ITEM 1. BUSINESS.
GENERAL
Reliance Financial Services Corporation (the 'Company' or 'Reliance Financial') is a holding company whose principal business is the ownership of property and casualty and title insurance companies. The Company also owns an information technology consulting company.
Reliance Insurance Company and its property and casualty insurance subsidiaries (the 'Reliance Property and Casualty Companies') underwrite a broad range of commercial lines of property and casualty insurance. Reliance Insurance Company has conducted business since 1817, making it one of the oldest property and casualty insurance companies in the United States. The Reliance Property and Casualty Companies consist of four principal operations: Reliance National, Reliance Insurance, Reliance Surety and Reliance Reinsurance. Reliance National offers a broad range of commercial property and casualty insurance products and services for large companies and specialty line customers. Reliance National selects market segments where it can provide specialized coverages and services, and it conducts business nationwide and in international markets. In 1996, Reliance National accounted for 45% of the net premiums written by the Reliance Property and Casualty Companies. Reliance Insurance offers commercial property and casualty insurance coverages primarily for mid-sized companies throughout the United States. Reliance Insurance also offers traditional and specialized coverages for more complex risks as well as insurance programs for groups with common insurance needs. In 1996, Reliance Insurance accounted for 38% of the net premiums written by the Reliance Property and Casualty Companies. Reliance Surety is a leading writer of surety bonds and fidelity bonds in the United States. Reliance Reinsurance primarily provides casualty treaty and facultative reinsurance for small to medium sized regional and specialty insurance companies located in the United States. The Reliance Property and Casualty Companies accounted for $1.8 billion (70%) of the 1996 premiums earned by Reliance Insurance Company and its property and casualty and title insurance subsidiaries (the 'Reliance Insurance Group').
Title insurance business is conducted by Commonwealth Land Title Insurance Company and Transnation Title Insurance Company and their respective subsidiaries ('Commonwealth/Transnation Title'). Commonwealth/Transnation Title is the third largest title insurance operation in the United States, in terms of 1995 total premiums and fees. Commonwealth/Transnation Title accounted for $780.2 million (30%) of the Reliance Insurance Group's 1996 premiums earned.
The Company's Information technology consulting unit is RCG Information Technology, Inc. ('RCG Information Technology'), which had revenues of $136.7 million in 1996.
Business segment information for the years ended December 31, 1996, 1995 and 1994 is set forth in Note 15 to the Company's consolidated financial statements (the 'Consolidated Financial Statements'), which segment information is included in the Company's 1996 Annual Report and incorporated herein by reference. All financial information in this Annual Report on Form 10-K is
presented in accordance with generally accepted accounting principles ('GAAP') unless otherwise specified.
The Company owns all of the common stock of Reliance Insurance Company. The common stock of Reliance Insurance Company is pledged to secure certain indebtedness. See Note 8 to the Consolidated Financial Statements. Reliance Insurance Company owns all of the common stock of Commonwealth Land Title Insurance Company, Transnation Title Insurance Company and RCG Information Technology. The Company is a wholly-owned subsidiary of Reliance Group Holdings, Inc. ('Reliance Group Holdings'). Approximately 45% of the common stock of Reliance Group Holdings, the only class of voting securities outstanding, is owned by Saul P. Steinberg, members of his family and affiliated trusts.
OPERATING UNITS
Property and Casualty Insurance. The following table sets forth the amount of net premiums written in each line of business for the years ended December 31, 1996, 1995 and 1994 by the Reliance Property and Casualty Companies four principal operations: Reliance National, Reliance Insurance, Reliance Surety and Reliance Reinsurance.
The following table sets forth underwriting results for the Reliance Property and Casualty Companies for the years ended December 31, 1996, 1995 and 1994.
- ------------------ (1) Includes catastrophe losses (net of reinsurance) for the years ended December 31, 1996, 1995 and 1994 of $19.9 million, $25.7 million and $50.1 million, respectively. (2) Excludes a charge of $134.0 million (7.4 combined ratio points) to increase net loss reserves for asbestos-related and environmental pollution claims for business written in or before 1987. The actual underwriting loss was
$172.4 million and the combined ratio was 109.0%. (3) Excludes a charge of $4.0 million in 1995 and $11.6 million in 1994 pertaining to Proposition 103.
The following table sets forth certain financial information of the Reliance Property and Casualty Companies based upon statutory accounting practices and common shareholder's equity of Reliance Insurance Company in thousands:
- ------------------ * Includes Reliance Insurance Company's investment in title insurance operations of $199.6 million at December 31, 1996.
The Reliance Property and Casualty Companies write insurance in every state of the United States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. The Reliance Property and Casualty Companies also write insurance in the European Community through offices in the United Kingdom, the Netherlands, Sweden, Spain, Germany, in the Americas through offices in Canada, Mexico and Argentina and in the Pacific Rim through an office in Singapore. In 1996, California, New York, Texas and Florida accounted for approximately 15%, 10%, 7% and 6%, respectively, of direct premiums written. No other state accounted for more than 5% of direct premiums written by the Reliance Property and Casualty Companies. The Reliance Property and Casualty Companies write insurance through independent agents, program agents and brokers. No single insurance agent or broker accounts for 10% or more of the direct premiums written by the Reliance Property and Casualty Companies.
A. M. Best & Company, Inc. ('Best'), publisher of Best's Insurance Reports, Property-Casualty, has assigned an 'A-(Excellent)' rating to the Reliance Property and Casualty Companies. Best's ratings are based on an analysis of the financial condition and operations of an insurance company as they relate to the industry in general. An 'A-(Excellent)' rating is assigned to those companies which have demonstrated excellent overall performance when compared to the norms of the property and casualty industry. Standard & Poor's ('S&P') has assigned an 'A' rating to the claims-paying ability of the Reliance Property and Casualty Companies. S&P's ratings are based on a quantitative and qualitative analysis, including consideration of ownership and support factors, if applicable. An 'A' rating is assigned to those companies which have good financial security, but capacity to meet policyholder obligations is somewhat susceptible to adverse economic and underwriting conditions. The Best and S&P ratings are not designed
for the protection of investors and do not constitute recommendations to buy, sell or hold any security. Although the Best and S&P ratings of the Reliance Property and Casualty Companies are lower than those of many of the insurance companies with which the Reliance Property and Casualty Companies compete, management believes that the current ratings are adequate to enable the Reliance Property and Casualty Companies to compete successfully.
Reliance National. Reliance National offers a broad range of commercial insurance products and services to selected segments of the property and casualty market which do not lend themselves to traditional insurance products and services. Reliance National selects market segments where it can provide specialized coverages and services, such as providing captive insurance arrangements to the alternative risk markets. In addition, Reliance National provides non-standard personal automobile insurance and certain traditional insurance products, including guaranteed cost workers' compensation insurance. In 1996, Reliance National accounted for 45% of the net premiums written by the Reliance Property and Casualty Companies. Reliance National, which conducts business nationwide, is headquartered in New York City and has offices in fifteen states. Reliance National also conducts business in the European Community through offices located in the United Kingdom, the Netherlands, Sweden, Spain and Germany, in the Americas through offices in Canada, Mexico and Argentina and in the Pacific Rim through an office in Singapore. Reliance National distributes its products through national and regional insurance brokers, program agents and, with respect to non-standard automobile insurance, independent insurance agents. Net premiums written by Reliance National were $833.7 million, $864.4 million and $889.7 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Reliance National is organized into eight major divisions. Each division is comprised of one or more departments which focus on a particular type of business, program or market segment. Each department makes use of underwriters, actuaries and other professionals to market, structure and price its products. Reliance National's eight major divisions are:
o Casualty Risk Services, Reliance National's largest division, provides workers' compensation, commercial automobile and general liability coverages to Fortune 1,000 companies, multinationals and the construction and transportation industries. These coverages are provided on a retrospectively rated and high deductible basis, and to the alternative risk markets on a captive insurance arrangement basis. This division also provides environmental pollution coverages (primarily on a claims made basis) for consultants, contractors, transporters and certain other insureds. In early 1997, this division began providing comprehensive insurance coverages for public and private entities engaged in the development of infrastructure projects outside of North America and guaranteed cost workers' compensation coverages.
o International writes predominantly commercial casualty and property insurance products, including specialized coverages such as excess casualty, directors and officers liability and fidelity insurance, in certain international markets. This division also provides ocean marine coverages in domestic and certain international markets.
o Excess and Surplus Lines primarily provides professional liability insurance to architects, engineers, lawyers, healthcare providers and other professionals, and excess and umbrella coverages.
o Financial and Specialty Coverages provides aviation and space satellite risk coverages, as well as certain non-traditional insurance products.
o Financial Products provides directors and officers liability insurance, errors and omissions insurance and fidelity and fiduciary coverages in the domestic market.
o Accident and Health provides high limit disability, group accident, blanket special risk and medical excess of loss programs.
o Property primarily provides commercial property coverage focusing on excess and specialty commercial property.
o Non-Standard Automobile primarily provides non-standard personal automobile insurance for drivers unable to obtain insurance in the standard automobile insurance market. This division was formed in February of 1996 and had a minimal amount of net premiums written in 1996.
Reliance National attempts to limit its exposure to losses through the use of claims-made policies, reinsurance and policies written on a loss sensitive basis, which include retrospectively rated and high deductible policies. Approximately 26% of Reliance National's net premiums written during 1996 were written on a 'claims-made' basis which provides coverage only for claims reported during the policy
period or within an established reporting period, as opposed to 'occurrence' basis policies which provide coverage for events that occur during the policy period without regard for when the claim is reported. Claims-made policies mitigate the 'long tail' nature of the risks insured.
Approximately 7% of Reliance National's net premiums written during 1996 were written on a retrospectively rated basis, whereby the insured effectively pays for a large portion or, in many cases, all of its losses. Approximately 14% of Reliance National's net premiums written during 1996 were written on a high deductible basis, whereby the insured pays for all of its losses up to the deductible amount. The use of high deductible policies results in lower premiums and losses for Reliance National as payments for losses made by an insured under a high deductible policy are not considered premiums or losses to an insurer. With retrospectively rated and high deductible policies, Reliance National provides insurance and loss control management services while reducing its underwriting risk. Reliance National assumes a credit risk in connection with retrospectively rated and high deductible policies and, therefore, insureds with such policies undergo extensive credit analysis by a centralized credit department that is independent from the underwriting process. Collateral in the form of bank letters of credit, trust accounts or cash is generally provided by the insured to cover a significant portion of Reliance National's credit
exposure.
To further limit exposures, the vast majority of Reliance National's net premiums written during 1996 were for policies with net retentions equal to or lower than $1.5 million per risk. By reinsuring a large proportion of its business, Reliance National seeks to limit its exposure to losses on each line of business it writes.
Reliance Insurance. Reliance Insurance offers commercial lines property and casualty insurance products, primarily focusing on the diverse needs of mid-sized companies nationwide. Reliance Insurance distributes its products through approximately 2,600 independent agents, program agents and brokers. Reliance Insurance's insureds are primarily closely held companies with 100 to 1,000 employees and annual sales of $5 million to $300 million. Reliance Insurance underwrites a variety of commercial insurance coverages, including multiple peril, property, general liability, commercial automobile and workers' compensation. In 1996, Reliance Insurance accounted for 38% of the net premiums written by the Reliance Property and Casualty Companies. Reliance Insurance is headquartered in Philadelphia and operates in 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. Net premiums written by Reliance Insurance were $702.2 million, $656.4 million and $631.0 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Reliance Insurance is organized into the following three operating divisions:
o The Commercial Accounts division focuses on accounts with annual premiums of up to $1 million. This division offers a broad range of traditional commercial coverages, primarily written on a guaranteed cost basis.
o The Specialty division provides underwriting of excess and surplus coverages (generally with lower net retentions than for other commercial lines written by Reliance Insurance) for insureds with non-standard exposures. This division also provides property and liability insurance programs to homogeneous groups of insureds with particular insurance needs, such as auto rental companies, day care centers and municipalities. These programs are administered directly by Reliance Insurance or by independent program agents, with Reliance Insurance retaining authority for all underwriting and pricing decisions and handling claims and other services. When utilized, program agents market the programs, gather the initial underwriting data and, if authorized by Reliance Insurance, issue the policies.
o The Large Accounts division focuses on casualty exposures of accounts with annual premiums in excess of $1 million where it is able to offer more flexible coverages through the use of retrospectively rated and high deductible policies. The Large Accounts division primarily provides workers' compensation insurance and approximately 69% of its business was written on a loss sensitive basis. Accounts with retrospectively rated and high deductible policies undergo extensive credit analysis by a centralized credit department and collateral in the form of bank letters of credit,
trust accounts or cash collateral is generally provided by the insured to cover a significant portion of Reliance Insurance's credit exposure.
The Commercial Accounts division and the Large Accounts division provide their products and services through a decentralized network of regional and branch offices. This organization allows the Commercial Accounts division and the Large Accounts division to place major responsibility and accountability for underwriting, sales, and customer service close to the insured. The Specialty division has three regional offices. Reliance Insurance manages its claims through a decentralized network of regional and branch offices, which allows the point of service to be close to the insured.
Reliance Surety. Reliance Surety is a leading writer of surety and fidelity bonds in the United States. Reliance Surety concentrates on writing performance and payment bonds for contractors of public works projects, commercial real estate and multi-family housing. It also writes commercial surety, financial institution and commercial fidelity bonds. Reliance Surety performs extensive credit analysis on its clients, and actively manages claims to minimize losses and maximize recoveries. Reliance Surety has enjoyed long relationships with a large majority of the contractors and accounts it has insured. Reliance Surety's Firemark and Express Surety operations target smaller contractors and accounts, a market traditionally less fully serviced by national surety companies. Reliance Surety is headquartered in Philadelphia and conducts business nationwide through 32 branch offices and approximately 2,250 independent agents and brokers. Net premiums written by Reliance Surety were $159.2 million, $139.3 million and $118.0 million for the years 1996, 1995 and 1994, respectively.
Surety bonds guarantee the payment or performance of one party (called the principal) to another party (called the obligee). This guarantee is typically evidenced by a written agreement by the surety (e.g., Reliance Surety) to discharge the payment or performance obligations of the principal pursuant to the underlying contract between the obligee and the principal. Fidelity bonds insure against losses arising from employee dishonesty. Financial institution fidelity bonds insure against losses arising from employee dishonesty and other specifically named theft and fraud perils.
Reliance Reinsurance. Reliance Reinsurance provides casualty reinsurance on both a treaty (blocks of risk) and facultative (individual risks) basis and, to a lesser extent, property reinsurance on a treaty basis. The business of Reliance Reinsurance is primarily conducted on a treaty basis. All treaty business is marketed through reinsurance brokers who negotiate contracts of reinsurance on behalf of the primary insurer or ceding reinsurer, while facultative business is produced both directly and through reinsurance brokers. While Reliance Reinsurance's treaty clients include all types and sizes of insurers, Reliance Reinsurance typically targets treaty reinsurance for small to medium sized regional and specialty insurance companies, as well as captives, risk retention groups and other alternative risk markets, providing both pro rata and excess of loss coverage. Reliance Reinsurance believes that this market is subject to less competition and provides Reliance Reinsurance with an opportunity to develop and market innovative programs where pricing is not the key competitive factor. Reliance Reinsurance typically avoids participating in large capacity reinsurance treaties where price is the predominant competitive
factor. It generally writes reinsurance in the 'lower layers,' the first $1 million of primary coverage, where losses are more predictable and quantifiable. The assumed reinsurance business of the Reliance Property and Casualty Companies is conducted nationwide and is headquartered in Philadelphia. Net premiums written by Reliance Reinsurance were $151.1 million, $119.0 million and $125.6 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Title Insurance. Commonwealth/Transnation Title writes title insurance for residential and commercial real estate nationwide and provides escrow and settlement services in connection with real estate closings. The National Title Services division of Commonwealth/Transnation Title provides title services for large and multi-state commercial transactions. Through the Commonwealth OneStop(Registered) operation, Commonwealth/Transnation Title provides national and regional lenders with a full range of residential closing services, including title insurance through its National Residential Title Services division, appraisal management through its CLT Appraisal Services, Inc. subsidiary, and other real estate related services. Commonwealth/Transnation Title is the third largest title insurance operation in the United
States, based on 1995 total premiums and fees. Commonwealth/Transnation Title had premiums and fees of $780.2 million, $671.9 million and $856.8 million for the years 1996, 1995 and 1994, respectively.
S&P has assigned an 'A' rating to the claims-paying ability of Commonwealth/Transnation Title. S&P's ratings are based on a quantitative and qualitative analysis, including consideration of ownership and support factors, if applicable. An 'A' rating is assigned to those companies which have good financial security, but capacity to meet policyholder obligations is somewhat susceptible to adverse economic and underwriting conditions. Duff & Phelps Credit Rating Co. ('Duff & Phelps') has assigned an 'A+' rating to the claims-paying ability of Commonwealth/ Transnation Title. Duff & Phelps ratings are based on a quantitative and qualitative analysis, with particular emphasis on fundamental factors, recent operating results, reserves, capitalization and invested assets. An 'A+' rating is assigned to those companies which have a high claims paying ability; protection factors are average and there is an expectation of variability in risk over time due to economic and/or underwriting conditions. The S&P and Duff & Phelps ratings are not designed for the protection of investors and do not constitute recommendations to buy, sell or hold any security.
Commonwealth/Transnation Title is organized into nine regions with more than 325 offices and over 4,000 independent agents covering all 50 states, as well as Puerto Rico and the Virgin Islands. In 1996, California, Texas, Florida, New York, Pennsylvania, Washington and Michigan accounted for approximately 11%, 11%, 10%, 8%, 6%, 6% and 6%, respectively, of revenues for premiums and services related to title insurance. No other state accounted for more than 5% of such revenues.
A title insurance policy protects the insured party and certain successors in interest against losses resulting from title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from the policy's provisions. Generally, a title policy is obtained by the buyer, the
mortgage lender or both at the time real property is transferred or refinanced. The policy is written for an indefinite term for a single premium which is due in full upon issuance of the policy. The face amount of the policy is usually either the purchase price of the property or the amount of the loan secured by the property. Title policies issued to lenders insure the priority position of the lender's lien. Most lenders require title insurance as a condition to making loans secured by real estate. Title insurers, unlike other types of insurers, seek to eliminate losses through the title examination process and the closing process, and a substantial portion of the expenses of a title insurer relate to those functions.
Information Technology Consulting Services. RCG Information Technology provides a full range of information technology services to large corporate clients in the United States. Such services include providing supplemental computer professional staffing, Year 2000 solutions, software outsourcing, computer programming and development services and other computer consulting services. RCG Information Technology had revenues of $136.7 million, $106.5 million and $90.0 million for 1996, 1995 and 1994, respectively.
INSURANCE CEDED
All of the Reliance Insurance Group's insurance operations purchase reinsurance to limit the Company's exposure to losses. The ceding of insurance does not discharge an insurer from its primary legal liability to a policyholder, even though the reinsuring company assumes a related liability. The Reliance Insurance Group enters into reinsurance arrangements that are both facultative (individual risks) and treaty (blocks of risk). Limits and retentions are based on a number of factors, including the previous loss history of the operating unit, policy limits and exposure data, industry studies as to potential severity, and market terms, conditions and capacity, and may change over time. Where appropriate, the Reliance Insurance Group limits its exposure to individual risks by purchasing excess of loss and quota share reinsurance, with treaty structures and net retentions varying with the specific requirements of the line of business or program being reinsured. In many cases, the Reliance Insurance Group purchases additional facultative reinsurance to further reduce its retentions below treaty levels.
Reinsurers of the Reliance Insurance Group. Premiums ceded by the Reliance Insurance Group to reinsurers were $1.6 billion and $1.3 billion in 1996 and 1995, respectively. The Reliance Insurance Group is subject to credit risk with respect to its reinsurers, as the ceding of risk to reinsurers does not relieve the
Reliance Insurance Group of its liability to insureds. At December 31, 1996, the Reliance Insurance Group had reinsurance recoverables of $3.6 billion, representing estimated amounts recoverable from reinsurers pertaining to paid claims, unpaid claims, claims incurred but not reported and unearned premiums. In order to minimize losses from uncollectible reinsurance, the Reliance Insurance Group places its reinsurance with a number of different reinsurers, and utilizes a security committee and a staff of analysts to approve in advance the reinsurers which meet its standards of financial strength and are acceptable for use by Reliance Insurance Group. The Reliance Insurance Group holds
substantial amounts of collateral, consisting of letters of credit, trust accounts and cash collateral, to secure recoverables from unauthorized reinsurers. The Company had $6.4 million reserved for potentially unrecoverable reinsurance at December 31, 1996. The Company is not aware of any impairment of the creditworthiness of any of the Reliance Insurance Group's significant reinsurers. While the Company is aware of financial difficulties experienced by certain Lloyd's of London syndicates, the Company has not experienced deterioration of payments from the Lloyd's of London syndicates from which it has reinsurance.
In 1996, the Reliance Property and Casualty Companies did not cede more than 4.4% of direct premiums to any one reinsurer and no one reinsurer accounted for more than 8.6% of total ceded premiums. The Reliance Insurance Group's ten largest reinsurers, based on 1996 ceded premiums, are as follows:
- ------------------ (1) An unrated captive reinsurer that is not affiliated with the Company. Recoverables from such reinsurer are fully collateralized. (2) Assigned a Best rating of NR-2 (Less than Minimum Size and/or Operating Experience), as the reinsurer does not meet the minimum size and/or operating experience requirement. Recoverables from such reinsurer are fully collateralized. (3) Individual Lloyd's of London syndicates are not rated by Best. (4) Assigned a Best rating of NR-2 (Less than Minimum Size and/or Operating Experience), as the reinsurer does not meet the minimum size and/or operating experience requirement. The vast majority of recoverables from such reinsurer are fully collateralized.
The Reliance Insurance Group maintains no 'Funded Cover' reinsurance agreements. 'Funded Cover' reinsurance agreements are multi-year retrospectively rated reinsurance agreements which may not meet relevant accounting standards for risk transfer and under which the reinsured must pay additional premiums in subsequent years if losses in the current year exceed levels specified in the
reinsurance agreement.
PROPERTY AND CASUALTY LOSS RESERVES
The Reliance Insurance Group's staff of over 100 actuaries regularly performs comprehensive analyses of reserves and reviews the pricing and reserving methodologies of the Reliance Insurance Group. Although the Company believes, in light of present facts and current legal interpretations, that the Reliance Insurance Group's overall property and casualty reserve levels are adequate to meet its obligations under existing policies, due to the inherent uncertainty and complexity of the reserving process, the ultimate liability may be more or less than such reserves.
The following tables present information relating to the liability for unpaid claims and related expenses ('loss reserves') for the Reliance Property and Casualty Companies. The table below provides a reconciliation of the beginning to ending liability balances for the years ended December 31, 1996, 1995 and 1994.
- ------------------ (1) The 1996 increase in provision for insured events of prior years includes a pretax charge of $134.0 million to increase net loss reserves for asbestos-related and environmental pollution claims for business written in or before 1987. (2) Loss reserves exclude the loss reserves of title insurance operations of $264.8 million, $240.8 million and $228.1 million at December 31, 1996, 1995 and 1994, respectively.
Policy claims and settlement expenses include a provision for insured events of prior years of $138.7 million, $38.5 million and $22.4 million for the years 1996, 1995 and 1994, respectively. The provision for all years includes adverse development related to prior year asbestos-related and environmental pollution claims, which primarily affect general liability, multiple peril and reinsurance lines of business, and includes a pretax charge of $134.0 million in 1996 to increase net loss reserves for asbestos-related and environmental pollution claims for business written in or before 1987. The 1996 provision also includes adverse development in the automobile line, offset by favorable development in workers' compensation. The 1995 provision also included adverse development in other general liability, automobile and reinsurance lines, partially offset by favorable development in workers' compensation. The 1994 provision also included adverse development in other general liability lines, partially offset by favorable development in workers' compensation.
The table below summarizes the development of the estimated liability for loss reserves (net of reinsurance recoverables) as of December 31 of each of the prior ten years. The amounts shown on the top line of the table represent the estimated liability for loss reserves (net of reinsurance recoverables) for claims that are unpaid at the particular balance sheet date, including losses that had been incurred but not reported to the Reliance Property and Casualty Companies. The upper portion of the table indicates the loss reserves as they are reestimated in subsequent periods as a percentage of the originally recorded reserves. These estimates change as losses are paid and more accurate information becomes available about remaining loss reserves. A redundancy exists when the original loss reserve estimate is greater, and a deficiency exists when the original loss reserve estimate is less, than the reestimated loss reserve at December 31, 1996. A redundancy or deficiency indicates the cumulative percentage change, as of December 31, 1996, of originally recorded loss reserves. The lower portion of the table indicates the cumulative amounts paid as of successive periods as a percentage of the original loss reserve liability. In calculating the percentage of cumulative paid losses to the loss reserve liability in each year, unpaid losses of General Casualty Company of Wisconsin, a former wholly-owned subsidiary, and its subsidiaries ('General Casualty') at April 30, 1990 (the date of sale of General Casualty), relating to 1986 through
1989, were deducted from the original liability in each year. Each amount in the following table includes the effects of all changes in amounts for prior periods. The table does not present accident or policy year development data. For the years 1986 through 1995, the Company has experienced deficiencies in its estimated liability for loss reserves. The table includes provisions specifically made to strengthen prior-years' loss reserves of $134.0 million in 1996, $156.0 million in 1991 and $100.0 million in 1986. The Company's loss reserves during this period have been adversely affected by a number of factors beyond the Company's control as follows: (i) significant increases in claim settlements reflecting, among other things, inflation in medical costs; (ii) increases in the costs of settling claims, particularly legal expenses; (iii) more frequent resort to litigation in connection with claims; and (iv) a widening interpretation of what constitutes a covered claim.
- ------------------ (1) The gross liability for unpaid claims and related expenses was $6.3 billion at December 31, 1996. The gross liability for unpaid claims and related expenses for years 1995 and prior was deficient by $55.0 million at December 31, 1996.
The difference between the property and casualty liability for loss reserves at December 31, 1996 and 1995 reported in the Company's consolidated financial statements (net of reinsurance recoverables) and the liability which would be reported in accordance with statutory accounting practices is as follows:
The difference between the property and casualty liability for gross loss reserves at December 31, 1996 and 1995 reported in the Company's consolidated financial statements and the liability which would be reported in accordance with statutory accounting practices is as follows:
Property and casualty loss reserves are based on an evaluation of reported claims, in addition to statistical projections of claims incurred but not reported and loss adjustment expenses. Estimates of salvage and subrogation are deducted from the liability for unpaid claims. Also considered are other factors such as the promptness with which claims are reported, the history of the ultimate liability for such claims compared with initial and intermediate estimates, the type of insurance coverage involved, the experience of the property and casualty industry and other economic indicators, when applicable.
The establishment of loss reserves requires an estimate of the ultimate liability based primarily on past experience. The Reliance Property and Casualty Companies apply a variety of generally accepted actuarial techniques to determine the estimates of ultimate liability. The techniques recognize, among
other factors, the Reliance Insurance Group's and the industry's experience with similar business, historical trends in reserving patterns and loss payments, pending level of unpaid claims, the cost of claim settlements, the Reliance Insurance Group's product mix 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 Reliance Property and Casualty Companies regularly analyze their reserves and review their pricing and reserving methodologies, using Reliance Insurance Group actuaries, so that future adjustments to prior year reserves can be minimized. From time to time, the Reliance Property and Casualty Companies consult with independent actuarial firms concerning reserving practices and levels. The Reliance Property and Casualty Companies are required by state insurance regulators to file, along with their statutory reports, a statement of actuarial reserve opinion setting forth an actuary's assessment of their reserve status. Since 1992, the Reliance Property and Casualty Companies have used an independent actuarial firm to meet such requirements. However, given the complexity of this process, reserves will require continual updates and the ultimate liability may be more or less than such estimates indicate. Estimation of loss reserves for long tail lines of business is more difficult than for short tail lines because long tail claims may not become apparent for a number of years, and a relatively higher proportion of ultimate losses are considered incurred but not reported. As a result, variation in loss development is more
likely in long tail lines of business. The Reliance Property and Casualty Companies attempt to reduce these variations in certain of its long tail lines, primarily directors and officers liability and professional liability, by writing policies on a claims-made basis, which mitigates the long tail nature of the risks. The Reliance Property and Casualty Companies also limit the potential loss from a single event through the extensive use of reinsurance.
In calculating the liability for loss reserves, the Reliance Property and Casualty Companies discount workers' compensation pension claims which are expected to have regular, periodic payment patterns. These claims are discounted for mortality and for interest using statutory annual rates ranging from 3.5% to 6%. In addition, the reserves for claims assumed through the participation of the Reliance Property and Casualty Companies in workers' compensation reinsurance pools are discounted. The discounting of all claims (net of reinsurance recoverables) resulted in a decrease in the liability for loss reserves of $230.0 million, $235.7 million and $245.7 million at December 31, 1996, 1995 and 1994, respectively. The discount in 1996 was increased by $5.4 million which was more than offset by discount amortization of $11.1 million, resulting in a reduction in pre-tax income of $5.7 million. The discount in 1995 was increased by $1.8 million, which was more than offset by discount amortization of $11.8 million, resulting in a reduction in pre-tax income of $10.0 million. The discount in 1994 was reduced by $27.3 million plus discount amortization of $11.7 million, resulting in a reduction in pre-tax income of $39.0 million.
The liability for loss reserves includes provisions for inflation in several ways, depending on how the reserve is established. An explicit provision for inflation is used where estimates of ultimate loss are based on pricing. A provision for inflation is also included for certain discounted workers' compensation claims. In these cases, the provision for inflation is based on factors supplied by the respective workers' compensation rating bureaus which have jurisdiction for states which provide for cost-of-living increases in indemnity benefits. In other reserves, the analysis reflects the effect of inflationary trends as part of the overall effect on claim costs, as well as changes in marketing, underwriting, reporting and processing systems, claims settlement and coverages purchased.
Included in the liability for loss reserves at December 31, 1996 are $238.3 million ($213.0 million net of reinsurance recoverables) of loss reserves pertaining to asbestos-related and environmental pollution claims for business written in or before 1987. The following table presents information relating to the net loss reserves pertaining to asbestos-related and environmental pollution claims for business written in or before 1987 for the years ending December 31, 1996, 1995 and 1994:
The 1996 provision for policy claims and related expenses includes a pretax charge of $134.0 million to increase net loss reserves for asbestos-related and environmental pollution claims for business written in or before 1987. In the second quarter of 1996, the Company completed a study of its asbestos-related and environmental pollution reserves. The study entailed a detailed review of the Company's claims, analysis of new industry data, review of policies and classes of business written by the Company and industry at large, and new actuarial methodologies for projecting ultimate losses based on payment patterns and claims analyses. The loss reserve levels established represent the Company's estimate of its ultimate losses, based on current information and actuarial methodologies.
Included in the December 31, 1996 net loss reserves pertaining to asbestos-related and environmental pollution claims for business written in or before 1987 are $78.2 million of loss costs for claims incurred but not reported, $49.2 million of loss costs for reported claims and $85.6 million of related expenses.
The following table presents information related to the number of insureds with asbestos-related and environmental pollution claims outstanding for business written in or before 1987:
The average net paid loss per insured for asbestos-related and environmental pollution claims for business written in or before 1987 was $50,200 and $61,100 for the years 1996 and 1995, respectively.
The Company continues to receive claims asserting injuries from hazardous materials and alleged damages to cover various clean-up costs. Asbestos-related and environmental pollution claims primarily affect the Company's general liability, multiple peril and reinsurance lines of business. For business written in or before 1987, coverage and claim settlement issues, such as the determination that coverage exists and the definition of an occurrence, may cause the actual loss development for asbestos-related and environmental pollution claims to exhibit more variation than the remainder of the Company's book of business.
Since 1987, the Company has generally excluded coverage for most types of asbestos-related and environmental pollution claims from its general liability policies, other than policies specifically intended to provide environmental pollution and asbestos removal coverages. Policies written by the Company after 1987 ('post-1987 A&E business') which specifically intend to provide environmental pollution coverages are written primarily on a claims made basis and those which specifically intend to provide asbestos removal coverages are written on an occurrence basis, generally with liability limits of $1.1 million (net of reinsurance), including defense costs.
The liability for loss reserves at December 31, 1996 also included $40.8 million ($27.8 million net of reinsurance recoverables) of loss reserves pertaining to post-1987 A&E business. The following table presents information relating to the net loss reserves pertaining to claims for post-1987 A&E business for the years ending December 31, 1996, 1995 and 1994:
The December 31, 1996 net loss reserves pertaining to claims for post-1987 A&E business include $13.2 million of loss costs for claims incurred but not reported, $4.3 million of loss costs for reported claims and $10.3 million of related expenses.
The following table presents information related to the number of insureds with claims outstanding for post-1987 A&E business:
The average net paid loss per insured for claims for post-1987 A&E business was $20,500 and $5,600 for the years 1996 and 1995, respectively.
Although the Company believes, in light of present facts and current legal interpretations, that the overall loss reserves of the Reliance Property and Casualty Companies are adequate to meet their obligations under existing policies, due to the inherent uncertainty and complexity of the reserving process, the ultimate liability may be more or less than such reserves.
PORTFOLIO INVESTMENTS
Investment activities are an integral part of the business of the Reliance
Insurance Group. The Reliance Insurance Group believes that the investment objectives of safety and liquidity, while seeking the best available return, can be achieved by active portfolio management and intensive monitoring of investments. Reference is made to 'Financial Review--Investment Portfolio' on page 29 of the Company's 1996 Annual Report, which section is incorporated herein by reference, and Note 2 to the Consolidated Financial Statements.
At December 31, 1996, the Company's investment portfolio was $4.2 billion (at cost) with 90% in fixed maturities and short-term securities (including redeemable preferred stock and cash) and 10% in equity securities, approximately 24% of which were convertible preferred stock. The following table details the distribution of the Company's investments at December 31, 1996:
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(1) Does not include investment in Zenith National Insurance Corp. which is accounted for by the equity method and which, as of December 31, 1996, had a carrying value of $157.9 million and a market value of $180.0 million. See '--Investee Company.'
(2) Includes cash of $36.8 million.
(3) In the Company's Consolidated Financial Statements, mortgage loans are included in premiums and other receivables.
The Company seeks to maintain a diversified and balanced fixed maturity portfolio representing a broad spectrum of industries and types of securities. The Company holds virtually no investments in commercial real estate mortgages and has no exposure to derivative securities (other than through its ownership of any option, warrant or convertible security with an exercise or conversion price related to an equity security). Purchases of fixed maturity securities are researched individually based on in-depth analysis and objective predetermined investment criteria and are managed to achieve a proper balance of safety, liquidity and investment yields. The Reliance Insurance Group primarily invests in investment grade securities (those rated 'BBB' or better by S&P), and, to a lesser extent, non-investment grade and non-rated securities.
At December 31, 1996, the aggregate carrying value and market value of
fixed maturities (other than short-term investments and cash) that either have been rated by S&P in the following categories or are non-rated were as follows:
Substantially all of the non-investment grade and non-rated fixed maturities are classified as 'available for sale' and, accordingly, are carried at quoted market value. All publicly traded investment grade securities are priced using the Merrill Lynch Matrix Pricing model, which model is one of the standard methods of pricing such securities in the industry. All publicly traded non-investment grade securities, except as indicated below, are priced from broker-dealers who make markets in these and other similar securities. For fixed maturities not publicly traded, prices are estimated based on values obtained from independent third parties or quoted market prices of comparable instruments. Upon sale, such prices may not be realized when the size of a particular investment in an issue is significant in relation to the total size of such issue. Non-investment grade securities that are thinly traded are priced using internally developed calculations. Such securities represent less than 1% of the Reliance Insurance Group's fixed maturities portfolio.
Equity investments are made after an in-depth analysis of individual company's fundamentals by the Reliance Insurance Group's staff of investment professionals. They seek to identify equities of companies with strong growth prospects and equities that appear to be undervalued relative to the issuer's business fundamentals, such as earnings, cash flows, balance sheet and future prospects. Subsequent to purchase, the business fundamentals of each equity investment are carefully monitored.
As of March 1, 1997, the Reliance Insurance Group owned 3,578,634 shares of common stock of Symbol Technologies, Inc. ('Symbol'), representing 13.7% of the then outstanding common stock of Symbol. Symbol is the nation's largest manufacturer of bar code-based data capture systems. As of March 1, 1997, the market value of the Reliance Insurance Group's investment in Symbol was $179,826,000 (based upon the closing price on such date as reported by the
NYSE), with a cost basis of $27,252,000. The board of directors of Symbol includes certain executive officers of the Company.
As of March 1, 1997, the Reliance Insurance Group owned 2,449,624 shares of Human Genome Sciences, Inc. ('Human Genome'), representing 13.1% of the then outstanding common stock of Human Genome. Human Genome specializes in human genetic research designed to detect and treat human illnesses. As of March 1, 1997, the market value of the Reliance Insurance Group's investment in Human Genome was $93,086,000 (based upon
the last reported sales price on such date as reported by the Nasdaq National Market), with a cost basis of $52,382,000.
At December 31, 1996, the Company's real estate operations had holdings with a carrying value of $275.2 million, which includes nine shopping centers with an aggregate carrying value of $127.5 million, office buildings and other commercial properties with an aggregate carrying value of $85.3 million, and undeveloped land with a carrying value of $62.4 million.
The following table presents the investment results of the Reliance Insurance Group's investment portfolio for each of the years ended December 31, 1996, 1995, and 1994:
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(1) The average is computed by dividing the total market value of investments at the beginning of the period plus the individual quarter-end balances by five for the years ended December 31, 1996, 1995 and 1994.
(2) Does not include investment in Zenith National Insurance Corp. See '--Investee Company.'
(3) The impact on the overall rate of return of a one percent increase or decrease in the December 31, 1996 fixed maturity portfolio market value would be approximately 0.78%
The carrying value and market value at December 31, 1996 of fixed maturities for which interest is payable on a deferred basis was $152.2 million.
INVESTEE COMPANY
As of March 1, 1997, the Reliance Insurance Group owned 6,574,445 shares of common stock of Zenith National Insurance Corp. ('Zenith'), representing 37.4% of the outstanding common stock of Zenith, a California-based insurance company with significant workers' compensation and standard commercial and personal lines business. As of March 1, 1997 the market value of the Reliance Insurance Group's investment in Zenith was $174,223,000 (based upon the closing price on such date as reported by the NYSE), with a carrying value of $157,894,000. Certain executive officers of the Company serve, at the Company's request, as directors of Zenith. The Company's investment in Zenith is accounted for by the equity method. See Note 3 to the Consolidated Financial Statements.
REGULATION
The businesses of the Reliance Insurance Group, in common with those of other insurance companies, are subject to comprehensive, detailed regulation in the jurisdictions in which they do business. Such regulation is primarily for the protection of policyholders rather than for the benefit of investors. Although their scope varies from place to place, insurance laws in general grant broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of the conduct of the insurance business. These include the licensing of companies and agents to transact business, the imposition of monetary penalties for rules violations, varying degrees of control over premium rates (particularly for property and casualty companies), the forms of policies offered to customers, financial statements, periodic reporting, permissible investments and adherence to financial standards relating to surplus, dividends and other criteria of solvency intended to assure the satisfaction of obligations to policyholders. Other legislation obliges the Reliance Property and Casualty Companies to offer policies or assume risks in various markets which they would not seek if they were acting solely in their own interest. While such regulation and legislation is sometimes burdensome, inasmuch as all insurance companies similarly situated are subject to such controls, the Company does not believe that the competitive position of the Reliance Insurance Group is adversely affected.
State holding company acts also regulate changes of control in insurance holding companies and transactions and dividends between an insurance company and its parent or affiliates. Although the specific provisions vary, the holding company acts generally prohibit a person from acquiring a controlling interest in an insurer incorporated in the state promulgating the act or in any other controlling person of such insurer unless the insurance authority has approved the proposed acquisition in accordance with the applicable regulations. In many states, including Pennsylvania, where Reliance Insurance Company is domiciled, 'control' is presumed to exist if 10% or more of the voting securities of the insurer are owned or controlled by a party, although the insurance authority may find that 'control' in fact does or does not exist where a person owns or controls either a lesser or a greater amount of securities. The holding company acts also impose standards on certain transactions with related companies, which generally include, among other requirements, that all transactions be fair and reasonable and that certain types of transactions receive prior regulatory approval either in all instances or when certain regulatory thresholds have been exceeded.
The Insurance Law of Pennsylvania, where Reliance Insurance Company is domiciled, limits the maximum amount of dividends which may be paid without approval by the Pennsylvania Insurance Department. Under such law, Reliance Insurance Company may pay dividends during the year equal to the greater of (a) 10% of the preceding year-end policyholders' surplus or (b) the preceding year's statutory net income, but in no event to exceed the amount of unassigned funds, which are defined as 'undistributed, accumulated surplus including net income and unrealized gains since the organization of the insurer.' In addition, the Pennsylvania law specifies factors to be considered by the Pennsylvania Insurance Department to allow it to determine that statutory surplus after the payment of dividends is reasonable in relation to an insurance company's outstanding liabilities and adequate for its financial needs. Such factors include the size of the company, the extent to which its business is diversified among several lines of insurance, the number and size of risks insured, the nature and extent of the company's reinsurance and the adequacy of the company's reserves. The maximum dividend permitted by law is not indicative of an insurer's actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's ratings, competitive position, the amount of
premiums that can be written and the ability to pay future dividends. Furthermore, the Pennsylvania Insurance Department has broad discretion to limit the payment of dividends by insurance companies.
The total amount of common stock dividends paid by Reliance Insurance Company was $111.5 million in each of 1996, 1995 and 1994. During 1997, $118.5 million would be available for dividend payments by Reliance Insurance Company under Pennsylvania law. The Company believes such amount will be sufficient to meet its cash needs.
There is no assurance that Reliance Insurance Company will meet the test in effect from time to time under Pennsylvania law for the payment of dividends without prior Insurance Department approval or that any requested approval will be obtained. Reliance Insurance Company has been advised by the Pennsylvania Insurance Department that any required prior approval will be based upon a solvency standard and will not be unreasonably withheld. Any significant limitation of Reliance Insurance Company's dividends would adversely affect the Company's ability to service its debt and to pay dividends on its common stock.
The National Association of Insurance Commissioners (the 'NAIC') has a 'risk-based capital' requirement for the property and casualty insurance industry. 'Risk-based capital' refers to the determination of the amount of statutory capital required for an insurer based on the risks assumed by the insurer (including, for example, investment risks, credit risks relating to reinsurance recoverables and underwriting risks) rather than just the amount of net premiums written by the insurer. A formula that applies prescribed factors to the various risk elements in an insurer's business is used to determine the minimum statutory capital requirement for the insurer. An insurer having less statutory capital than the formula calculates would be subject to varying degrees of regulatory intervention, depending on the level of capital inadequacy. All of the Company's statutory insurance companies have statutory capital in excess of the minimum required risk-based capital.
Maintaining appropriate levels of statutory surplus is considered important by the Company's management, state insurance regulatory authorities, and the agencies that rate insurers' claims-paying abilities and financial strength. Failure to maintain certain levels of statutory capital and surplus could result in increased scrutiny or, in some cases, action taken by state regulatory authorities and/or downgrades in an insurer's ratings.
The Company's principal property and casualty insurance subsidiary, Reliance Insurance Company, has operated outside of the NAIC financial ratio range concerning liabilities to liquid assets (the 'NAIC liquidity test'). This ratio is intended only as a guideline for an insurance company to follow. The Company believes that it has sufficient marketable assets on hand to make timely payment of claims and other operating requirements.
In 1994, Reliance Insurance Company and several of its affiliates received an order from the outgoing Insurance Commissioner ordering refunds under California Proposition 103 totaling $72.3 million, inclusive of interest. On January 31, 1996, the Company reached a settlement with the California Department of Insurance resolving its total liability for refunds and interest under Proposition 103. The settlement requires the Company to pay $15.6 million
in refunds and interest on certain policies issued or renewed between November 8, 1988 and November 7, 1989. Although the Company believes that the California Department of Insurance misapplied Proposition 103 as it relates to it, the Company agreed to the settlement to avoid prolonging the matter further. In the fourth quarter of 1995, the Company recorded a pre-tax charge of $4.0 million related to Proposition 103. The fourth quarter 1995 charge represents the difference between the settlement amount and the pre-tax charge of $11.6 million the Company had taken in the fourth quarter of 1994 to provide for Proposition 103 refunds and interest.
From time to time, other states have considered adopting legislation or regulations which could adversely affect the manner in which the Company sets rates for policies of insurance, particularly as they relate to personal lines. No assurance can be given as to what effect the adoption of any such legislation or regulation would have on the ability of the Company to raise its rates.
COMPETITION
All of the Company's businesses are highly competitive. The property and casualty insurance business is fragmented and no single company dominates any of the markets in which the Company operates. The Reliance Property and Casualty Companies compete with individual companies and with groups of
affiliated companies with greater financial resources, larger sales forces and more widespread agency and broker relationships. Competition in the property and casualty insurance industry is based primarily on price, product design and service. In addition, because the Reliance Property and Casualty Companies sell policies through independent agents and insurance brokers who are not obligated to choose the policies of the Reliance Property and Casualty Companies over those of another insurer, the Reliance Property and Casualty Companies must compete for agents and brokers and for the business they control. Such competition is based upon price, product design, policyholder service, commissions and service to agents and brokers.
Commonwealth/Transnation Title competes with other large national title insurance companies and with smaller, locally established businesses which may possess distinct competitive advantages. Competition in the title insurance business is based primarily on the quality and timeliness of service. In some market areas, abstracts and title opinions issued by attorneys are used as an alternative to title insurance and other services provided by title companies. In addition, certain jurisdictions have title registration systems which can lessen the demand for title insurance.
RCG Information Technology competes with other national mid-size information technology services companies, as well as smaller computer professional supplemental staffing firms. Competition in the information technology consulting business is based primarily on price, service and quality of the solutions provided and the availability of qualified computer professionals.
SALE OF NON-CORE OPERATIONS
In July 1993, the Company completed the sale of its life insurance subsidiary, United Pacific Life Insurance Company. In the fourth quarter of 1992, the Company sold substantially all of the operating assets and insurance brokerage, employee benefits consulting and related services businesses of its insurance brokerage subsidiary, Frank B. Hall & Co. Inc. ('Hall'). Also in the fourth quarter of 1992, the Company sold its mortgage insurance subsidiary, Commonwealth Mortgage Assurance Corporation, through a public offering of 100% of the common stock of CMAC Investment Corporation.
ITEM 2.

ITEM 2. PROPERTIES.
The Company and its consolidated subsidiaries own and lease offices in various locations primarily in the United States. None of these properties is material to the Company's business. At December 31, 1996, the Company and its consolidated subsidiaries employed approximately 9,200 persons in approximately 480 offices.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in certain litigation arising in the course of their businesses, some of which involve claims of substantial amounts. Although the ultimate outcome of these matters cannot be ascertained at this time, and the results of legal proceedings cannot be predicted with certainty, the Company is contesting the allegations of the complaints in each action pending against it and believes, based on current knowledge and after consultation with counsel, that the resolution of these matters will not have a material adverse effect on the Consolidated Financial Statements. In addition, the Company is subject to the litigation set forth below.
In June 1989, Hall, the predecessor corporation of Prometheus Funding Corp., a subsidiary of the Company ('Prometheus'), entered into a settlement agreement, which is subject to court approval, with the Superintendent of Insurance of the State of New York (the 'Superintendent'), arising out of the insolvency of Union Indemnity Insurance Company of New York, Inc. ('Union Indemnity'). The settlement agreement was submitted to the court for approval in October 1989 and objections were filed and continue to be pursued by various parties. The Superintendent has informed Prometheus that he intends to pursue court approval of the settlement. The settlement agreement will not become effective until final approval by the court and there is no assurance that such approval will be obtained.
See Note 14 to the Consolidated Financial Statements for additional information concerning the above referenced legal proceedings affecting the Company and its subsidiaries.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Item 4 is not required pursuant to the reduced disclosure requirements applicable to this Form 10-K.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of March 1, 1997, all 1,000 shares of Reliance Financial's common stock are held of record by Reliance Group Holdings and are not publicly traded. See the information in 'Market and Dividend Information for Common Stock' on page 31 of the Reliance Financial 1996 Annual Report, which information is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
Item 6 is not required pursuant to reduced disclosure requirements applicable to this Form 10-K.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See the information in 'Reliance Financial Services & Subsidiaries Financial Review' on pages 26 through 31 of the Reliance Financial 1996 Annual Report, which information is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and its consolidated subsidiaries, included on pages 1 through 24 of the Reliance Financial 1996 Annual Report, which information is incorporated herein by reference, are listed in Item 14 below.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Items 10, 11, 12 and 13, which comprise Part III, are not required pursuant to reduced disclosure requirements applicable to this Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of Reliance Financial Services Corporation and Subsidiaries, which appear on pages 1 through 24 of the Reliance Financial 1996 Annual Report, are incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES.
3. EXHIBITS.
- ------------------ * Neither Reliance Financial nor its subsidiaries is a party to any instrument relating to long-term debt under which the securities authorized exceed 10% of the total consolidated assets of Reliance Financial and its subsidiaries. Copies of instruments relating to long-term debt of lesser amounts will be provided to the Securities and Exchange Commission upon request.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the year ended December 31, 1996.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 21ST DAY OF MARCH, 1997.
RELIANCE FINANCIAL SERVICES CORPORATION
BY: SAUL P. STEINBERG --------------------------------- SAUL P. STEINBERG CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder Reliance Financial Services Corporation New York, New York
We have audited the consolidated financial statements of Reliance Financial Services Corporation (a subsidiary of Reliance Group Holdings, Inc.) and subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 14, 1997; such financial statements and report are included in your 1996 Annual Report and are incorporated herein by reference. Our audits also included the financial statement schedules of Reliance Financial Services Corporation, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP New York, New York February 14, 1997
A-1
SCHEDULE I ITEM 14(A)2 RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(1) In the consolidated financial statements, mortgage loans are included in other accounts and notes receivable.
A-2
SCHEDULE II ITEM 14(A)2 RELIANCE FINANCIAL SERVICES CORPORATION (PARENT COMPANY)
STATEMENT OF INCOME
A-3
SCHEDULE II ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION (PARENT COMPANY)
BALANCE SHEET
A-4
SCHEDULE II ITEM 14(A)2
RELIANCE FINANCIAL SERVICES CORPORATION (PARENT COMPANY)
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In 1994, non-cash dividends of $24,813,000 were recorded as a reduction in notes receivable from parent company.
A-5
SCHEDULE III ITEM 14(A)2 RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION
A-6
SCHEDULE IV ITEM 14(A)2 RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES REINSURANCE
A-7
SCHEDULE VI ITEM 14(A)2 RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
(a) Liabilities for unpaid claims and related expenses for short-duration contracts which are expected to have fixed, periodic payment patterns are discounted to present values using statutory annual rates ranging from 3 1/2% to 6%. Discount shown relates to net liabilities for unpaid claims and related expenses for short-duration contracts which are expected to have fixed, periodic payment patterns.
A-8
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------- -------------------------------------------------------------------- 3.1 Reliance Financial's Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to Registration Statement No. 2-458933). 3.2 Amendment to Exhibit 3.1 (incorporated by reference to Exhibit 3.2 to Registration Statement No. 2-60201). 3.3 Amendment to Exhibit 3.1 (incorporated by reference to Exhibit 3.3 to Reliance Financial's Annual Report on Form 10-K for the year ended December 31, 1983). 3.4 Reliance Financial's By-Laws, as amended (incorporated by reference to Exhibit 3.4 to Reliance Financial's Annual Report on Form 10-K for the year ended December 31, 1990). *4. 10.1 Asset Purchase Agreement, dated July 24, 1992, between Frank B. Hall & Co. Inc. ('Hall') and Aon Corporation ('Aon') (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 10.2 Agreement and Plan of Merger, dated as of July 24, 1992, among Reliance Group Holdings, Hall and Prometheus Liquidating Corp. (incorporated by reference to Exhibit 2.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 10.3 Employee Benefit Agreement, dated July 24, 1992, among Reliance Group Holdings and Aon (incorporated by reference to Exhibit 28.2 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 10.4 Amendment, dated November 2, 1992, to Exhibit 10.1 (incorporated by reference to Exhibit 2.1 to Reliance Group Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1992). 10.5 Settlement Agreement and Release, dated June 2, 1989, between James P. Corcoran, Superintendent of Insurance of the State of New York, as Liquidator of Union Indemnity Insurance Company of New York, Inc. and Hall (now known as Prometheus Funding Corp.)(incorporated herein by reference to Exhibit 10.01 to Frank B. Hall & Co. Inc.'s report on Form 10-Q for the quarter ended June 30, 1989). 13.1 Reliance Financial 1996 Annual Report. 27.1 Financial Data Schedule.
- ------------------ * Neither Reliance Financial nor its subsidiaries is a party to any instrument relating to long-term debt under which the securities authorized exceed 10% of the total consolidated assets of Reliance Financial and its subsidiaries. Copies of instruments relating to long-term debt of lesser amounts will be provided to the Securities and Exchange Commission upon request.