7 million in
1995. Other expenses of the title insurance operations include personnel costs
relating to marketing activities, title searches, information gathering on
specific properties and preparation of insurance policies, as well as costs
associated with the maintenance of title plants. Other expenses were $410.2
million in 1997, $355.4 million in 1996 and $318.4 million in 1995. The increase
in other expenses in 1997 and 1996 reflect higher employee related expenses due
to growth in premium volume. The expense ratio of the title insurance operations
(which includes agency commissions) was 90.9% in 1997 compared to 90.5% in 1996
and 93.1% in 1995. The provision for policy claims was $41.5 million in 1997
compared to $61.1 million in 1996 and $58.5 million in 1995. The decrease in the
provision for policy claims in 1997 reflects the favorable paid claims
experience in recent years.
Other Operations
RCG Information Technology, Inc. ("RCG"), a subsidiary of the Company, primarily
provides computer-related professional services to large corporate clients
throughout the United States. Information technology revenues were $191.9
million in 1997, $136.7 million in 1996 and $106.4 million in 1995. The increase
in revenues in both 1997 and 1996 resulted from a significant increase in demand
for information technology services from both existing and new clients.
Information technology operating expenses increased to $187.1 million in 1997
from $134.4 million in 1996 and $101.0 million in 1995. These increases in
operating expenses in 1997 and 1996 resulted from higher employee related
expenses associated with the increased revenues and higher selling, recruiting
and administrative costs associated with building the infrastructure of the
information technology operations. RCG's revenues and expenses are included in
other revenues and other operating expenses in the accompanying consolidated
statement of income.
Equity in Investee Company
Equity in investee company was $7.7 million in 1997, $8.9 million in 1996 and
$7.8 million in 1995, respectively, from the Company's investment in Zenith. The
decline in equity income in 1997, when compared to 1996, reflects increased
underwriting losses in Zenith's workers' compensation business due, in part, to
reserve strengthening for prior year losses. The increase in equity income in
1996, when compared to 1995, reflects lower catastrophe losses. Catastrophe
losses for 1997 and 1995 were $1.0 million and $8.7 million, respectively. There
were no catastrophe losses in 1996.
Liquidity and Capital Resources
The Company's principal sources of funds consist of dividends, advances and net
tax payments from its subsidiaries. These payments aggregated $138.3 million for
the year ended December 31, 1997. The Company's ability to receive cash
dividends has depended upon and continues to depend upon the dividend paying
ability of its insurance subsidiaries. The Insurance Law of Pennsylvania, where
Reliance Insurance Company (the Company's principal property and casualty
insurance subsidiary) is domiciled, limits the maximum amount of dividends which
may be paid without approval by the Pennsylvania Insurance Department. Under
such law, Reliance Insurance Company may pay dividends during the year equal to
the greater of (a) 10% of the preceding year-end policyholders' surplus or (b)
the preceding year's statutory net income. 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.
Reliance Group Holdings, Inc. and Subsidiaries 29
Total common stock dividends paid by Reliance Insurance Company were $114.6
million in 1997 and $111.5 million in each of 1996 and 1995. 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 million, representing
a portion of the gain from the sale of the title insurance operations. The
Company plans to use funds provided by the dividend to purchase approximately
$125 million of its outstanding debt.
Reliance Insurance Company collects and invests premiums prior to payment of
associated claims, which are generally made months or years subsequent to the
receipt of premiums. Reliance Insurance Company carefully monitors its cash,
short-term investments and marketable securities to maintain adequate balances
for timely payment of claims and other operating requirements. At December 31,
1997, the property and casualty insurance operations had $527 million of cash
and short-term investments.
For the year ended December 31, 1997, the Company generated $10.5 million of
cash flow from operating activities compared to $160.4 million in 1996 and
$168.5 million in 1995. The decline in 1997 operating cash flow reflects the
increase in premiums receivable, other receivables and reinsurance recoverables.
The decline in operating cash flow in 1997 also reflects higher payments for
property and casualty insurance policy claims and related expenses due, in part,
to a shift in the mix of business to shorter tailed lines. The decrease in 1996
operating cash flow when compared to 1995, reflected higher net payments for
property and casualty insurance policy claims and related expenses, partially
offset by higher levels of operating cash flow from the title insurance
operations, due to an increase in their operating income and a decline in paid
claims.
The Company generated $56.7 million of cash flow from investing activities
for the year ended December 31, 1997, primarily from sales of real estate. The
Company used $159.9 million and $111.2 million of cash flow for investing
activities for the years ended December 31, 1996 and 1995, respectively. Net
purchases of marketable securities for the property and casualty insurance
investment portfolio were $62.2 million and $90.8 million in 1996 and 1995,
respectively.
The Company used $34.6 million and $12.5 million of cash flow for financing
activities for the years ended December 31, 1997 and 1996, respectively,
primarily for the payment of dividends, partially offset, in 1996, by additional
term loan borrowings. The Company used $53.4 million of cash flow for financing
activities for the year ended December 31, 1995, principally for the payment of
dividends and reduction of debt.
During 1997, the Company increased term loan borrowings by $25 million to
$187.5 million. The additional borrowings were used to redeem all outstanding
7.866% senior reset notes, due December 1, 2000. The outstanding principal
amount of such notes was $25 million, including $9.6 million held by Reliance
Insurance Company. The redemption price was 100% of the principal amount of such
notes plus interest from June 1, 1997 to the redemption date.
The Company has a revolving credit facility with various banks providing for
aggregate maximum outstanding borrowings of $100 million. At December 31, 1997,
borrowings aggregating $25 million were outstanding under this facility. The
Company has $903.1 million of debt outstanding at December 31, 1997 with $11.5
million maturing on or before December 31, 1998. An additional $617.1 million of
debt matures on or before December 31, 2002 of which $563.8 million matures in
the year 2000. The Company expects to repay these amounts at their existing
maturities, utilizing a combination of refinancing these obligations and cash
flow generated from operations. In addition, the Company intends to use the
extraordinary dividend from Reliance Insurance Company to purchase, during 1998,
approximately $125 million of its debt.
30 Reliance Group Holdings, Inc. and Subsidiaries
Financial Review continued
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess of the minimum
required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important
by the Company's management, state insurance regulatory authorities and the
agencies that rate the 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.
Year 2000
Many existing computer systems and software products are coded to accept only
two digit entries in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. If not corrected, the Company's business
operations, including claims and premiums processing operations, financial
reporting systems and its actuarial calculations could be affected by the year
2000 issue. The Company commenced its efforts to address the year 2000 issue in
1996 and believes that its claims and premiums processing systems and corporate
financial recording and reporting systems are year 2000 compliant. The Company
is currently in the process of confirming its belief that these systems are year
2000 compliant and that certain of its other computer systems and software
products are year 2000 compliant. Through year-end 1997, the Company has
incurred approximately $5 million to correct the year 2000 issue. The Company
does not believe that the costs associated with its resolution of the year 2000
issue will have a material adverse effect on its financial position, results of
operations or cash flows.
As part of its year 2000 process, the Company is identifying certain third
parties with whom the Company does significant business to determine whether
such third parties are, or will be, year 2000 compliant. While the Company is
taking what it believes are appropriate safeguards, there can be no assurances
that the failure of such third parties to be year 2000 compliant will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows in future financial periods.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 31
Consolidated Statement of Income
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues:
Premiums earned $2,810,762 $2,581,011 $2,446,538
Net investment income 294,971 287,588 275,289
Gain on sales of investments 73,097 49,610 27,377
Other 263,806 172,378 156,783
---------------------------------------------
3,442,636 3,090,587 2,905,987
---------------------------------------------
Claims and expenses:
Policy claims and settlement expenses 1,304,559 1,411,453 1,260,445
Policy acquisition costs and other insurance expenses 1,496,983 1,327,306 1,238,142
Interest 88,663 87,724 90,245
Other operating expenses 311,210 217,505 196,631
---------------------------------------------
3,201,415 3,043,988 2,785,463
---------------------------------------------
Income before income taxes and equity
in investee company 241,221 46,599 120,524
Provision for income taxes (74,400) (7,300) (32,400)
Equity in investee company 7,675 8,908 7,792
---------------------------------------------
Income from continuing operations 174,496 48,207 95,916
Gain on disposal of discontinued operation 68,865 - -
Litigation settlement of discontinued operation (7,500) - -
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 debt - - (3,363)
Cumulative effect of change in accounting for process reengineering costs (6,442) - -
---------------------------------------------
Net income $ 229,419 $ 48,207 $ 88,056
=============================================
Basic per share information:
Income from continuing operations $ 1.52 $ .42 $ .85
=============================================
Net income $ 2.00 $ .42 $ .75
=============================================
Diluted per share information:
Income from continuing operations $ 1.47 $ .41 $ .83
=============================================
Net income $ 1.94 $ .41 $ .74
=============================================
See notes to consolidated financial statements
32 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
Assets December 31 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amount)
Marketable securities:
Fixed maturities held for investment - at amortized cost
(quoted market $663,744 and $660,949) $ 636,119 $ 648,038
Fixed maturities available for sale - at quoted market
(amortized cost $2,214,963 and $2,311,548) 2,317,673 2,333,678
Equity securities - at quoted market
(cost $376,065 and $436,053) 708,563 716,606
Short-term investments 487,614 293,305
Cash 53,661 26,525
Premiums and other receivables 1,460,426 1,222,916
Reinsurance recoverables 4,241,015 3,447,953
Investment in investee company 166,673 159,157
Deferred policy acquisition costs 248,572 215,438
Excess of cost over fair value of net assets acquired,
less accumulated amortization 229,484 239,047
Other assets 494,067 558,914
Net assets of title insurance operations 288,619 282,115
-----------------------------
$11,332,486 $10,143,692
=============================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------------------
Unearned premiums $ 1,722,258 $ 1,468,299
Unpaid claims and related expenses 6,669,508 6,136,420
Accounts payable and accrued expenses 579,582 503,249
Reinsurance ceded premiums payable 402,972 365,412
Federal and foreign income taxes, including deferred taxes 92,568 92,100
Term loans and short-term debt 253,083 236,167
Debentures and notes 650,000 665,365
-----------------------------
10,369,971 9,467,012
=============================
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) 142,701 (50,012)
Net unrealized gain on investments 292,081 198,786
Net unrealized loss on foreign currency translation (25,802) (23,987)
-----------------------------
962,515 676,680
-----------------------------
$11,332,486 $10,143,692
=============================
See notes to consolidated financial statements
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 33
Consolidated Statement of Changes in Shareholders' Equity
Net
Net Unrealized
Unrealized Loss on
Additional Retained Gain Foreign
Common Paid-In Earnings (Loss) on Currency Shareholders'
Stock Capital (Deficit) Investments Translation Equity
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Balance, January 1, 1995 $11,313 $533,979 $(110,479) $(27,881) $(20,182) $386,750
Issuance of common stock 31 1,165 - - - 1,196
Transactions of investee company
and other - (53) - 8,693 - 8,640
Net income - - 88,056 - - 88,056
Loss on early extinguishment of
redeemable preferred stock
of a subsidiary - - (3,029) - - (3,029)
Dividends ($.32 per share) - - (36,242) - - (36,242)
Appreciation after deferred
income taxes - - - 238,544 - 238,544
Foreign currency translation - - - - (5,567) (5,567)
-----------------------------------------------------------------------------------------
Balance, December 31, 1995 11,344 535,091 (61,694) 219,356 (25,749) 678,348
Issuance of common stock 84 5,754 - - - 5,838
Transactions of investee company - (380) - (1,504) - (1,884)
Net income - - 48,207 - - 48,207
Dividends ($.32 per share) - - (36,525) - - (36,525)
Depreciation after deferred
income taxes - - - (19,066) - (19,066)
Foreign currency translation - - - - 1,762 1,762
-----------------------------------------------------------------------------------------
Balance, December 31, 1996 11,428 540,465 (50,012) 198,786 (23,987) 676,680
Issuance of common stock 58 2,393 - - - 2,451
Transactions of investee company
and other - (809) - 3,284 - 2,475
Net income - - 229,419 - - 229,419
Dividends ($.32 per share) - - (36,706) - - (36,706)
Appreciation after deferred
income taxes - - - 90,011 - 90,011
Foreign currency translation - - - - (1,815) (1,815)
------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 11,486 $ 542,049 $ 142,701 $ 292,081 $ (25,802) $ 962,515
------------------------------------------------------------------------------------------
See notes to consolidated financial statements
34 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income (including net income of $42,176, $25,233 and $5,102
from the title insurance operations) $ 229,419 $ 48,207 $ 88,056
Adjustments to reconcile net income to net cash
provided from operating activities:
Discontinued operation (68,865) - -
Gain on sales of investments (73,097) (49,610) (27,377)
Deferred policy acquisition costs (33,134) (20,790) (12,710)
Premiums and other receivables and reinsurance recoverables (993,443) (418,187) (209,054)
Unearned premiums, unpaid claims and related expenses 788,523 532,699 271,574
Accounts payable, accrued expenses and other 134,757 25,902 52,404
Change in title insurance operating assets and liabilities 26,307 42,144 5,613
----------------------------------------------
10,467 160,365 168,506
----------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Fixed maturities available for sale 503,609 541,463 507,118
Fixed maturities held for investment - 25,610 34,951
Equity securities 352,445 360,983 400,635
Maturities and repayments of:
Fixed maturities available for sale 259,717 93,140 46,349
Fixed maturities held for investment 49,885 28,441 52,033
Purchases of:
Fixed maturities available for sale (682,577) (888,946) (476,569)
Fixed maturities held for investment (41,156) (58,373) (97,071)
Equity securities (228,598) (343,146) (262,075)
(Increase) decrease in short-term investments - net (207,717) 178,580 (296,197)
Discontinued operation (11,238) - -
Investing cash flows of the title insurance operations (23,887) (51,319) (2,318)
Other - net 86,238 (46,362) (18,008)
-----------------------------------------------
56,721 (159,929) (111,152)
-----------------------------------------------
Cash flows from financing activities:
Increase in term loans 75,000 86,327 120,298
Increase (decrease) in short-term debt - net 985 (2,174) (5,400)
Repayments of term loans (61,003) (40,483) (68,152)
Issuance of common stock 2,451 5,838 1,196
Repurchases of senior reset notes (15,365) (25,000) (40,348)
Debt issuance costs - (480) (1,000)
Dividends (36,706) (36,525) (36,242)
Redemption of redeemable preferred stock of a subsidiary - - (23,769)
-----------------------------------------------
(34,638) (12,497) (53,417)
-----------------------------------------------
Increase (decrease) in cash 32,550 (12,061) 3,937
(Increase) decrease in cash of the title insurance operations (5,414) 902 (5,945)
Cash, beginning of year 26,525 37,684 39,692
----------------------------------------------
Cash, end of year $ 53,661 $ 26,525 $ 37,684
==============================================
Supplemental disclosures of cash flow information:
Interest paid $ 75,900 $ 75,100 $ 77,200
==============================================
Income taxes paid $ 39,700 $ 8,900 $ 9,500
==============================================
See notes to consolidated financial statements
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 35
Notes to Consolidated Financial Statements
NOTE 1 Nature of Operations/Summary of Significant Accounting Policies
Nature of Operations
The Company's property and casualty insurance business consists of
four principal operations: Reliance National, Reliance Insurance,
Reliance Surety and Reliance Reinsurance. Reliance National offers,
through brokers and agents, a broad range of commercial property and
casualty insurance products and services for large companies and
specialty line 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 Company's property and casualty insurance operations.
The Reliance Insurance operation offers, 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 Company's property and casualty insurance
operations. Reliance Surety is a leading writer of surety bonds and
fidelity bonds in the United States and conducts its business
through 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 Company's property and casualty insurance
operations accounted for $1,947,016,000 (69%) of the Company's 1997
net premiums earned.
On February 27, 1998, the Company completed the sale of its title
insurance operations to Lawyers Title Corporation ("Lawyers Title"),
whose name was changed to LandAmerica Financial Group, Inc.
("LandAmerica") on that date. As consideration for the sale, the
Company received cash, convertible preferred stock, and common stock
which represents ownership of 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. The Company also has three representatives on its 14 member
board of directors. Accordingly, the Company will account for its
investment in LandAmerica by the equity method of accounting for
periods subsequent to the sale date. See note 2 to the consolidated
financial statements. LandAmerica writes, through direct and agency
operations, title insurance for residential and commercial real
estate nationwide and provides escrow, appraisal and settlement
services in connection with real estate closings. The Company's
title insurance operations accounted for $863,746,000 (31%) of the
Company's 1997 net premiums earned.
The Company also provides computer-related professional services to
large corporate clients throughout the United States. Information
technology consulting revenues were $191,900,000 in 1997.
Basis of Consolidation and Presentation
The consolidated financial statements of the Company include the
accounts of all subsidiaries. The consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles. Such statements include informed estimates and judgments
of management for those transactions that are not yet complete or
for which the ultimate effects cannot be precisely determined.
Actual results may differ from these estimates.
All material intercompany balances and transactions have been
eliminated in consolidation.
Insurance
The financial statements of the insurance subsidiaries have been
prepared in accordance with generally accepted accounting
principles, which differ in certain respects from those followed in
reports to regulatory authorities.
36 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Fixed maturity investments, the vast majority of which are
publicly traded securities, include bonds, notes and redeemable
preferred stocks. Fixed maturity investments classified as
"available for sale" represent securities that will be held for an
indefinite period of time and are carried at quoted market value
with the net unrealized gain or loss included in shareholders'
equity. Such investments may be sold in response to changes in
interest rates, future general liquidity needs and similar factors.
Fixed maturity investments classified as "held for investment" are
carried at amortized cost since the Company has the positive intent
and ability to hold these securities to maturity. Investments in
equity securities include common stocks, where the Company's
ownership of outstanding voting stock is less than 20%, and
nonredeemable preferred stocks and are carried at quoted market
value with the net unrealized gain or loss included in shareholders'
equity. Investments in which the Company has a 20% to 50% ownership
interest of voting stock, or otherwise exercises significant
influence, are reported using the equity method of accounting.
Short-term investments primarily consist of United States government
and other foreign government securities, certificates of deposit and
commercial paper carried at cost which approximates market value.
Investments whose declines in market values are deemed to be other
than temporary are written down to market value. In circumstances
where market values are not available, investments are written down
to estimated fair value. In determining estimated fair value of
investments, the Company reviews the issuer's financial condition
and the stability of its income, as well as the discounted cash flow
to be received by the Company. Write-downs and other realized gains
and losses, determined on a specific identification basis, are
included in income.
Property and casualty insurance premiums reported as earned
represent the portion of premiums written applicable to the current
period, computed on a pro-rata basis over the terms of the policies
in force. Premiums include estimated audit premiums and estimated
premiums on retrospectively rated policies.
The costs associated with the acquisition of property and
casualty business are deferred and amortized on a straight-line
basis over the terms (principally one year) of the policies in
force. Such deferred policy acquisition costs consist of
commissions, premium taxes and other variable policy issuance and
underwriting expenses. Deferred policy acquisition costs are
reviewed to determine that they do not exceed recoverable amounts,
including anticipated investment income.
Property and casualty unpaid claims and related expenses are
estimated based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss
adjustment expenses. Estimates of salvage and subrogation are
deducted from the liability. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates
of ultimate liability. The process of estimating claims is a complex
task and the ultimate liability may be more or less than such
estimates indicate. Adjustments of the probable ultimate liability,
based on subsequent developments, are included in operations
currently.
Direct title insurance premiums and fees are recognized as
revenue when policies become effective. Agency title insurance
premiums are recognized as revenue when reported by the agent. Title
insurance claims arise principally from unknown title defects which
exist at the time policies become effective. The reserve for title
losses, which is based on historical and anticipated loss
experience, represents the estimated costs to settle reported claims
and claims incurred but not reported. The process of estimating
claims is a complex task and the actual payments may be more or less
than such estimates indicate. Changes in loss estimates, based on
subsequent developments, are included in operations currently.
Investments in Real Estate
Investments in real estate were $126,800,000 and $286,700,000 at
December 31, 1997 and 1996, respectively, and are included in other
assets in the accompanying consolidated balance sheet. Investments
in real estate, at December 31, 1997, consist primarily of office
buildings and undeveloped land zoned for mixed use development, and
are carried at cost (less accumulated
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 37
depreciation), which includes real estate taxes and other carrying
costs incurred prior to substantial completion of the real estate
development projects. Depreciation expense is provided using the
straight-line method.
The Company's real estate properties are reviewed for impairment
whenever events or circumstances indicate that the carrying value of
such properties may not be recoverable. In performing the review for
recoverability of carrying value, the Company estimates the future
undiscounted cash flows expected to result from the use of each of its
properties and their eventual disposition. These cash flow projections
reflect changes in occupancy, new leases, current rent roll, future
expirations and general market conditions. If the total expected
future undiscounted cash flows are less than the carrying value of
such properties, impairment losses are recognized on a
property-by-property basis. An impairment loss is measured by the
amount that the carrying value of the property exceeds its fair value.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is being
amortized over 40 years using the straight-line method. The Company
evaluates the carrying amount of the excess of cost over fair value of
net assets acquired by analyzing historical and expected future income
and undiscounted cash flows of its operations.
Income Taxes
The Company and its domestic subsidiaries, where their ownership is at
least 80% of outstanding voting stock, file a consolidated federal
income tax return. The Company provides for deferred income taxes
under the asset and liability method, whereby deferred income taxes
result from temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. In
addition, deferred income taxes are provided for unrealized
appreciation and depreciation on investments carried at quoted market
value.
Postretirement Benefit Plans
Retirement pension benefits, covering substantially all employees, are
provided under noncontributory trusteed defined benefit pension plans.
Contributions to the pension plans are based on the minimum funding
requirements of the Employee Retirement Income Security Act of 1974.
In addition, the Company sponsors defined contribution plans covering
employees who meet eligibility requirements.
Translation of Foreign Currency Financial Statements
Assets and liabilities of foreign subsidiaries are translated at
year-end exchange rates. Results of operations are translated at
average rates during the year. The effects of exchange rate changes in
translating foreign financial statements are excluded from the
consolidated statement of income and are presented as a separate
component of shareholders' equity. Exchange gains and losses resulting
from foreign currency transactions are included in operations
currently. Translation gains and losses relating to operations of
companies where hyperinflation exists are included in the consolidated
statement of income.
Fair Value of Financial Instruments
The estimated fair value of publicly traded financial instruments is
determined by the Company using quoted market prices, dealer quotes
and prices obtained from independent third parties. For financial
instruments not publicly traded, fair values are estimated based on
values obtained from independent third parties or quoted market prices
of comparable instruments. However, judgment is required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates are not necessarily indicative of the amounts that could be
realized in a current market exchange.
38 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
The carrying values and fair values of financial instruments are as
follows:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------------------------------------------------------------------------
(In thousands)
Assets:
Marketable securities:
Fixed maturities held for investment $ 636,119 $ 663,744 $ 648,038 $ 660,949
Fixed maturities available for sale 2,317,673 2,317,673 2,333,678 2,333,678
Equity securities 708,563 708,563 716,606 716,606
Short-term investments 487,614 487,614 293,305 293,305
Investment in investee company 166,673 169,292 159,157 179,975
Liabilities:
Term loans and short-term debt 253,083 253,083 236,167 236,167
Debentures and notes 650,000 675,375 665,365 684,553
Reclassifications
Certain reclassifications have been made to the Company's prior years'
consolidated financial statements to conform with the current year's
consolidated financial statements.
Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). This Statement was effective
for 1996 and encouraged, but did not require, companies to adopt a
fair value based method of accounting for stock compensation plans,
under which compensation cost is measured based on the fair value of
the award at the grant date. The resulting compensation cost would be
charged to income. Companies may continue to account for these plans
as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations ("APB 25"), under which compensation cost is measured
as the excess, if any, of the quoted market price of the stock at the
grant date over the exercise price to acquire the stock. Companies not
adopting the fair value based method of FAS 123 must present pro forma
disclosures of net income and net income per share as if this method
had been applied. The Company has elected to continue to follow APB 25
in accounting for its plans. See note 11 for the pro forma disclosures
of net income and net income per share.
Effective January 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
adoption of this Statement had no material effect on the Company's
consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share." This Statement requires dual presentation of basic and diluted
income per share. Basic income per share is computed by dividing net
income by the weighted average common shares outstanding for the
period. Diluted income per share reflects the potential dilution that
could occur if securities, such as stock options, were exercised or
otherwise converted into common stock. The Company adopted this
Statement in 1997. See note 16 to the consolidated financial
statements. All prior periods earnings per share data have been
restated to conform with the provisions of this Statement.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The adoption of these Statements, which concern
disclosure standards only, is not required until 1998.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 39
On November 20, 1997, the Emerging Issues Task Force released
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."
Issue No. 97-13 requires that the cost of business process
reengineering activities that are part of a systems development
project be expensed as those costs are incurred. Any unamortized costs
that were previously capitalized must be written off as a cumulative
adjustment in the quarter containing November 20, 1997. The effect of
adopting Issue No. 97-13 was a decrease in income for the cumulative
effect of the change in accounting principle of $6,442,000, net of an
income tax benefit of $3,468,000.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments."
The adoption of this Statement, which is not required until 1999, is
not expected to have a material effect on the Company's consolidated
financial statements.
NOTE 2 Sale of Subsidiaries
Sale of Title Insurance Operations
On February 27, 1998, the Company completed the sale of its title
insurance operations to Lawyers Title, whose name was changed to
LandAmerica Financial Group, Inc. ("LandAmerica") on that date. As
consideration for the sale, the Company received $266,600,000 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 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 total sales proceeds were
approximately $662,000,000. 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 its 14 member board of
directors. Accordingly, the Company will account for its investment in
LandAmerica by the equity method of accounting for periods subsequent
to the sale date. The transaction resulted in an after-tax gain of
approximately $245,000,000 of which approximately $135,000,000 will be
recognized in the first quarter of 1998. The deferred gain of
approximately $110,000,000 will be recognized as the equity securities
received from LandAmerica are sold. See note 17 to the consolidated
financial statements for business segment information regarding the
title insurance operations.
The assets and liabilities of the title insurance operations have been
reclassified as a one line item "net assets of title insurance
operations" in the accompanying consolidated balance sheet. Such net
assets are comprised of the following:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands)
Investments $462,345 $455,649
Premiums and other receivables 37,132 27,415
Other assets 152,831 138,642
------- -------
652,308 621,706
------- -------
Unpaid claims and related expenses 272,792 264,838
Other liabilities 90,897 74,753
------- -------
363,689 339,591
------- -------
Net assets of title insurance operations $288,619 $282,115
======= =======
The cash flows of the title insurance operations have likewise been
reclassified in the accompanying consolidated statement of cash flows.
40 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Sale of Discontinued Operation
On December 31, 1997, the Company sold all of the issued and
outstanding common stock of Prometheus Funding Corp. ("Prometheus"),
formerly known as Frank B. Hall & Co. Inc. The net proceeds received
were $5,954,000. The sale resulted in an after-tax gain of
$68,865,000, which included a tax benefit of $87,766,000. The tax
benefit resulted primarily from a reversal of a previously established
deferred tax asset valuation allowance pertaining to the tax basis
differential of the Company's investment in Prometheus. The
$68,865,000 after-tax gain has been classified as a gain on disposal
of a discontinued operation in the accompanying consolidated statement
of income.
NOTE 3 Investments
Fixed maturities held for investment at December 31, 1997 consisted
of:
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
Public utilities $ 249,202 $ 257,434 $ 8,238 $ 6
Foreign government 129,571 137,544 7,973 -
Corporate bonds and notes and other 165,634 172,395 6,895 134
Redeemable preferred stock 91,712 96,371 4,728 69
-------------------------------------------------------
$ 636,119 $ 663,744 $ 27,834 $ 209
=======================================================
(1)The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $30,537,000 and
$30,328,000.
Fixed maturities available for sale at December 31, 1997 consisted of:
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities $ 443,032 $ 438,885 $ 4,536 $ 389
States, municipalities and political
subdivisions 139,473 130,922 8,551 -
Public utilities 351,680 340,477 11,367 164
Corporate bonds and notes and other 919,724 880,068 50,696 11,040
Redeemable preferred stock 463,764 424,611 39,263 110
------------------------------------------------------
$2,317,673 $2,214,963 $114,413 $11,703
======================================================
(1)The amortized cost and market value of fixed maturities available
for sale which have unrealized losses were $335,885,000 and
$324,182,000.
Fixed maturities held for investment at December 31, 1996 consisted
of:
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses(1)
------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
Public utilities $ 265,146 $ 266,767 $ 3,652 $ 2,031
Foreign government 133,575 138,665 6,115 1,025
Corporate bonds and notes and other 148,202 152,077 5,992 2,117
Redeemable preferred stock 101,115 103,440 2,461 136
------------------------------------------------------
$ 648,038 $ 660,949 $ 18,220 $ 5,309
======================================================
(1)The amortized cost and market value of fixed maturities held for
investment which have unrealized losses were $192,403,000 and
$187,094,000.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 41
Fixed maturities available for sale at December 31, 1996 consisted of:
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses(1)
------------------------------------------------------------------------------------------------------------
(In thousands)
Bonds and notes:
United States government and government
agencies and authorities $ 607,325 $ 609,041 $ 2,268 $ 3,984
States, municipalities and political subdivisions 132,163 128,874 4,221 932
Public utilities 300,509 300,947 5,444 5,882
Corporate bonds and notes and other 828,472 826,303 29,827 27,658
Redeemable preferred stock 465,209 446,383 21,289 2,463
------------------------------------------------------
$2,333,678 $2,311,548 $ 63,049 $ 40,919
======================================================
(1)The amortized cost and market value of fixed maturities available
for sale which have unrealized losses were $979,267,000 and
$938,348,000.
As of December 31, 1997, the contractual maturities of fixed maturity
investments are as follows:
Held for investment Available for sale
--------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------------------------------------------------------
(In thousands)
Due within one year $ 6,894 $ 7,067 $ 132,746 $ 132,605
Due after one year through five years 107,110 112,278 279,467 287,073
Due after five years through ten years 292,601 307,278 674,634 708,874
Due after ten years 229,514 237,121 954,024 1,012,581
--------------------------------------------------------
636,119 663,744 2,040,871 2,141,133
Mortgage-backed securities - - 174,092 176,540
--------------------------------------------------------
$ 636,119 $ 663,744 $2,214,963 $2,317,673
========================================================
Net investment income consisted of:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Investment income:
Fixed maturities $ 252,930 $ 236,093 $ 221,279
Equity securities 11,510 12,990 20,187
Short-term investments 24,607 32,244 30,292
Other 18,416 18,652 15,359
------------------------------------------
307,463 299,979 287,117
Investment expenses (12,492) (12,391) (11,828)
------------------------------------------
$ 294,971 $ 287,588 $ 275,289
==========================================
42 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Gain on sales of investments consisted of:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Fixed maturities(1):
Realized gains $ 31,171 $ 15,302 $ 47,764
Realized losses(2) (26,828) (18,022) (28,406)
---------------------------------------
4,343 (2,720) 19,358
Equity securities(3) 55,667 58,296 19,457
Real estate(4) 16,955 - -
Other(3),(5) (3,868) (5,966) (11,438)
--------------------------------------
$ 73,097 $ 49,610 $ 27,377
======================================
(1) The Company sold fixed maturities held for investment with an
amortized cost of $26,100,000 and $41,000,000 in 1996 and 1995,
respectively. These sales were in response to a significant
deterioration in the issuers' creditworthiness. No fixed
maturities held for investment were sold in 1997.
(2) Includes realized losses of $3,300,000, $600,000 and $7,600,000
in 1997, 1996 and 1995, respectively, and write-downs of
$18,100,000, $3,200,000 and $15,700,000 in 1997, 1996 and 1995,
respectively, related to securities not rated investment grade.
(3) Gain on sales of equity securities and other in 1997, 1996 and
1995 includes write-downs of $2,700,000, $3,600,000 and
$1,500,000, respectively.
(4) Includes gains of $42,800,000 resulting from the sale of shopping
centers located throughout the United States and an office
building located in Glendale, California and a write-down of
$25,900,000 related to undeveloped land.
(5) Includes exchange losses of $3,500,000, $3,300,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, related to
certain foreign currency denominated investments.
Net unrealized appreciation (depreciation) on investments consisted
of:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Unrealized appreciation (depreciation):
Equity securities $ 51,945 $ 15,939 $ 182,507
Fixed maturities available for sale 80,580 (38,441) 161,756
-------------------------------------
132,525 (22,502) 344,263
Deferred income tax (provision) benefit (46,025) 7,533 (116,987)
Net unrealized appreciation (depreciation) in
investments of title insurance operations 3,511 (4,097) 11,268
Net unrealized appreciation (depreciation) in
investments of investee company 3,284 (1,504) 8,693
-------------------------------------
$ 93,295 $(20,570) $ 247,237
-------------------------------------
Unrealized appreciation (depreciation) on
fixed maturities held for investment $ 14,714 $(18,907) $ 119,490
=====================================
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 43
Net unrealized gain on investments consisted of:
December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Equity securities:
Unrealized gains $ 340,361 $ 293,269 $ 276,760
Unrealized losses (7,863) (12,716) (12,146)
--------------------------------------
332,498 280,553 264,614
Fixed maturities available for sale:
Unrealized gains 114,413 63,049 78,017
Unrealized losses (11,703) (40,919) (17,446)
--------------------------------------
102,710 22,130 60,571
--------------------------------------
435,208 302,683 325,185
Deferred income tax provision (152,324) (106,299) (113,832)
Net unrealized gain in investments of title insurance operations 7,158 3,647 7,744
Net unrealized gain (loss) in investments of investee company 2,039 (1,245) 259
--------------------------------------
$ 292,081 $ 198,786 $ 219,356
======================================
Fixed maturity investments carried at $567,300,000 at December 31,
1997 were on deposit under requirements of regulatory authorities,
including deposits related to workers' compensation reinsurance pools.
Investments in a single issuer, other than obligations of the
United States government, whose aggregate carrying value is in excess
of 10% of the Company's shareholders' equity at December 31, 1997 are
comprised of fixed maturity investments of Time Warner Inc. and United
Kingdom Gilts with carrying values of $100,169,000 and $119,878,000,
respectively, and market values of $100,169,000 and $121,680,000,
respectively, and equity securities of Occidental Petroleum Corp. and
Symbol Technologies, Inc. with carrying and market values of
$115,333,000 and $202,640,000, respectively.
NOTE 4 Investment in Investee Company
Investment in investee company at December 31, 1997 and 1996 was
$166,673,000 and $159,157,000 which represents the Company's
investment in Zenith National Insurance Corp. ("Zenith"). Equity
income in Zenith was $7,675,000, $8,908,000 and $7,792,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. In
addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations
by Zenith. Dividends received by the Company from Zenith were
$6,574,000 for each of the years ended December 31, 1997, 1996 and
1995.
44 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
Summarized financial information for Zenith is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $600,480 $ 556,371 $ 519,020
Income from continuing operations before income taxes 43,478 57,117 29,422
Loss on disposal of discontinued life insurance operations - - (19,553)
Net income 28,100 37,600 6,600
Net income per diluted share 1.57 2.12 .36
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands, except percentage of ownership)
Total assets $1,252,156 $1,242,724
Senior notes 74,474 74,353
Common shareholders' equity 361,866 337,503
Percentage of ownership 36.9% 37.4%
The Company's equity in net income includes amortization of excess of
cost over fair value of net assets acquired. At December 31, 1997,
retained earnings (deficit) included undistributed net income of
$31,247,000 from Zenith.
NOTE 5 Premiums and Other Receivables
Premiums and other receivables consisted of:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands)
Premiums receivable $1,284,034 $1,092,296
Investment income receivable 47,868 49,733
Accounts, notes and other receivables 128,524 80,887
------------------------
$1,460,426 $1,222,916
========================
At December 31, 1997, substantially all receivables were due within
one year.
NOTE 6 Income Taxes
Provision for income taxes consisted of:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Current:
Federal $ 64,944 $ (6,313) $ 11,611
Foreign 8,327 7,888 6,830
--------------------------------------
73,271 1,575 18,441
Deferred federal 1,129 5,725 13,959
--------------------------------------
$ 74,400 $ 7,300 $ 32,400
======================================
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 45
Domestic and foreign income before income taxes and equity in investee
company is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Domestic $217,430 $ 24,062 $ 101,010
Foreign 23,791 22,537 19,514
-------------------------------------
$241,221 $ 46,599 $ 120,524
=====================================
The reconciliation of taxes computed at the statutory rate of 35% to
the provision for income taxes is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Tax provision at statutory rate $ 84,427 $ 16,310 $ 42,183
Nontaxable investment income (15,228) (14,403) (13,405)
Amortization of excess of cost over fair
value of net assets acquired 3,150 3,150 3,150
Net increase in valuation allowance - 2,400 1,226
Other 2,051 (157) (754)
---------------------------------------
Provision for income taxes $ 74,400 $ 7,300 $ 32,400
======================================
The tax effects of items comprising the Company's net deferred tax
asset are as follows:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Discounting of loss reserves $ 192,939 $ 194,957
Tax basis differential of subsidiary not
included in consolidated tax return - 111,815
Operating loss carryforwards of subsidiary not
included in consolidated tax return - 61,110
Unearned premium reserve 52,067 43,063
Accruals not currently deductible 42,142 57,021
Other 102,174 32,278
-----------------------
389,322 500,244
Deferred tax liabilities:
Deferred policy acquisition costs 87,000 75,062
Unrealized investment gains 152,324 106,299
Investment in investee company 23,728 21,098
Other 75,386 94,572
-----------------------
50,884 203,213
Valuation allowance (10,672) (169,215)
-----------------------
Net deferred tax asset $ 40,212 $ 33,998
=======================
As a result of the sale of Prometheus, the Company's valuation
allowance was decreased, in 1997, by $158,543,000 relating to deferred
tax assets for which it was likely that tax benefits would not be
realized. For the years ended December 31, 1996 and 1995, the
Company's valuation allowance and income tax provision were increased
by $2,400,000 and $1,226,000 relating primarily to deferred tax assets
for which it is likely that tax benefits will not be realized.
The Company is seeking a redetermination in the U.S. Tax Court of
an asserted tax deficiency for the year ended December 31, 1980, as
set forth by the Commissioner of Internal Revenue in a Notice of
Deficiency dated June 27, 1994. See note 15 to the consolidated
financial statements.
46 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
The Internal Revenue Service ("IRS") completed its examination of
the Company's 1986 through 1991 federal income tax returns and issued
a Revenue Agent's Report on August 19, 1997. A protest in response to
the Revenue Agent's Report was submitted on January 16, 1998 and the
Company does not believe it is probable that its tax liability, if
any, will have a material adverse effect on its consolidated financial
statements. The IRS is currently examining the Company's 1992 through
1994 federal income tax returns. While the outcome of the current
examination is uncertain, the Company does not believe it is probable
that its tax liability, if any, will have a material adverse effect on
its consolidated financial statements.
NOTE 7 Unpaid Claims and Related Expenses
The reconciliation of the beginning to ending liability for unpaid
claims and related expenses ("loss reserves") for the Company's
property and casualty insurance operations is as follows:
December 31 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 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
=======================================
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 $134,000,000 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 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.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 47
At December 31, 1997 and 1996, loss reserves include $380,900,000
and $396,700,000 relating to short-duration contracts which are
expected to have fixed, periodic payment patterns and have been
discounted to present values using statutory annual rates ranging from
31/2% to 6%.
The reconciliation of the beginning to ending net loss reserves for
business written in or before 1987 pertaining to asbestos-related and
environmental pollution claims is as follows:
December 31 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 included a
pretax charge of $134,000,000 to increase net loss reserves for
asbestos-related and environmental pollution claims for business
written in or before 1987. In 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.
Included in the December 31, 1997 net loss reserves for business
written in or before 1987 pertaining to asbestos-related and
environmental pollution claims are $69,097,000 of loss costs for
claims incurred but not reported, $43,942,000 of loss costs for
reported claims and $79,894,000 of related expenses.
For business written in or before 1987, the number of insureds with
asbestos-related and environmental pollution claims outstanding is as
follows:
December 31 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
=================
For business written in or before 1987, the average net paid loss for
asbestos-related and environmental pollution claims was $44,200 and
$50,200 for the years 1997 and 1996.
In addition, the Company currently underwrites policies with
environmental coverage, primarily on a claims made basis, and
underwrites policies covering asbestos removal. The net loss reserves
for these policies as of December 31, 1997, 1996 and 1995 were
$20,193,000, $16,554,000 and $15,829,000, respectively. The provisions
for these policy claims and related expenses for the years 1997, 1996
and 1995 were $6,758,000, $4,053,000 and $1,891,000, respectively, and
related payments were $3,119,000, $3,328,000 and $991,000,
respectively. Included in the December 31, 1997 net loss reserves for
these policies are $13,642,000 of loss costs for claims incurred but
not reported, $2,271,000 of loss costs for reported claims and
$4,280,000 of related expenses. The number of direct insureds with
outstanding claims related to these policies as of December 31, 1997
and 1996 were 167 and 86. Additional direct insureds with claims
reported during the years 1997 and 1996 were 155 and 44, and with
claims closed or settled during 1997 and 1996 were 74 and 46. The
average net paid loss for these claims was $24,000 and $56,800 for the
years 1997 and 1996.
48 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
NOTE 8 Debentures, Notes, Term Loans and Short-Term Debt
Debentures and notes outstanding are as follows:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
9% senior notes due 2000 $400,000 $400,000
9 3/4% senior subordinated debentures due 2003 250,000 250,000
7.866% senior reset notes due 2000 - 15,365
----------------------
$650,000 $665,365
======================
At December 31, 1997, term loans and short-term debt aggregated
$253,083,000 and consisted of $246,419,000 of term loans which are
payable in varying amounts through 2015 with interest rates ranging
from 3.0% to 9.0% and $6,664,000 of short-term debt. The weighted
average interest rate on term loans and short-term debt was 6.2% and
6.0% at December 31, 1997 and 1996.
Maturities of term loans and short-term debt for each of the next
five years are as follows: $11,511,000 in 1998; $51,267,000 in 1999;
$163,807,000 in 2000; $2,007,000 in 2001; and $67,000 in 2002. In
addition, $400,000,000 of notes mature in the year 2000.
Reliance Financial Services Corporation ("Reliance Financial")
has a revolving credit facility and term loan agreement with various
banks ("Credit Facility"). On July 8, 1997, the Company increased term
loan borrowings by $25,000,000 to $187,500,000. The additional
borrowings were used to redeem all outstanding 7.866% senior reset
notes, due December 1, 2000. The outstanding principal amount of such
notes was $25,000,000, including $9,600,000 held by Reliance Insurance
Company, the principal subsidiary of Reliance Financial. The
redemption price was 100% of the principal amount of such notes plus
interest from June 1, 1997 to the redemption date.
The revolving credit facility provides for aggregate maximum
outstanding borrowings of $100,000,000. At Reliance Financial's
option, all borrowings under the revolving credit facility will bear
interest at a floating rate based on a bank reference rate (or, if
higher, the Federal Funds rate plus 1/2%) or at a rate based on the
Eurodollar rate. At December 31, 1997, borrowings aggregating
$25,000,000 were outstanding under this facility. All of the common
stock of Reliance Insurance Company has been pledged to secure the
Credit Facility.
The provisions of notes and debentures contain limitations on the
payment of dividends, including maintaining a minimum fixed charge
coverage ratio. At February 11, 1998, the Company could pay up to
$106,100,000 in dividends without violating the most restrictive
provisions. See note 10 to the consolidated financial statements.
NOTE 9 Reinsurance
In the normal course of business, the property and casualty insurance
companies assume and cede reinsurance on both a pro-rata and excess
basis. Reinsurance provides greater diversification of business and
limits the maximum net loss potential arising from large claims.
Although the ceding of reinsurance does not discharge an insurer from
its primary legal liability to a policyholder, the reinsuring company
assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the liability for unpaid claims and related expenses
associated with the reinsurance. Estimated amounts of reinsurance
recoverables are reported as assets in the accompanying consolidated
balance sheet. As of December 31, 1997 and 1996, reinsurance
recoverables include $719,784,000 and $596,743,000 of prepaid
reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 49
The reconciliation of property and casualty insurance direct premiums
to net premiums is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
-----------------------------------------------------------------------------------------------------------
(In thousands)
Direct $ 3,428,059 $ 3,232,403 $ 3,070,944 $ 2,894,096 $ 2,748,439 $ 2,707,978
Assumed 494,140 447,924 329,318 356,489 325,226 350,636
Ceded (1,856,352) (1,733,311) (1,554,063) (1,449,731) (1,294,625) (1,284,023)
------------------------------------------------------------------------------------
Net premiums $ 2,065,847 $ 1,947,016 $ 1,846,199 $ 1,800,854 $ 1,779,040 $ 1,774,591
====================================================================================
The reconciliation of property and casualty insurance gross policy
claims and settlement expenses to net policy claims and settlement
expenses is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands)
Gross $ 2,562,423 $ 2,228,809 $ 1,956,055
Reinsurance recoveries (1,299,337) (878,472) (754,096)
------------------------------------------
Net policy claims and settlement expenses $ 1,263,086 $ 1,350,337 $ 1,201,959
==========================================
For the year ended December 31, 1996, gross policy claims and
settlement expenses included a charge of $134,500,000 and net policy
claims and settlement expenses included a charge of $134,000,000 to
increase property and casualty insurance loss reserves for
asbestos-related and environmental pollution claims for business
written in or before 1987.
The Company holds substantial amounts of funds and letters of
credit as collateral pursuant to recoverables from unauthorized
reinsurers. The Company is not aware of any impairment of the
creditworthiness of any of its significant reinsurers.
Reliance Insurance Company's ten largest reinsurers, based on 1997
ceded premiums, are as follows:
--------------------------------------------------------------------
(In thousands)
American Re-Insurance Company $ 171,092
General Reinsurance Corporation 70,337
Hertz International Reinsurance Ltd. 60,393
Commercial Risk Re-Insurance Company 60,223
Kemper Reinsurance Company 58,554
Swiss Reinsurance America Corporation 57,006
Everest Reinsurance Company 56,346
Zurich Reinsurance (North America), Inc. 49,723
Employers Reinsurance Corporation 41,405
SCOR Reinsurance Company 38,405
NOTE 10 Dividends of Subsidiaries
The Company's principal sources of funds consist of dividends,
advances and net tax payments from its subsidiaries. The Credit
Facility of Reliance Financial requires, among other things, a minimum
net worth requirement and a limitation of indebtedness. At February
11, 1998, Reliance Financial could pay up to $563,100,000 in cash
dividends without violating the most restrictive provisions. Dividend
payments by Reliance Insurance Company, without prior regulatory
approval, are limited to the greater of 10% of the preceding year-end
policyholders' surplus or the preceding year's statutory net income,
but in no event to exceed the amount of unassigned funds. In
accordance with these regulatory restrictions, $130,100,000 is
available for the payment of dividends to Reliance Financial
50 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
in 1998, subject to the broad discretionary powers of insurance
regulatory authorities to further limit dividend payments of insurance
companies. 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 $135,000,000,
representing a portion of the gain from the sale of the title
insurance operations. The Company plans to use the funds provided by
the dividend to purchase, during 1998, approximately $125,000,000 of
its outstanding debt.
NOTE 11 Stock Plans
Stock Options
The Company's stock option plans (the "Plans") provide for the
granting of incentive stock options and nonstatutory stock options to
officers, non-employee directors and key employees of the Company.
Under the terms of the Plans, options have a maximum term of 10 years
from the date of grant. At December 31, 1997, there were 3,152,400
options available for future grants.
A summary of the Plans' activity is as follows:
Year Ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------------------------------
(Shares in thousands)
Balance, beginning
of year 10,905 $ 5.40 8,462 $4.48 8,129 $4.28
Granted 4,460 13.40 2,839 8.03 789 6.26
Exercised 573 4.28 292 4.21 313 3.83
Cancelled 125 6.71 104 5.52 143 4.57
------------------------------------------------------------------------------------
Balance, end of year 14,667 $ 7.87 10,905 $5.40 8,462 $4.48
====================================================================================
Exercisable portion 6,187 $ 4.19 6,196 $4.04 4,624 $3.96
====================================================================================
Weighted average
fair value of
options granted
during the year $ 4.53 $2.08 $1.64
====== ===== =====
Summarized information about stock options outstanding at December 31,
1997 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Number of Weighted Average Weighted Number of Weighted
Range of Shares Remaining Average Shares Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------------------------------------------------------------------------------------------------------
(Shares in thousands)
$3.825 to $5.75 5,560 4.46 years $ 3.94 5,319 $ 3.89
$5.875 to $8.75 4,647 7.80 7.25 868 6.03
$11.00 to $14.375 4,460 9.80 13.40 - -
---------------------------------------------------------------------------
$3.825 to $14.375 14,667 7.13 years $ 7.87 6,187 $ 4.19
===========================================================================
Employee Stock Purchase Plan
In 1997, the Company initiated an Employee Stock Purchase Plan
("ESPP") which enables eligible employees of the Company to subscribe
for shares of common stock on an annual offering date at a purchase
price which is the lesser of 85% of the fair market value of the
shares on the first day or the last day of the annual period. Employee
contributions to the ESPP were $2,388,000 in 1997. Pursuant to the
ESPP, 237,000 shares were sold to employees in January 1998 and
10,000,000 shares are available for future sales.
The Company has elected to follow APB 25 in accounting for its
Plans and ESPP. In applying APB 25 no compensation cost has been
recognized.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 51
Pro forma information regarding net income and net income per share is
required by FAS 123, and has been determined as if the Company had
accounted for its Plans and ESPP under the fair value based method of
FAS 123. The fair value of stock options granted under the Company's
Plans was estimated on the grant dates using the Black-Scholes
option-pricing model. The following weighted average assumptions were
used for grants in 1997, 1996 and 1995, respectively: dividend yields
of 2.4%, 4.0% and 5.1%, expected volatility of 30.2%, 27.3% and 33.7%,
risk-free interest rates of 6.1%, 6.4% and 6.5% and an expected life
of 7 years for all three years. The fair value of the shares purchased
under the ESPP was calculated as if the shares were "look back
options" as required by FAS 123.
Pro forma information regarding net income and diluted net income per
share is as follows:
Year Ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net income as reported $ 229,419 $ 48,207 $ 88,056
pro forma 226,814 47,724 87,956
Diluted net income per share as reported 1.94 .41 .74
pro forma 1.92 .41 .74
NOTE 12 Policy Acquisition Costs and Other Insurance Expenses
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------
(In thousands)
Policy acquisition costs amortized during the year $ 487,432 $ 414,636 $ 411,979
----------------------------------------
Other insurance expenses:
Salaries and commissions 696,747 630,777 563,680
Taxes, other than income taxes 38,689 41,564 48,603
Rent 61,001 61,305 55,848
Policyholders' dividends 4,224 3,158 7,065
Other 208,890 175,866 150,967
----------------------------------------
1,009,551 912,670 826,163
----------------------------------------
$1,496,983 $1,327,306 $1,238,142
========================================
NOTE 13 Postretirement Benefit Plans
Retirement benefits under the Company's noncontributory trusteed
defined benefit pension plans are paid to eligible employees based
primarily on years of service and compensation. Plan assets
principally consist of corporate and government debt securities and
1,116,200 shares of the Company's common stock.
Pension cost includes the following components(1):
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost - benefits earned during the period $ 6,784 $ 7,201 $ 5,176
Interest cost on projected benefit obligation 12,743 12,273 11,253
Actual return on plan assets (23,487) (7,574) (28,210)
Net amortization and deferral 6,892 (8,475) 14,803
------------------------------------------
$ 2,932 $ 3,425 $ 3,022
==========================================
(1) Excludes pension cost for the Company's title insurance
operations which was $2,852,000, $2,850,000 and $2,639,000 for
1997, 1996 and 1995, respectively.
52 Reliance Group Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements continued
A reconciliation of the funded status of the plans with the accrued
pension cost included in accounts payable and accrued expenses is as
follows:
December 31 1997 1996
-----------------------------------------------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligation:
Vested $ 162,071 $ 140,166
Nonvested 5,825 4,191
-------------------------
Accumulated benefit obligation 167,896 144,357
Effect of anticipated future compensation levels 28,821 23,166
-------------------------
Projected benefit obligation 196,717 167,523
Plan assets at market value (167,698) (150,640)
-------------------------
Projected benefit obligation in excess of plan assets 29,019 16,883
Unrecognized net asset at date of adoption 4,207 5,517
Unrecognized net loss (19,899) (10,908)
--------------------------
Accrued pension cost $ 13,327 $ 11,492
==========================
Contributions under the Company's noncontributory trusteed defined
benefit pension plans were $1,097,000 and $2,550,000 in 1997 and 1996.
No contributions were made during 1995.
The assumptions used to measure the projected benefit obligation
at December 31, 1997 and 1996 include a discount rate of 7.25% and
8.0% and a weighted average rate of compensation increase of 4.0% for
both 1997 and 1996. The expected long-term investment rate of return
on plan assets for the years ended December 31, 1997 and 1996 was
10.0%.
Contributions under the Company's defined contribution plans were
$7,535,000, $6,102,000 and $4,670,000 in 1997, 1996 and 1995,
respectively, and were based on a formula specified in the plan
agreements.
NOTE 14 Statutory Information
Statutory net income is as follows:
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------
(In thousands)
Property and casualty insurance operations $95,111 $121,665 $ 225,989
Title insurance operations 49,481 40,094 12,439
Statutory policyholders' surplus at December 31, 1997 and 1996 was
$1,302,490,000 and $1,187,056,000 which reflects a reduction in
statutory loss reserves of $79,400,000 and $93,700,000, respectively,
representing discounts of workers' compensation reserves in excess of
GAAP discounts.
NOTE 15 Contingencies and Commitments
Legal Proceedings
The Company and its subsidiaries are involved in certain litigation
arising in the course of their businesses, some of which involve
claims of substantial amounts. Although the ultimate outcome of these
matters cannot be ascertained at this time, and the results of legal
proceedings cannot be predicted with certainty, the Company is
contesting the allegations of the complaints in each pending action
against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will
not have a material adverse effect on the consolidated financial
statements of the Company. In addition, the Company is subject to the
litigation set forth below.
The Company is seeking a redetermination in the U.S. Tax Court of
an asserted tax deficiency for the year ended December 31, 1980, as
set forth by the Commissioner of Internal Revenue in a Notice
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 53
of Deficiency dated June 27, 1994. The Company intends to pursue the
action vigorously. The IRS seeks to disallow investment tax credits of
approximately $36,500,000 with respect to intermodal cargo containers
leased to others by a former subsidiary of the Company. The Company
estimates that, if the IRS were to prevail, the deficiency would
result in an increase in tax of approximately $31,000,000 for 1980,
plus interest at the statutorily prescribed rates for the periods
since that year. On January 11, 1995, the U.S. Tax Court handed down a
decision in Norfolk Southern Corp. v. Commissioner, a case involving a
taxpayer, which, like the Company, had claimed investment tax credits
in connection with the leasing of intermodal cargo containers. In the
decision, which is the first pronouncement by the courts on this
issue, the Tax Court articulated a standard, different from that
proposed by the IRS, which, if applied to the Company, would result in
the disallowance of a substantial percentage (although significantly
less than that sought by the IRS) of the investment tax credits
claimed by the Company. The Company believes that it has appropriately
provided for this matter in light of its exposure in the event a
standard such as the one articulated in Norfolk Southern is applied to
the Company's facts and circumstances. On February 22, 1995, the Tax
Court granted the joint motion of the Company and the Commissioner to
postpone the trial of this matter until after the resolution of
appellate proceedings in Norfolk Southern. The Company does not
believe that it is probable that its liability, if any, in respect of
this matter will have a material adverse effect on the Company's
financial position, although there is no assurance that the
disposition of this matter will not materially affect the Company's
results of operations for any period.
The Company is also subject to the following litigation set forth
below.
Employers who purportedly purchased workers' compensation
insurance policies on a retrospectively rated or other loss-sensitive
basis have brought several putative class actions against, among
others, individual insurance companies ranging in number from
approximately 30 to approximately 270, including Reliance Insurance
Company and several of its subsidiaries. The plaintiffs in the actions
assert that, from as early as January 1, 1985 through the present,
they and the members of the putative classes they purport to represent
were overcharged for such insurance covering workers' compensation
risks in the states in which the actions have been brought. In each of
the cases, the plaintiffs, on behalf of themselves and the putative
class members, seek unspecified monetary damages, with interest and
attorneys' fees, against all defendants jointly and severally, and
injunctive and other equitable relief.
Such actions in which the Company is a defendant have been
brought in Georgia, Tennessee, Florida, New Jersey, Pennsylvania,
Illinois and Missouri. The Georgia lawsuit was dismissed without
prejudice in February 1998 on the ground that the plaintiff was not
licensed to do business in Georgia; the plaintiff's appeal from that
ruling is pending. The other actions are in their early stages and
there have been no rulings on any motions by the plaintiffs for
certification of the putative classes they purport to represent. The
Company has denied or intends to deny the material allegations in each
of the lawsuits and intends to contest each action vigorously.
The Company does not believe that it is probable that its
aggregate liability, if any, in respect of these actions will have a
material adverse effect on the Company's financial position, although
there is no assurance that the disposition of the actions will not
materially affect the Company's results of operations for any period.
Cancellation of Partnership Guarantee
Certain current and former senior executives of the Company are
limited partners in a partnership which owns various real estate
properties. The general partner of the partnership was, until late
June 1997, an indirect subsidiary of Reliance Insurance Company. At
June 15, 1997, the partnership's total outstanding debt was
$174,600,000, including $12,700,000 borrowed from the Company under a
line of credit. As of June 15, 1997, $38,000,000 of that indebtedness
was guaranteed by Reliance Financial. In June 1997, investors
unaffiliated with the Company acquired all of the common stock of the
indirect subsidiary, and Reliance Insurance Company acquired
$27,600,000 face amount of its preferred stock. Subsequently, the
former indirect subsidiary sold to Reliance Insurance Company
$11,000,000 in aggregate principal amount of senior notes, due 2010,
and to the Company
54 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
$18,000,000 in aggregate principal amount of subordinated notes, due
2020, the line of credit from the Company to the partnership was
repaid in full and the Reliance Financial guarantee was terminated.
Lease Commitments
The Company and its subsidiaries lease certain office facilities and
equipment under lease agreements that expire at various dates through
2007. Rent expense for the years ended December 31, 1997, 1996 and
1995 was $100,900,000, $97,300,000 and $95,900,000, respectively.
At December 31, 1997, future net minimum rental payments required
under noncancelable leases (excluding the title insurance operations)
are as follows:
------------------------------------------------------------------
(In thousands)
1998 $ 49,146
1999 44,348
2000 26,673
2001 17,285
2002 13,192
2003 and thereafter 21,380
---------
$ 172,024
=========
NOTE 16 Per Share Information
The basic and diluted per share reconciliations of income from
continuing operations to net income is as follows:
Year Ended December 31 1997 1996 1995
------------------------------------------------------------------------------------------------------------
Basic income per share:
Income from continuing operations $1.52 $.42 $.85
Gain on disposal of discontinued operation .60 - -
Litigation settlement of discontinued operation (.06) - -
Loss on disposal of discontinued operations of investee company - - (.04)
--------------------------------
Income before extraordinary item and cumulative
effect of accounting change 2.06 - .81
Extraordinary item - early extinguishment of debt(1) - - (.06)
Cumulative effect of change in accounting for process
reengineering costs (.06) - -
--------------------------------
Net income $2.00 $.42 $.75
================================
Diluted income per share:
Income from continuing operations $1.47 $.41 $.83
Gain on disposal of discontinued operation .58 - -
Litigation settlement of discontinued operation (.06) - -
Loss on disposal of discontinued operations of investee company - - (.04)
--------------------------------
Income before extraordinary item and cumulative
effect of accounting change 1.99 - .79
Extraordinary item - early extinguishment of debt(1) - - (.05)
Cumulative effect of change in accounting for process
reengineering costs (.05) - -
--------------------------------
Net income $1.94 $.41 $.74
================================
(1) In 1995, all of the outstanding shares of redeemable preferred
stock of Reliance Insurance Company, which had a carrying value
of $20,740,000, were redeemed. The cost of the early redemption
in excess of the carrying value of the preferred stock,
$3,029,000 ("Redemption Premium"), was charged directly to
shareholders' equity. For purposes of computing net income per
share in 1995, the Redemption Premium was deducted from net
income available to common shareholders' and classified as an
extraordinary loss. This reduced both basic and diluted net
income per share by $.03.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 55
The reconciliation of the basic to diluted per share information is as
follows:
Year Ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Basic income
per share:
Income from
continuing
operations $174,496 114,651 $1.52 $48,207 113,838 $.42 $95,916 113,214 $.85
===== ==== ====
Effect of dilutive
securities:
Options - 3,712 - 2,443 - 1,840
------------------ ---------------- -----------------
Diluted income
per share:
Income from
continuing
operations $174,496 118,363 $1.47 $48,207 116,281 $.41 $95,916 115,054 $.83
=========================================================================================
Options to purchase 2,000,000, 134,000 and 100,000 shares of common
stock were not included in the computation of diluted income per share
for the years 1997, 1996 and 1995, respectively, since the options'
exercise price was greater than the average market price of the common
shares.
56 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements continued
NOTE 17 Business Segment Information
Year Ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
(In thousands)
Revenues:
Property and casualty insurance
Premiums earned $ 1,947,016 $ 1,800,854 $1,774,591
Net investment income 263,981 257,133 247,343
Gain on sales of investments 71,501 49,264 27,381
----------------------------------------
2,282,498 2,107,251 2,049,315
----------------------------------------
Title insurance
Premiums earned 863,746 780,157 671,947
Net investment income 30,990 30,455 27,946
Gain on sales of investments 1,596 346 1,729
----------------------------------------
896,332 810,958 701,622
----------------------------------------
Other 263,806 172,378 155,050
----------------------------------------
$ 3,442,636 $ 3,090,587 $2,905,987
========================================
Income before income taxes and equity in investee company:
Property and casualty insurance
Underwriting(1) $ (31,722) $ (172,387) $ (45,644)
Net investment income 263,981 257,133 247,343
Gain on sales of investments 71,501 49,264 27,381
----------------------------------------
303,760 134,010 229,080
----------------------------------------
Title insurance 64,963 38,580 14,012
----------------------------------------
Other (127,502) (125,991) (122,568)
----------------------------------------
$ 241,221 $ 46,599 $ 120,524
========================================
Identifiable assets at year-end:
Property and casualty insurance $10,639,179 $ 9,490,869 $8,982,897
Net assets of title insurance operations 288,619 282,115 277,939
Other 404,688 370,708 351,972
----------------------------------------
$11,332,486 $10,143,692 $9,612,808
========================================
(1) The 1996 results included a charge of $134,000,000 to increase
net loss reserves for asbestos-related and environmental
pollution claims for business written in or before 1987.
On February 27, 1998, the Company completed the sale of its title
insurance operations to LandAmerica. See note 2 to the consolidated
financial statements.
Income before income taxes and equity in investee company
relating to property and casualty insurance underwriting has been
reduced by policyholders' dividends and other income and expense.
Income before income taxes and equity in investee company by segment
is before allocation of corporate overhead and corporate interest
expense, which relates primarily to the Company and its financing
subsidiary. Corporate overhead, corporate interest expense and the
pretax results of RCG International, Inc. (a subsidiary of the
property and casualty insurance operations) are included in Other.
Identifiable assets by industry segment are those assets which
are used in the Company's operations in each segment.
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 57
NOTE 18 Quarterly Financial Data (Unaudited)
1997 Quarter
------------------------------------------------------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues:
Premiums earned $642,195 $689,929 $702,703 $775,935
Net investment income 74,279 70,644 73,571 76,477
Gain on sales of investments 15,304 13,431 36,070 8,292
Other 50,167 65,558 68,901 79,180
----------------------------------------------------
$781,945 $839,562 $881,245 $939,884
====================================================
Income from continuing operations $ 35,886 $ 39,562 $ 57,316 $ 41,732
Gain on disposal of discontinued operation - - - 68,865
Litigation settlement of discontinued operation (7,500) - - -
----------------------------------------------------
Income before cumulative effect
of accounting change 28,386 39,562 57,316 110,597
Cumulative effect of change in accounting for
process reengineering costs - - - (6,442)
----------------------------------------------------
Net income $ 28,386 $ 39,562 $ 57,316 $104,155
====================================================
Diluted per share information:
Income from continuing operations $ .30 $ .33 $ .48 $ .35
Gain on disposal of discontinued operation - - - .58
Litigation settlement of discontinued operation (.06) - - -
----------------------------------------------------
Income before cumulative effect
of accounting change .24 .33 .48 .93
Cumulative effect of change in accounting for
process reengineering costs - - - (.05)
-----------------------------------------------------
Net income $ .24 $ .33 $ .48 $ .88
====================================================
Basic per share information:
Net income $ .25 $ .35 $ .50 $ .91
====================================================
1996 Quarter
------------------------------------------------------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues:
Premiums earned $609,867 $636,752 $661,980 $672,412
Net investment income 70,717 70,443 72,040 74,388
Gain on sales of investments 4,468 18,936 16,542 9,664
Other 38,734 41,765 43,548 48,331
----------------------------------------------------
$723,786 $767,896 $794,110 $804,795
====================================================
Net income (loss)(1) $ 22,512 $ (47,701) $ 37,651 $ 35,745
====================================================
Diluted per share information:
Net income (loss)(1) $.19 $(.42) $.32 $.31
====================================================
Basic per share information:
Net income (loss)(1) $.20 $(.42) $.33 $.31
====================================================
(1) Includes a second quarter after-tax charge of $87,100,000, or
$.75 per basic and diluted share, to increase net loss reserves
for asbestos-related and environmental pollution claims for
business written in or before 1987.
58 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Independent Auditors' Report
Board of Directors and Shareholders
Reliance Group Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Reliance Group Holdings, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related statements of income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Reliance Group
Holdings, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, in
1997 the Company changed its method of accounting for process
reengineering costs to conform with 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."
/s/ Deloitte & Touche LLP
New York, New York
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
RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES 59
Report of Management
Scope of Responsibility
Management is responsible for the financial information included in
this annual report and for ascertaining that such information presents
fairly the financial position and operating results of the Company.
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. Such
statements include informed estimates and judgments of management for
those transactions that are not yet complete or for which the ultimate
effects cannot be precisely determined. Financial information
presented elsewhere in this annual report is consistent with that in
the financial statements.
Internal Controls
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded
against losses from unauthorized use or disposition, that transactions
are executed in accordance with management's authorization and are
recorded properly. Qualified personnel throughout the organization
maintain and monitor these internal accounting controls on an ongoing
basis. In addition, the Company's Internal Audit Department
systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon.
Independent Auditors
The Company engages Deloitte & Touche LLP as independent auditors to
audit its financial statements and express their opinion thereon. They
have full access to each member of management in conducting their
audits. Such audits are conducted in accordance with generally
accepted auditing standards and include a review and evaluation of the
system of internal accounting controls, tests of the accounting
records and other auditing procedures they consider necessary to
express their opinion on the consolidated financial statements.
Audit Committee
The Audit Committee of the Board of Directors is comprised solely of
non-employee outside directors, and is responsible for overseeing and
monitoring the quality of the Company's accounting practices and
internal controls. The Committee meets regularly with management, the
internal auditors and the independent auditors to review the
accounting practices employed by the Company and to discuss auditing,
internal control and financial reporting matters. Both the internal
and independent auditors have unrestricted access to the Audit
Committee, without members of management present.
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
George E. Bello
Executive Vice President
and Controller
60 RELIANCE GROUP HOLDINGS, INC. AND SUBSIDIARIES
Market and Dividend Information for Common Stock
The Company's common stock, $.10 par value, is traded on the New York
Stock Exchange and the Pacific Exchange, Inc. under the symbol "REL".
As of March 1, 1998, there were approximately 2,300 holders of record
of the Company's common stock. The high and low sales prices of the
common stock, as reported by the New York Stock Exchange, are as
follows:
1997 1996
---------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
---------------------------------------------------------------------------------------------------------------
First 12 1/4 8 3/4 8 3/4 7 1/2
Second 12 3/4 10 1/8 8 3/4 7 1/8
Third 14 7/16 11 5/8 8 1/8 6 1/2
Fourth 15 1/8 12 1/16 9 1/8 7 5/8
Cash dividends for each share of the Company's common stock were $.08
for each quarter in 1997 and 1996.
The provisions of notes and debentures of the Company contain
limitations on the payment of dividends, including maintaining a
minimum fixed charge coverage ratio. At February 11, 1998, the Company
could pay up to $106,100,000 in dividends without violating the most
restrictive of these provisions. As a holding company, the Company is
dependent upon dividends, advances and net tax payments from its
wholly-owned subsidiaries to meet its debt service obligations, to pay
its expenses and to pay dividends to its shareholders. In addition to
the terms of bank covenants limiting the payment of dividends by
Reliance Financial, dividends from the Company's principal operating
subsidiaries are subject to regulatory limitations.
Reliance Group Holdings, Inc. and Subsidiaries 61
Directors and Officers
Directors
George R.Baker(2),(5),(6),(7)
Corporate Director/Advisor
George E. Bello(3)
Executive Vice President
and Controller
Reliance Group Holdings, Inc.
Dennis A. Busti
President and
Chief Executive Officer
Reliance National Insurance
Company
Lowell C. Freiberg(3)
Senior Vice President and
Chief Financial Officer
Reliance Group Holdings, Inc.
Dr. Thomas P. Gerrity(2),(7)
Dean of the Wharton School
University of Pennsylvania
Jewell Jackson McCabe(3),(4),(5),(6)
President, Jewell Jackson
McCabe Associates
Irving Schneider(2),(6)
Co-Chairman and
Chief Operations Officer
Helmsley-Spear, Inc.
Bernard L. Schwartz(1)
Chairman, President
& CEO of Loral Space
& Communications Ltd.
and Chairman & CEO of
Globalstar
Richard E. Snyder(3),(7)
Chairman and
Chief Executive Officer
Golden Books Family
Entertainment, Inc.
Robert M. Steinberg(1),(4)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
Saul P. Steinberg(1),(4)
Chairman of the Board and
Chief Executive Officer
Reliance Group Holdings, Inc.
James E. Yacobucci
Senior Vice President
Investments
Reliance Group Holdings, Inc.
(1) Executive Committee
(2) Audit Committee
(3) Finance Committee
(4) Regular Compensation Committee
(5) Special Compensation Committee
(6) Stock Option Committee
(7) Nominating Committee
Officers
Saul P. Steinberg
Chairman of the Board and
Chief Executive Officer
Robert M. Steinberg
President and
Chief Operating Officer
George E. Bello
Executive Vice President
and Controller
Lowell C. Freiberg
Senior Vice President and
Chief Financial Officer
Dennis J. O'Leary
Senior Vice President
Taxes
Philip S. Sherman
Senior Vice President and
Group Controller
Bruce L. Sokoloff
Senior Vice President
Administration
Howard E. Steinberg
Senior Vice President,
General Counsel and
Corporate Secretary
James E. Yacobucci
Senior Vice President
Investments
Albert A. Benchimol
Vice President and
Treasurer
Eilene S. Bloom
Vice President
Administrative Services
Thomas G. Butler
Vice President
Taxes
Andrew B. Donnellan, Jr.
Vice President and
Chief Litigation Counsel
David F. Noyes
Vice President and
Chief Credit Officer
Steven A. Rautenberg
Vice President
Communications
Joel H. Rothwax
Vice President
Human Resources
Thomas J. Sanders
Vice President and
Assistant Controller
Paul W. Zeller
Vice President,
Deputy General Counsel
and Assistant Secretary
Officers of Operating Units
Reliance Insurance Group
Robert M. Steinberg
Chairman and
Chief Executive Officer
Jerome H. Carr
Senior Vice President and
Chief Financial Officer
Kenneth R. Frohlich
Senior Vice President and
Chief Actuarial Officer
Linda S. Kaiser
Senior Vice President,
General Counsel and Secretary
Property and Casualty Insurance
Dennis A. Busti
President and
Chief Executive Officer
Reliance National Insurance Company
Robert C. Olsman
President and
Chief Operating Officer
Reliance Insurance Company
George H. Roberts
President
Reliance Reinsurance Corp.
C. Brian Schmalz
President and
Chief Executive Officer
Reliance Surety Company
RCG Information Technology
Robert P. Buttacavoli
President and
Chief Executive Officer
RCG Information Technology, Inc.
Reliance Development Group
Henry A. Lambert
President and
Chief Executive Officer
Reliance Development Group, Inc.
62 Reliance Group Holdings, Inc. and Subsidiaries
Corporate Data
Corporate Offices
Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
(212) 909-1100
FAX (212) 909-1864
Common Stock Transfer Agent
Chase Mellon Shareholder Services, L.L.C.
Shareholder Relations
P. O. Box 3315
South Hackensack, NJ 07606
Independent Auditors
Deloitte & Touche LLP
New York, NY
Annual Meeting
The annual meeting of shareholders
of Reliance Group Holdings, Inc.
will be held on Thursday, May 14, 1998
at 11:00 A.M. at the
corporate headquarters of
Reliance Insurance Group
located at 3 Parkway, Philadelphia, PA
Form 10-K
A copy of the Company's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished to any security holder upon written
request to Corporate Communications, Reliance Group Holdings, Inc., 55 East 52nd
Street, New York, NY 10055. This Report can also be obtained by calling (888)
REL-FACT or by visiting our Internet web site at http://www.rgh.com.
- --------------------------------------------------------------------------------
Listed Securities
Unless otherwise indicated, securities
are listed on the New York Stock Exchange.
Reliance Group Holdings, Inc.
Common Stock (Symbol: REL; New York Stock Exchange and
Pacific Exchange)
9% Senior Notes, due 2000
9 3/4% Senior Subordinated Debentures, due 2003
- --------------------------------------------------------------------------------
Reliance Group Holdings, Inc. quarterly results, as well as
Annual Reports on Form 10-K, Form 10-Q, Annual Reports
to shareholders, dividend declarations and other corporate information
can be obtained by calling (888) REL-FACT or by visiting our
Internet web site at http://www.rgh.com.
(Recycled Logo) The text of this annual report is printed on recycled paper