General Comments about the Insurance Industry Insurance Companies generate
revenues by selling insurance policies. These policies provide a known amount of
revenue for an unknown amount of losses offsetting that revenue. This can make
the matching principle difficult. Some of the potential losses can come years
after the insurance policy was written and the premiums received. The
liabilities for these future losses are estimated by actuaries and are subject
to a certain amount of interpretation by management. The accounting for the
premium revenues is reflected in written vs. earned premium. Various statutory
requirements are based on written premium, which is the amount of premium booked
in a given accounting period. Earned premium is generally used for recognizing
revenues for financial reporting. As insurance policies are written on an annual
basis or longer, the premiums (revenues) are spread over the duration of the
policy period even if the potential liability exceeds the policy period. The
future liability is estimated and booked against the earned premiums. Some
costs, however are not matched against this revenue, primarily commissions paid
to the insurance agent that sold the policy. This expense is fully recognized at
the time the premium is booked. These effects can have both positive and
negative implications. In an era of declining written premiums, revenue can
actually increase and expenses should decrease because of the costs incurred at
the time the policy was written. Very few insurance companies in the United
States actually make a profit by selling insurance. The profit is generally made
from the investment income earned investing the premiums they receive now, but
do not expect to pay out until some point in the future. This paper examines the
published financial information of Reliance Group Holdings and Travelers
Property Casualty Corp for the fiscal year ending December 31, 1998 and the
third quarter reports for the quarter ending September 30, 1999. The letters to
the shareholders are examined as well as the financial statements and subsequent
notes. An outline of the accounting principles employed by both companies is
provided as well as some basic ratio analysis.
Reliance Group Holdings, Inc. 1998 Annual Report Letter to Shareholders from
Saul Steinberg, Chairmen and CEO and Robert Steinberg, President and Chief
Operating Officer. Operating income was up slightly over 1997. Net income was a
record due to proceeds from sale of asset, Commonwealth Title. Reliance grew
Shareholders Equity by $1.32 billion, highest it has ever been in the history of
the company. This may not be significant accomplishment if the company had
sustained steady operating and earnings growth over the long run. Reliance had
18% growth in property and casualty premiums, despite continued soft pricing
environment and significant catastrophic losses as well as other weather related
losses. Combined ratio for 1998 102.1. Combined ratio is a measure of premiums
spent to cover losses and expenses.For every dollar in premium revenues, the
company spent $1.02 in expenses and losses. Employee and management ownership
aligns interests of employees with that of shareholders. The Steinberg's note a
successful track record of putting innovative and specialized skills to work. In
the third quarter of 1999 it will be noted that several of these innovations
were not as profitable as they thought they were. Note disciplined underwriting
approach. Reliance National Reliance Group Holdings largest profit center
offering specialized property and casualty insurance and risk management
services.They broke new ground in overseas expansion and e-commerce
opportunities. These e-commerce opportunities are Cybercomp, a program to offer
workmen's compensation insurance over the Internet. Reliance National's
international sources generated 12% of the total premium in 1998, through
offices in London, China and Argentina. Reliance Insurance This is considered a
middle market company, writing insurance for small and mid size companies. The
Steinbergs feel this is one of the few companies offering a full range of
specialized products delivered locally. This means it is underwritten through
local branch offices. Reliance National business is largely underwritten
centrally, in their head office in New York. Reliance Reinsurance Reinsurance
offers a method of limiting exposure for the generators of insurance policies.
