<PAGE>
 
<TABLE>
<C>                                            <S>                                                           <C>
                                               CONTENTS
                                               Financial Statements                                                  1
                                               Independent Auditors' Report                                         25
                                               Financial Review                                                     26
                                               Market and Dividend Information                                      31
                                               Directors                                                            32
                                               Officers                                                             33
                                               Corporate Data                                                       34
 
                                               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, N.Y. 10055.
</TABLE>
 
<PAGE>
                      [This page intentionally left blank]



<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                         1996         1995         1994
-----------------------------------------------------------------------------
<S>                                      <C>          <C>          <C>
(In thousands)
REVENUES:
Premiums earned.......................   $2,581,011   $2,446,538   $2,634,092
Net investment income.................      287,588      275,289      258,912
Gain on sales of investments..........       49,610       29,110        9,218
Interest income from parent company...       21,212       20,408       14,864
Other.................................      165,608      150,751      141,609
                                         ----------   ----------   ----------
                                          3,105,029    2,922,096    3,058,695
                                         ----------   ----------   ----------
CLAIMS AND EXPENSES:
Policy claims and settlement
  expenses............................    1,411,453    1,260,445    1,372,960
Policy acquisition costs..............      414,636      411,979      387,924
Interest..............................       20,030       21,753       22,988
Other insurance expenses..............      912,670      826,163      959,904
Other.................................      165,947      146,373      137,877
                                         ----------   ----------   ----------
                                          2,924,736    2,666,713    2,881,653
                                         ----------   ----------   ----------
INCOME BEFORE INCOME TAXES AND EQUITY
  IN INVESTEE COMPANY.................      180,293      255,383      177,042
Provision for income taxes............      (49,700)     (82,900)     (47,982)
Equity in investee company............        8,908        7,792        9,478
                                         ----------   ----------   ----------
INCOME FROM CONTINUING OPERATIONS.....      139,501      180,275      138,538
Loss on disposal of discontinued
  operations of
  investee company....................           --       (4,497)          --
                                         ----------   ----------   ----------
INCOME BEFORE EXTRAORDINARY ITEM......      139,501      175,778      138,538
Extraordinary item--early
  extinguishment of debt..............           --       (3,363)          --
                                         ----------   ----------   ----------
NET INCOME............................   $  139,501   $  172,415   $  138,538
                                         ----------   ----------   ----------
                                         ----------   ----------   ----------
</TABLE>
 
See notes to consolidated financial statements
 
                                       1


<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
ASSETS                   DECEMBER 31          1996         1995
------------------------------------------------------------------
<S>                                        <C>          <C>
(Dollars in thousands, except per-share
  amount)
Marketable securities:
     Fixed maturities held for             
      investment--at amortized cost
       (quoted market $801,738 and
      $791,459).........................  $   787,836   $  753,563
     Fixed maturities available for         
      sale--at quoted market
       (amortized cost $2,595,929 and
      $2,299,510).......................    2,623,669    2,371,995
     Equity securities--at quoted market      
      (cost $436,053 and $408,054)......      716,606      672,668
     Short-term investments.............      319,165      500,284
Cash....................................       38,520       50,848
Premiums receivable.....................    1,104,331    1,075,226
Other accounts and notes receivable.....      137,293      130,555
Reinsurance recoverables................    3,576,953    3,163,073
Federal and foreign income taxes,               
  including deferred taxes..............        4,390        9,784
Notes receivable from parent company....      202,272      184,108
Investments in real estate--at cost,          
  less accumulated depreciation.........      275,237      278,510    
Investment in investee company..........      157,894      156,404
Deferred policy acquisition costs.......      215,438      194,648
Other assets............................      351,016      354,254
                                          -----------   ----------
                                          $10,510,620   $9,895,920
                                          -----------   ----------
                                          -----------   ----------
</TABLE>

<TABLE> 
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------------------------------------
<S>                                        <C>          <C>
Unearned premiums.......................   $1,468,299   $1,299,465
Unpaid claims and related expenses......    6,530,258    6,100,129
Accounts payable and accrued expenses...      529,047      586,902
Reinsurance ceded premiums payable......      365,412      325,246
Senior reset notes......................       15,365       40,318
Term loans and short-term debt..........      224,167      176,101

                                           ----------   ----------
                                            9,132,548    8,528,161
                                           ----------   ----------
Contingencies and commitments
 
Shareholder's equity:
     Common stock, par value $.10                  
      per-share, 1,000 shares
       authorized, issued and
      outstanding.......................           --           --
     Additional paid-in capital.........      677,969      678,349
     Retained earnings..................      526,340      496,839
     Net unrealized gain on                   
      investments.......................      198,786      219,356
     Net unrealized loss on foreign           
      currency translation..............      (25,023)     (26,785)
                                          -----------   ----------
                                            1,378,072    1,367,759
                                          -----------   ----------
                                          $10,510,620   $9,895,920
                                          -----------   ----------
                                          -----------   ----------
</TABLE>
 
See notes to consolidated financial statements
 
                                       2

<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
 
--------------------------------------------------------------------------------
(In thousands)
 
<TABLE>
<CAPTION>
                                                                                                           NET
                                                                                                    UNREALIZED
                                                                                             NET       LOSS ON
                                                        ADDITIONAL                    UNREALIZED       FOREIGN
                                               COMMON      PAID-IN    RETAINED    GAIN (LOSS) ON      CURRENCY   SHAREHOLDER'S
                                                STOCK      CAPITAL    EARNINGS       INVESTMENTS   TRANSLATION          EQUITY
                                               ------   ----------   ---------    --------------   -----------   -------------
<S>                                            <C>      <C>          <C>          <C>              <C>           <C>
Balance, January 1, 1994.....................   $ --     $ 677,510   $ 406,138      $  115,023      $ (15,731)    $  1,182,940
Transactions of investee company.............     --          (597)         --          (9,002)            --           (9,599)
Net income...................................     --            --     138,538              --             --          138,538
Dividends....................................     --            --    (110,000)             --             --         (110,000)
Capital contribution.........................     --         1,589          --              --             --            1,589
Depreciation after deferred income taxes.....     --            --          --        (133,902)            --         (133,902)
Foreign currency translation.................     --            --          --              --         (5,487)          (5,487)

                                               ------   ----------   ---------    ------------     ----------    -------------
Balance, December 31, 1994...................     --       678,502     434,676         (27,881)       (21,218)       1,064,079
Transactions of investee company.............     --          (153)         --           8,693             --            8,540
Net income...................................     --            --     172,415              --             --          172,415
Loss on early extinguishment of redeemable
  preferred stock of a subsidiary............     --            --        (252)             --             --             (252)
Dividends....................................     --            --    (110,000)             --             --         (110,000)
Appreciation after deferred income taxes.....     --            --          --         238,544             --          238,544
Foreign currency translation.................     --            --          --              --         (5,567)          (5,567)
                                               ------   ----------   ---------    ------------     ----------    -------------
BALANCE, DECEMBER 31, 1995...................     --       678,349     496,839         219,356        (26,785)       1,367,759
Transactions of investee company.............     --          (380)         --          (1,504)            --           (1,884)
Net income...................................     --            --     139,501              --             --          139,501
Dividends....................................     --            --    (110,000)             --             --         (110,000)
Depreciation after deferred income taxes.....     --            --          --         (19,066)            --          (19,066)
Foreign currency translation.................     --            --          --              --          1,762            1,762
                                               ------   ----------   ---------    ------------     ----------    -------------
BALANCE, DECEMBER 31, 1996...................   $ --     $ 677,969   $ 526,340      $  198,786      $ (25,023)    $  1,378,072
                                               ------   ----------   ---------    ------------     ----------    -------------
                                               ------   ----------   ---------    ------------     ----------    -------------
</TABLE>
 
See notes to consolidated financial statements
 
                                       3

<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                           1996         1995         1994
-------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..............................   $  139,501   $  172,415   $  138,538
Adjustments to reconcile net income to
  net cash provided
  from operating activities:
  Gain on sales of investments..........      (49,610)     (29,110)      (9,218)
  Deferred policy acquisition costs.....      (20,790)     (12,710)      (3,809)
  Premiums and other receivables and
     reinsurance recoverables...........     (449,324)    (238,754)    (480,590)
  Unearned premiums, unpaid claims and
     related expenses...................      590,760      315,288      566,873
  Accounts payable, accrued expenses and
     other..............................       38,513       30,885      106,239
                                           ----------   ----------   ----------
                                              249,050      238,014      318,033
                                           ----------   ----------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
  Fixed maturities available for sale...      629,688      536,795      441,401
  Fixed maturities held for
     investment.........................       28,910       39,218       18,481
  Equity securities.....................      360,983      400,635      189,895
Maturities and repayments of:
  Fixed maturities available for sale...      106,811       49,218       60,752
  Fixed maturities held for
     investment.........................       31,141       54,038       15,785
Purchases of:
  Fixed maturities available for sale...   (1,027,256)    (514,491)    (587,581)
  Fixed maturities held for
     investment.........................      (83,190)    (108,053)    (265,672)
  Equity securities.....................     (343,146)    (262,075)    (209,506)
(Increase) decrease in short-term
  investments--net......................      193,940     (283,141)     151,965
Other--net..............................      (49,285)     (20,710)     (57,355)
                                           ----------   ----------   ----------
                                             (151,404)    (108,566)    (241,835)
                                           ----------   ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in notes receivable
  from parent company...................      (18,164)       2,957      (17,365)
Increase in term loans..................       86,327      120,298       75,272
Increase (decrease) in short-term
  debt--net.............................       (2,174)      (5,400)      10,652
Repayments of term loans................      (40,483)     (68,152)     (81,942)
Repurchases of senior reset notes.......      (25,000)     (40,348)     (19,062)
Debt issuance costs.....................         (480)      (1,000)          --
Dividends...............................     (110,000)    (110,000)     (85,187)
Redemption of redeemable preferred stock
  of a subsidiary.......................           --      (23,769)      (3,360)
                                           ----------   ----------   ----------
                                             (109,974)    (125,414)    (120,992)
                                           ----------   ----------   ----------
Increase (decrease) in cash.............      (12,328)       4,034      (44,794)
Cash, beginning of year.................       50,848       46,814       91,608
                                           ----------   ----------   ----------
Cash, end of year.......................   $   38,520   $   50,848   $   46,814
                                           ----------   ----------   ----------
                                           ----------   ----------   ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
Interest paid...........................   $   14,900   $   16,300   $   16,400
                                           ----------   ----------   ----------
                                           ----------   ----------   ----------
Income taxes paid.......................   $   40,500   $   55,000   $   44,500
                                           ----------   ----------   ----------
                                           ----------   ----------   ----------
</TABLE>
 
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
In 1994, non-cash dividends of $24,813,000 were recorded as a reduction in notes

receivable from parent company.
 
See notes to consolidated financial statements
 
                                       4

<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
--------------------------------------------------------------------------------
 
1. NATURE OF OPERATIONS/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
NATURE OF OPERATIONS
 
The Company's principal operations consist of property and casualty insurance
and title insurance. The Company's property and casualty insurance business
consists of four principal operations: Reliance National, Reliance Insurance,
Reliance Surety and Reliance Reinsurance. Reliance National offers, through
national and regional brokers and program agents, a broad range of commercial
property and casualty insurance products and services for large companies and
specialty line customers. Reliance National selects market segments where it can
provide specialized coverages and services, and it conducts business nationwide
and in certain international markets. In addition, in 1996, Reliance National
began to offer nonstandard automobile insurance. In 1996, Reliance National
accounted for 45% of the net premiums written by the Company's property and
casualty insurance operations. The Reliance Insurance operation offers, through
independent agents, program agents and brokers, commercial property and casualty
insurance coverages for mid-sized companies primarily throughout the United
States. Reliance Insurance also offers traditional and specialized coverages for
more complex risks as well as insurance programs for groups with common
insurance needs. In 1996, Reliance Insurance accounted for 38% of the net
premiums written by the Company's property and casualty insurance operations.
Reliance Surety is a leading writer of surety bonds and fidelity bonds in the
United States and conducts its business through branch offices, independent
agents and brokers. Reliance Reinsurance offers, through reinsurance brokers,
treaty and facultative reinsurance for small to medium sized regional and
specialty insurance companies located in the United States. The Company's
property and casualty insurance operations accounted for $1,800,854,000 (70%) of
the Company's 1996 net premiums earned.
 
The Company's title insurance business consists of Commonwealth Land Title
Insurance Company, Transnation Title Insurance Company and their subsidiaries
('Commonwealth/Transnation'). Commonwealth/Transnation writes, through direct
and agency operations, title insurance for residential and commercial real
estate nationwide and provides escrow, appraisal and settlement services in
connection with real estate closings. Commonwealth/Transnation accounted for
$780,157,000 (30%) of the Company's 1996 net premiums earned.
 
The Company also provides information technology consulting services offering
computer-related professional services to large corporate clients throughout the

United States. Information technology revenues were $136,700,000 in 1996.
 
Reliance Group Holdings, Inc. owns 100% of the common stock of the Company.
 
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.
 
                                       5

<PAGE>

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 shareholder's equity. Such
investments may be sold in response to changes in interest rates, future general
liquidity needs and similar factors. Fixed maturity investments classified as
'held for investment' are carried at amortized cost since the Company has the
positive intent and ability to hold these securities to maturity. In 1995, the
Financial Accounting Standards Board issued a special report which permitted a
one-time reassessment of the classification of securities designated held for
investment. Accordingly, the Company reclassified fixed maturity securities with
a market value of $426,442,000 and an amortized cost of $410,395,000 from the
held for investment portfolio into the available for sale portfolio. This
reclassification resulted in an increase in shareholder's equity of $10,431,000.
Investments in equity securities include common stocks, where the Company's
ownership of outstanding voting stock is less than 20%, and nonredeemable
preferred stocks and are carried at quoted market value with the net unrealized
gain or loss included in shareholder's 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.
 
                                       6

<PAGE>

INVESTMENTS IN REAL ESTATE
 
Investments in real estate consist primarily of shopping centers and office
buildings, and are carried at cost (less accumulated depreciation), which
includes real estate taxes, interest and other carrying costs incurred prior to
substantial completion of the real estate development projects. Investments in
real estate at December 31, 1996 include $62,400,000 related to undeveloped land
which is zoned for mixed use development. Depreciation expense is provided using
the straight-line method.
 
The Company's real estate properties are reviewed for impairment whenever events

or circumstances indicate that the carrying value of such properties may not be
recoverable. In performing the review for recoverability of carrying value, the
Company estimates the future undiscounted cash flows expected to result from the
use of each of its properties and their eventual disposition. These cash flow
projections reflect changes in occupancy, new leases, current rent roll, future
expirations and general market conditions. If the total expected future
undiscounted cash flows are less than the carrying value of such properties,
impairment losses are recognized on a property-by-property basis. An impairment
loss is measured by the amount that the carrying value of the property exceeds
its fair value.
 
INCOME TAXES
 
The Company and its domestic subsidiaries, where their ownership is at least 80%
of outstanding voting stock, are included in the consolidated federal income tax
return of Reliance Group Holdings, Inc. 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
and unfunded postretirement medical and life insurance plans for certain
employees of a subsidiary.
 
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
 
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates. Results of operations are translated at average rates during the
year. The effects of exchange rate changes in translating foreign financial
statements are excluded from the consolidated statement of income and are
presented as a separate component of shareholder's equity. Exchange gains and
losses resulting from foreign currency transactions are included in operations
currently.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The estimated fair value of publicly traded financial instruments is determined
by the Company using quoted market prices, dealer quotes and prices obtained
from independent third parties. For financial instruments not publicly traded,
fair values are estimated based on values obtained from independent third
parties or quoted market prices of comparable instruments. However, judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange.
 
                                       7


<PAGE>

The carrying values and fair values of financial instruments are as follows:
 
<TABLE>
<CAPTION>
DECEMBER 31                                                           1996                        1995
----------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>           <C>
                                                             Carrying        Fair        Carrying        Fair
(IN THOUSANDS)                                                Value         Value         Value         Value
                                                            ------------------------    ------------------------
                                                            
Assets:
  Marketable securities:
     Fixed maturities:
       Held for investment...............................   $  787,836    $  801,738    $  753,563    $  791,459
       Available for sale................................    2,623,669     2,623,669     2,371,995     2,371,995
       Equity securities.................................      716,606       716,606       672,668       672,668
       Short-term investments............................      319,165       319,165       500,284       500,284
  Notes receivable from parent company...................      202,272       202,272       184,108       184,108
  Investment in investee company.........................      157,894       179,975       156,404       140,529
Liabilities:
  Senior reset notes.....................................       15,365        15,365        40,318        40,345
  Term loans and short-term debt.........................      224,167       224,167       176,101       176,101
</TABLE>
 
RECLASSIFICATIONS
 
Certain reclassifications have been made to the Company's 1995 and 1994
consolidated financial statements to conform with the current year's
consolidated financial statements.
 
ADOPTION OF NEW ACCOUNTING STANDARDS
 
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, 'Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities.' The adoption of this
Statement, which is not required until 1997, is not expected to have a material
effect on the Company's consolidated financial statements.
 
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.' The adoption of this Statement had no
material effect on the Company's consolidated financial statements.
 
                                       8

<PAGE>

2. INVESTMENTS
 
Fixed maturities held for investment at December 31, 1996 consisted of:

 
<TABLE>
<CAPTION>
                                                                GROSS        GROSS
                                  AMORTIZED       MARKET   UNREALIZED   UNREALIZED
                                       COST        VALUE        GAINS       LOSSES(1)
----------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>
(In thousands)
Bonds and notes:
     Public utilities.........   $  355,567   $  357,377   $    4,759   $    2,949
     Foreign government.......      145,065      150,622        6,583        1,026
     Corporate bonds and notes
       and other..............      174,386      178,400        6,870        2,856
Redeemable preferred stock....      112,818      115,339        2,657          136
                                 ----------   ----------   ----------   ----------
                                 $  787,836   $  801,738   $   20,869   $    6,967
                                 ----------   ----------   ----------   ----------
                                 ----------   ----------   ----------   ----------
</TABLE>
 
(1) The amortized cost and market value of fixed maturities held for investment
    which have unrealized losses were $242,880,000 and $235,913,000.
 
Fixed maturities available for sale at December 31, 1996 consisted of:
 
<TABLE>
<CAPTION>
                                                                Gross        Gross
                                     Market    Amortized   Unrealized   Unrealized
                                      Value         Cost        Gains       Losses(1)
----------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>
(In thousands)
Bonds and notes:
     United States government
       and government agencies
       and authorities........   $  702,472   $  704,386   $    2,928   $    4,842
     States, municipalities
       and political
       subdivisions...........      132,163      128,874        4,221          932
     Public utilities.........      373,389      374,404        5,792        6,807
     Corporate bonds and notes
       and other..............      892,091      889,016       31,498       28,423
Redeemable preferred stock....      523,554      499,249       26,776        2,471
                                 ----------   ----------   ----------   ----------
                                 $2,623,669   $2,595,929   $   71,215   $   43,475
                                 ----------   ----------   ----------   ----------
                                 ----------   ----------   ----------   ----------
</TABLE>
 
(1) The amortized cost and market value of fixed maturities available for sale
    which have unrealized losses were $1,116,139,000 and $1,072,664,000.
 

Fixed maturities held for investment at December 31, 1995 consisted of:
 
<TABLE>
<CAPTION>
                                                                Gross        Gross
                                  Amortized       Market   Unrealized   Unrealized
                                       Cost        Value        Gains       Losses(1)
----------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>
(In thousands)
Bonds and notes:
     Public utilities.........   $  296,456   $  309,920   $   13,470   $        6
     Foreign government.......      133,252      139,042        6,715          925
     Corporate bonds and notes
       and other..............      181,849      193,087       11,526          288
Redeemable preferred stock....      142,006      149,410        7,405            1
                                 ----------   ----------   ----------   ----------
                                 $  753,563   $  791,459   $   39,116   $    1,220
                                 ----------   ----------   ----------   ----------
                                 ----------   ----------   ----------   ----------
</TABLE>
 
(1) The amortized cost and market value of fixed maturities held for investment
    which have unrealized losses were $41,358,000 and $40,138,000.
 
                                       9

<PAGE>

Fixed maturities available for sale at December 31, 1995 consisted of:
 
<TABLE>
<CAPTION>
                                                                Gross        Gross
                                     Market    Amortized   Unrealized   Unrealized
                                      Value         Cost        Gains       Losses(1)
----------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>
(In thousands)
Bonds and notes:
     United States government
       and government agencies
       and authorities........   $  685,376   $  679,007   $    7,867   $    1,498
     States, municipalities
       and political
       subdivisions...........      133,093      125,967        7,151           25
     Public utilities.........      313,906      305,652        8,900          646
     Corporate bonds and notes
       and other..............      868,291      837,060       44,864       13,633
Redeemable preferred stock....      371,329      351,824       21,445        1,940
                                 ----------   ----------   ----------   ----------
                                 $2,371,995   $2,299,510   $   90,227   $   17,742
                                 ----------   ----------   ----------   ----------
                                 ----------   ----------   ----------   ----------

</TABLE>
 
(1) The amortized cost and market value of fixed maturities available for sale
    which have unrealized losses were $603,568,000 and $585,826,000.
 
As of December 31, 1996, the contractual maturities of fixed maturity
investments are as follows:
 
<TABLE>
<CAPTION>
                                     
                                    Held for investment       Available for sale
                                  -----------------------  -----------------------
                                  Amortized       Market    Amortized       Market
                                       Cost        Value         Cost        Value
----------------------------------------------------------------------------------
<S>                              <C>          <C>          <C>          <C>
(In thousands)
Due within one year...........   $    2,046   $    2,079   $   62,538   $   62,915
Due after one year through
  five years..................      102,270      107,114      537,805      541,773
Due after five years through
  ten years...................      315,437      323,020      597,028      599,049
Due after ten years...........      368,083      369,525    1,113,204    1,134,904
                                 ----------   ----------   ----------   ----------
                                    787,836      801,738    2,310,575    2,338,641
Mortgage-backed securities....           --           --      285,354      285,028
                                 ----------   ----------   ----------   ----------
                                 $  787,836   $  801,738   $2,595,929   $2,623,669
                                 ----------   ----------   ----------   ----------
                                 ----------   ----------   ----------   ----------
</TABLE>
 
Net investment income consisted of:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                              1996         1995         1994
----------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
(In thousands)
Investment income:
     Fixed maturities......................   $  236,093   $ 221,279    $  218,970
     Equity securities.....................       12,990      20,187        27,390
     Short-term investments................       32,244      30,292         9,159
     Other.................................       18,652      15,359        14,159
                                              ----------   ---------    ----------
                                                 299,979     287,117       269,678
Investment expenses........................      (12,391)    (11,828)      (10,766)
                                              ----------   ---------    ----------
                                              $  287,588   $ 275,289    $  258,912
                                              ----------   ---------    ----------
                                              ----------   ---------    ----------
</TABLE>

 
                                       10

<PAGE>

Gain on sales of investments consisted of:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                              1996         1995         1994
----------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
(In thousands)
Fixed maturities (1):
     Realized gains........................   $   15,302   $  47,764    $   44,512
     Realized losses (2)...................      (18,022)    (28,406)      (28,016)
                                              ----------   ---------    ----------
                                                  (2,720)     19,358        16,496
     Equity securities (3).................       58,296      20,445         8,890
     Other (3),(4).........................       (5,966)    (10,693)      (16,168)
                                              ----------   ---------    ----------
                                              $   49,610   $  29,110    $    9,218
                                              ----------   ---------    ----------
                                              ----------   ---------    ----------
</TABLE>
 
(1) The Company sold fixed maturities held for investment with an amortized cost
    of $26,100,000, $41,000,000 and $18,100,000 in 1996, 1995 and 1994,
    respectively. These sales were in response to a significant deterioration in
    the issuers' creditworthiness.
 
(2) Includes realized losses of $600,000, $7,600,000 and $11,600,000 in 1996,
    1995 and 1994, respectively, and write-downs of $3,200,000, $15,700,000 and
    $10,300,000 in 1996, 1995 and 1994, respectively, related to securities not
    rated investment grade.
 
(3) Gain on sales of equity securities and other in 1996, 1995 and 1994 includes
    write-downs of $3,600,000, $1,500,000 and $13,200,000, respectively.
 
(4) Includes exchange losses of $3,300,000 in 1996 and $10,400,000 in 1995
    related to certain foreign currency denominated investments and realized
    losses of $14,500,000 in 1994 related to certain foreign currency contracts.
 
Net unrealized appreciation (depreciation) on investments consisted of:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                              1996         1995         1994
----------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
(In thousands)
Unrealized appreciation (depreciation):
     Equity securities.....................   $   15,939   $ 182,507    $   (6,849)
     Fixed maturities available for sale...      (44,745)    179,092      (193,737)

                                              ----------   ---------    ----------
                                                 (28,806)    361,599      (200,586)
Deferred income tax (provision) benefit....        9,740    (123,055)      66,684
Net unrealized appreciation (depreciation)
  in investments
  of investee company......................       (1,504)      8,693        (9,002)
                                              ----------   ---------    ----------
                                              $  (20,570)  $ 247,237    $ (142,904)
                                              ----------   ---------    ----------
                                              ----------   ---------    ----------
Unrealized appreciation (depreciation) on
  fixed maturities
  held for investment......................   $  (23,994)  $ 150,365    $ (148,939)
                                              ----------   ---------    ----------
                                              ----------   ---------    ----------
</TABLE>
 
                                       11

<PAGE>

Net unrealized gain (loss) on investments consisted of:
 
<TABLE>
<CAPTION>
                   DECEMBER 31         1996         1995         1994
---------------------------------------------------------------------
<S>                              <C>          <C>          <C>
(In thousands)
Equity securities:
     Unrealized gains.........   $  293,269   $  276,760   $  114,231
     Unrealized losses........      (12,716)     (12,146)     (32,124)
                                 ----------   ----------   ----------
                                    280,553      264,614       82,107
                                 ----------   ----------   ----------
Fixed maturities available for
  sale:
     Unrealized gains.........       71,215       90,227       38,507
     Unrealized losses........      (43,475)     (17,742)    (145,114)
                                 ----------   ----------   ----------
                                     27,740       72,485     (106,607)
                                 ----------   ----------   ----------
                                    308,293      337,099      (24,500)
Deferred income tax
  (provision) benefit.........     (108,262)    (118,002)       5,053
Net unrealized gain (loss) in
  investments of investee
  company.....................       (1,245)         259       (8,434)
                                 ----------   ----------   ----------
                                 $  198,786   $  219,356   $  (27,881)
                                 ----------   ----------   ----------
                                 ----------   ----------   ----------
</TABLE>
 

Fixed maturity investments carried at $553,600,000 at December 31, 1996 were on
deposit under requirements of regulatory authorities, including deposits related
to workers' compensation reinsurance pools.
 
Investments in a single issuer, other than obligations of the United States
government, whose aggregate carrying value is in excess of 10% of the Company's
shareholder's equity at December 31, 1996 is comprised of common stock of Symbol
Technologies, Inc. with a carrying and market value of $158,355,000.
 
3. INVESTMENT IN INVESTEE COMPANY
 
Investment in investee company at December 31, 1996 and 1995 was $157,894,000
and $156,404,000 which represents the Company's investment in Zenith National
Insurance Corp. ('Zenith'). Equity income in Zenith was $8,908,000, $7,792,000
and $9,478,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, in 1995, the Company recognized an after-tax loss of
$4,497,000 on the disposal of discontinued life insurance operations by Zenith.
The Company's prior period results of operations were not reclassified since
amounts attributable to Zenith's life insurance operations were not significant.
Dividends received by the Company from Zenith were $6,574,000 for each of the
years ended December 31, 1996, 1995 and 1994.
 
Summarized financial information for Zenith is as follows:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                 1996         1995         1994
---------------------------------------------------------------------
<S>                              <C>          <C>          <C>
(In thousands, except
  per-share amounts)
Revenues......................   $  556,371   $  519,020   $  512,455
Income from continuing
  operations before income
  taxes.......................       57,117       29,422       45,106
Loss on disposal of
  discontinued life insurance
  operations..................           --      (19,553)          --
Net income....................       37,600        6,600       37,900
Net income per-share..........         2.11          .36         1.99

<CAPTION>
                                DECEMBER 31         1996         1995
---------------------------------------------------------------------
<S>                                           <C>          <C>
(In thousands, except
  percentage of ownership)
Total assets...............................   $1,242,724   $1,115,433
Senior notes...............................       74,353       74,232
Common shareholders' equity................      337,503      330,432
Percentage of ownership....................         37.4%        37.0%
</TABLE>
 
                                       12


<PAGE>

The Company's equity in net income includes amortization of excess of cost over
fair value of net assets acquired. At December 31, 1996, retained earnings
included undistributed net income of $30,146,000 from Zenith.
 
4. PREMIUMS AND OTHER ACCOUNTS RECEIVABLE
 
As of December 31, 1996 and 1995, the Company sold with limited recourse
$97,200,000 and $122,400,000 of reinsurance recoverables and premiums receivable
relating to its insurance operations. Pursuant to these recourse provisions, the
maximum amount, at December 31, 1996, that the Company may be obligated to
repurchase is $7,500,000.
 
5. NOTES RECEIVABLE FROM PARENT COMPANY
 
The notes receivable from parent company, Reliance Group Holdings, Inc., bear
interest at rates sufficient to cover the annual interest expense of the Company
for such funds and are due at various dates commencing June 1, 2000.
 
6. INCOME TAXES
 
Federal income tax has been computed as if the Company filed a separate
consolidated tax return with its domestic subsidiaries where their ownership is
at least 80% of outstanding voting stock. The current tax so computed is paid to
or due from Reliance Group Holdings, Inc.
 
Provision for income taxes consisted of:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                 1996         1995         1994
---------------------------------------------------------------------
<S>                              <C>          <C>          <C>
(In thousands)
Current:
     Federal..................   $   35,150   $   54,862   $   52,666
     Foreign..................        7,888        6,830        6,204
                                 ----------   ----------   ----------
                                     43,038       61,692       58,870
Deferred federal..............        6,662       21,208      (10,888)
                                 ----------   ----------   ----------
                                 $   49,700   $   82,900   $   47,982
                                 ----------   ----------   ----------
                                 ----------   ----------   ----------
</TABLE>
 
Domestic and foreign income before income taxes and equity in investee company
is as follows:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                 1996         1995         1994

---------------------------------------------------------------------
<S>                              <C>          <C>          <C>
(In thousands)
Domestic......................   $  157,756   $  235,869   $  158,544
Foreign.......................       22,537       19,514       18,498
                                 ----------   ----------   ----------
                                 $  180,293   $  255,383   $  177,042
                                 ----------   ----------   ----------
                                 ----------   ----------   ----------
</TABLE>
 
The reconciliation of taxes computed at the statutory rate of 35% to the
provision for income taxes is as follows:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                 1996         1995         1994
---------------------------------------------------------------------
<S>                              <C>          <C>          <C>
(In thousands)
Tax provision at statutory
  rate........................   $   63,103   $   89,384   $   61,965
Nontaxable investment
  income......................      (14,403)     (13,405)     (13,989)
Increase in valuation
  allowance...................        2,400        7,000           --
Other.........................       (1,400)         (79)           6
                                 ----------   ----------   ----------
Provision for income taxes....   $   49,700   $   82,900   $   47,982
                                 ----------   ----------   ----------
                                 ----------   ----------   ----------
</TABLE>
 
                                       13

<PAGE>

The tax effects of items comprising the Company's net deferred tax asset are as
follows:
 
<TABLE>
<CAPTION>
                                DECEMBER 31         1996         1995
---------------------------------------------------------------------
<S>                                           <C>          <C>
(In thousands)
Deferred tax assets:
     Discounting of loss reserves..........   $  195,442   $  200,907
     Tax basis differential of subsidiary
         not included in
         consolidated tax return...........      111,815      111,815
     Operating loss carryforwards of
         subsidiary not included
         in consolidated tax return........       61,110       57,925

     Unearned premium reserve..............       43,063       40,354
     Accruals not currently deductible.....       40,933       42,569
     Other.................................       61,055       62,681
                                              ----------   ----------
                                                 513,418      516,251
Deferred tax liabilities:
     Deferred policy acquisition costs.....       75,062       67,785
     Unrealized investment gains...........      108,262      118,002
     Investment in investee company........       21,098       20,576
     Other.................................       74,747       81,378
                                              ----------   ----------
                                                 234,249      228,510
Valuation allowance........................     (168,559)    (165,803)
                                              ----------   ----------
Net deferred tax asset.....................   $   65,690   $   62,707
                                              ----------   ----------
                                              ----------   ----------
</TABLE>
 
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 $7,000,000
relating primarily to deferred tax assets of a subsidiary that is not included
in the consolidated tax return for which it is likely that tax benefits will not
be realized.
 
At December 31, 1996, a subsidiary of the Company, not included in the
consolidated tax return, had available net operating loss carryforwards ('NOL')
of approximately $174,600,000, of which $129,700,000 is subject to a valuation
allowance. For federal income tax purposes, approximately $129,300,000 expires
in 2001, $17,000,000 in 2002, $17,000,000 in 2004, $2,200,000 in 2010 and
$9,100,000 in 2011. The Internal Revenue Code imposes limitations on the
availability of these NOL's since the subsidiary experienced a more than 50
percentage point ownership change in 1989. The amount of the NOL incurred prior
to the ownership change which can be utilized in each subsequent year is limited
(the 'Loss Limitation') based on the value of the subsidiary on the date of the
ownership change. The annual Loss Limitation approximates $25,000,000.
 
The Internal Revenue Service is currently examining Reliance Group Holdings,
Inc.'s 1986 through 1991 federal income tax returns. While the outcome of the
current examinations is uncertain, the Company does not believe it is probable
that its additional tax liability, if any, will have a material adverse effect
on its consolidated financial statements.
 
                                       14

<PAGE>

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:
 
<TABLE>

<CAPTION>
                             DECEMBER 31         1996         1995         1994
-------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>
(In thousands)
Loss reserves, beginning of year........   $5,859,352   $5,581,483   $5,048,442
     Less reinsurance recoverables......    2,679,917    2,453,702    2,116,914
                                           ----------   ----------   ----------
Net loss reserves, beginning of year....    3,179,435    3,127,781    2,931,528
                                           ----------   ----------   ----------
Provision for policy claims and related
  expenses:
     Provision for insured events of the
     current year.......................    1,211,672    1,163,447    1,274,649
     Increase in provision for insured
     events of prior years..............      138,665       38,512       22,444
                                           ----------   ----------   ----------
          Total provision...............    1,350,337    1,201,959    1,297,093
                                           ----------   ----------   ----------
Payments for policy claims and related
  expenses:
     Attributable to insured events of
     the current year...................      298,838      271,915      321,538
     Attributable to insured events of
     prior years........................      926,996      868,622      780,961
                                           ----------   ----------   ----------
          Total payments................    1,225,834    1,140,537    1,102,499
                                           ----------   ----------   ----------
Foreign currency translation............        7,668       (9,768)       1,659
                                           ----------   ----------   ----------
Net loss reserves, end of year..........    3,311,606    3,179,435    3,127,781
     Plus reinsurance recoverables......    2,953,814    2,679,917    2,453,702
                                           ----------   ----------   ----------
Loss reserves, end of year..............   $6,265,420   $5,859,352   $5,581,483
                                           ----------   ----------   ----------
                                           ----------   ----------   ----------
</TABLE>
 
The provision for insured events of prior years for 1996, 1995 and 1994 includes
adverse development related to asbestos-related and environmental pollution
claims, which primarily affect general liability, multiple peril and reinsurance
lines of business, and includes a pretax charge of $134,000,000 in the second
quarter of 1996 to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. The 1996
provision also includes adverse development in the automobile line, offset by
favorable development in workers' compensation. The 1995 provision also included
adverse development in other general liability, automobile and reinsurance
lines, partially offset by favorable development in workers' compensation. The
1994 provision also included adverse development in other general liability
lines, partially offset by favorable development in workers' compensation.
 
At December 31, 1996 and 1995, loss reserves include $396,700,000 and
$400,200,000 relating to short-duration contracts which are expected to have
fixed, periodic payment patterns and have been discounted to present values

using statutory annual rates ranging from 3 1/2% to 6%.
 
                                       15

<PAGE>

The reconciliation of the beginning to ending loss reserves for the Company's
title insurance operations is as follows:
 
<TABLE>
<CAPTION>
                             DECEMBER 31         1996         1995         1994
-------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>
(In thousands)
Loss reserves, beginning of year........   $  240,777   $  228,063   $  204,695
                                           ----------   ----------   ----------
Provision for policy claims and related
  expenses:
     Provision for insured events of the
     current year.......................       59,771       57,900       71,060
     Increase in provision for insured
     events of prior years..............        1,345          586        4,807
                                           ----------   ----------   ----------
          Total provision...............       61,116       58,486       75,867
                                           ----------   ----------   ----------
Payments for policy claims and related
  expenses:
     Attributable to insured events of
     the current year...................        1,755        2,187        4,475
     Attributable to insured events of
     prior years........................       35,300       43,585       48,024
                                           ----------   ----------   ----------
          Total payments................       37,055       45,772       52,499
                                           ----------   ----------   ----------
Loss reserves, end of year..............   $  264,838   $  240,777   $  228,063
                                           ----------   ----------   ----------
                                           ----------   ----------   ----------
</TABLE>
 
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:
 
<TABLE>
<CAPTION>
                             DECEMBER 31         1996         1995         1994
<S>                                        <C>          <C>          <C>
-------------------------------------------------------------------------------
(In thousands)
Net loss reserves, beginning of year....   $  101,008   $  100,404   $   97,040
Provision for policy claims and related
  expenses..............................      135,801       23,547       17,996
Payments for policy claims and related

  expenses..............................      (23,762)     (22,943)     (14,632)
                                           ----------   ----------   ----------
Net loss reserves, end of year..........   $  213,047   $  101,008   $  100,404
                                           ----------   ----------   ----------
                                           ----------   ----------   ----------
</TABLE>
 
The 1996 provision for policy claims and related expenses includes a pretax
charge of $134,000,000 to increase net loss reserves for asbestos-related and
environmental pollution claims for business written in or before 1987. In the
second quarter of 1996, the Company completed a study of its asbestos-related
and environmental pollution reserves. The study entailed a detailed review of
the Company's claims, analysis of new industry data, review of policies and
classes of business written by the Company and industry at large, and new
actuarial methodologies for projecting ultimate losses based on payment patterns
and claims analyses. The loss reserve levels established represent the Company's
estimate of its ultimate losses, based on current information and actuarial
methodologies.
 
Included in the December 31, 1996 net loss reserves for business written in or
before 1987 pertaining to asbestos-related and environmental pollution claims
are $78,184,000 of loss costs for claims incurred but not reported, $49,245,000
of loss costs for reported claims and $85,618,000 of related expenses.
 
For business written in or before 1987, the number of insureds with asbestos-
related and environmental pollution claims outstanding is as follows:
 
<TABLE>
<CAPTION>
                             DECEMBER 31         1996         1995
------------------------------------------------------------------
<S>                                        <C>          <C>

Number of insureds with outstanding
  claims, beginning of year.............          447          477
Additional insureds with claims during
  the year..............................          153          188
Insureds with closed or settled claims
  during the year.......................         (252)       (218)
                                           ----------   ----------
Number of insureds with outstanding
  claims, end of year...................          348          447
                                           ----------   ----------
                                           ----------   ----------
</TABLE>
 
For business written in or before 1987, the average net paid loss for asbestos-
related and environmental pollution claims was $50,200 and $61,100 for the years
1996 and 1995.
 
                                       16
<PAGE>

In addition, the Company currently underwrites policies covering asbestos

removal and provides environmental pollution coverages for other insureds,
primarily on a claims made basis. The net loss reserves for these policies as of
December 31, 1996, 1995 and 1994 were $27,764,000, $29,698,000 and $29,739,000,
respectively. The provisions for these policy claims and related expenses for
the years 1996, 1995 and 1994 were $5,857,000, $2,357,000 and $10,283,000,
respectively, and related payments were $7,791,000, $2,398,000 and $5,538,000,
respectively. Included in the December 31, 1996 net loss reserves for these
policies are $13,154,000 of loss costs for claims incurerd but not reported,
$4,282,000 of loss costs for reported claims and $10,328,000 of related
expenses. The number of outstanding claims related to these policies as of
December 31, 1996 and 1995 were 474 and 303. Additional claims reported during
the years 1996 and 1995 were 385 and 275, and claims closed or settled during
1996 and 1995 were 214 and 161. The average net paid loss for these claims was
$20,500 and $5,600 for the years 1996 and 1995.

8. SENIOR RESET NOTES, TERM LOANS AND SHORT-TERM DEBT

 
Senior reset notes outstanding are as follows:
 
<TABLE>
<CAPTION>
                             DECEMBER 31         1996         1995
------------------------------------------------------------------
<S>                                        <C>          <C>
(Dollars in thousands)
7.866% senior reset notes due 2000......   $   15,365      $15,365
9.48% senior reset notes due 2000;
  ($25,000 principal amount, less
  unamortized discount of $47 at
  December 31, 1995)....................           --       24,953
                                           ----------   ----------
                                           $   15,365      $40,318
                                           ----------   ----------
                                           ----------   ----------
</TABLE>
 
At December 31, 1996, term loans and short-term debt aggregated $224,167,000 and
consisted of $218,488,000 of term loans which are payable in varying amounts
through 2015 with interest rates ranging from 3.0% to 9.6% and $5,679,000 of
short-term debt. The weighted average interest rate on term loans and short-term
debt was 6.2% and 6.8% at December 31, 1996 and 1995.
 
Maturities of term loans and short-term debt for each of the next five years 
are as follows: $6,627,000 in 1997; $4,489,000 in 1998; $50,767,000 in 1999; 
$148,267,000 in 2000; and $1,467,000 in 2001.
 
The Company has a revolving credit facility and term loan agreement with various
banks ('Credit Facility'). In 1995, the Company extended its revolving credit
facility through March 31, 2000 from December 31, 1998. In addition, the Company
increased term loan borrowings to $137,500,000 from $62,500,000 and extended the
maturity dates of the term loan borrowings through March 31, 2000. The
additional $75,000,000 of borrowings under the term loan were used, in part, to
redeem $25,000,000 of the 7.866% senior reset notes and $25,000,000 of the 9.48%

senior reset notes, including $9,652,000 of notes held by Reliance Insurance
Company. These transactions resulted in an extraordinary loss of $3,363,000, net
of income taxes of $1,811,000, in 1995. In addition, all of the outstanding
shares of redeemable preferred stock of Reliance Insurance Company, which had a
carrying value of $23,517,000, were redeemed. The cost of the early redemption
in excess of the carrying value of the preferred stock, $252,000, was charged
directly to shareholder's equity in 1995. On November 8, 1996, the Company
increased term loan borrowings by an additional $25,000,000 to $162,500,000. The
additional borrowings were used to redeem all outstanding ($25,000,000 principal
amount) 9.48% senior reset notes.
 
The revolving credit facility provides for aggregate maximum outstanding
borrowings of $100,000,000. At the Company's option, all borrowings under the
revolving credit facility will bear interest at a floating rate based on a bank
reference rate (or, if higher, the Federal Funds rate plus 1/2%) or at a rate
based on the Eurodollar rate. At December 31, 1996, borrowings aggregating
$35,000,000 were outstanding under this facility. All of the common stock of
Reliance Insurance Company, the principal subsidiary of the Company, has been
pledged to secure the Credit Facility and the senior reset notes.
 
The Company's dividends are subject to provisions of the senior reset notes.
These provisions are less restrictive than the provisions in the Credit Facility
which requires, among other things, a minimum net worth requirement and a
limitation of indebtedness. At February 14, 1997, the Company could pay up to
$288,300,000 in cash dividends without violating the most restrictive
provisions.
 
                                       17

<PAGE>

9. DIVIDENDS OF SUBSIDIARIES
 
The Insurance Law of Pennsylvania, where Reliance Insurance Company (the
Company's principal property and casualty insurance subsidiary) is domiciled,
limits the maximum amount of dividends which may be paid without approval by the
Pennsylvania Insurance Department. Under such law, Reliance Insurance Company
may pay dividends during the year equal to the greater of (a) 10% of the
preceding year-end policyholders' surplus or (b) the preceding year's statutory
net income, but in no event to exceed the amount of unassigned funds, which are
defined as 'undistributed, accumulated surplus including net income and
unrealized gains since the organization of the insurer.' In addition, the
Pennsylvania law specifies factors to be considered by the Pennsylvania
Insurance Department to allow it to determine that statutory surplus after the
payment of dividends is reasonable in relation to an insurance company's
outstanding liabilities and adequate for its financial needs. Such factors
include the size of the company, the extent to which its business is diversified
among several lines of insurance, the number and size of risks insured, the
nature and extent of the company's reinsurance and the adequacy of the company's
reserves. The maximum dividend permitted by law is not indicative of an
insurer's actual ability to pay dividends, which may be constrained by business
and regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings, competitive position, the amount of premiums
that can be written and the ability to pay future dividends. Furthermore, the

Pennsylvania Insurance Department has broad discretion to limit the payment of
dividends by insurance companies.
 
Common stock dividends paid by Reliance Insurance Company were $111,467,000 in
each of 1996, 1995 and 1994. During 1997, $118,500,000 would be available for
dividend payments by Reliance Insurance Company under Pennsylvania law. The
Company believes such amount will be sufficient to meet its cash needs.
 
There is no assurance that Reliance Insurance Company will meet the tests in
effect from time to time under Pennsylvania law for the payment of dividends
without prior Insurance Department approval or that any requested approval will
be obtained. Reliance Insurance Company has been advised by the Pennsylvania
Insurance Department that any required prior approval will be based upon a
solvency standard and will not be unreasonably withheld. Any significant
limitation of Reliance Insurance Company's dividends would adversely affect the
Company's ability to service its debt and to pay dividends on its common stock.
 
10. REINSURANCE
 
In the normal course of business, the property and casualty insurance companies
assume and cede reinsurance on both a pro-rata and excess basis. Reinsurance
provides greater diversification of business and limits the maximum net loss
potential arising from large claims. Although the ceding of reinsurance does not
discharge an insurer from its primary legal liability to a policyholder, the
reinsuring company assumes the related liability.
 
Amounts recoverable from reinsurers are estimated in a manner consistent with
the liability for unpaid claims and related expenses associated with the
reinsurance. Estimated amounts of reinsurance recoverables are reported as
assets in the accompanying consolidated balance sheet. As of December 31, 1996
and 1995, reinsurance recoverables include $596,743,000 and $472,925,000 of
prepaid reinsurance premiums which represents the portion of property and
casualty premiums ceded to reinsurers applicable to unearned premiums.
 
                                       18

<PAGE>

The reconciliation of property and casualty insurance direct premiums to net
premiums is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                              1996                      1995                      1994
----------------------------------------------------------------------------------------------------------------------
(In thousands)
                                             Premiums     Premiums     Premiums     Premiums     Premiums     Premiums
                                              Written       Earned      Written       Earned      Written       Earned
                                           ----------   ----------   ----------   ----------   ----------   ----------
<S>                                        <C>          <C>          <C>          <C>          <C>          <C>
Direct..................................   $3,070,944   $2,894,096   $2,748,439   $2,707,978   $2,654,437   $2,630,549
Assumed.................................      329,318      356,489      325,226      350,636      330,261      345,398
Ceded...................................   (1,554,063)  (1,449,731)  (1,294,625)  (1,284,023)  (1,220,408)  (1,198,629)
                                           ----------   ----------   ----------   ----------   ----------   ----------

Net premiums............................   $1,846,199   $1,800,854   $1,779,040   $1,774,591   $1,764,290   $1,777,318
                                           ----------   ----------   ----------   ----------   ----------   ----------
                                           ----------   ----------   ----------   ----------   ----------   ----------
</TABLE>
 
The reconciliation of property and casualty insurance gross policy claims and
settlement expenses to net policy claims and settlement expenses is as follows:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                        1996         1995         1994
------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>          <C>
(In thousands)
Gross................................................................   $2,262,809   $1,987,055   $2,220,285
Reinsurance recoveries...............................................     (912,472)    (785,096)    (923,192)
                                                                        ----------   ----------   ----------
Net policy claims and settlement expenses............................   $1,350,337   $1,201,959   $1,297,093
                                                                        ----------   ----------   ----------
                                                                        ----------   ----------   ----------
</TABLE>
 
For the year ended December 31, 1996, gross policy claims and settlement
expenses include a charge of $134,500,000 and net policy claims and settlement
expenses include a charge of $134,000,000 to increase property and casualty
insurance loss reserves for asbestos-related and environmental pollution claims
for business written in or before 1987.
 
The Company holds substantial amounts of funds and letters of credit as
collateral pursuant to recoverables from unauthorized reinsurers. The Company is
not aware of any impairment of the creditworthiness of any of its significant
reinsurers.

<TABLE>
Reliance Insurance Company's ten largest reinsurers, based on 1996 ceded 
premiums, are as follows:
--------------------------------------------------------------------------------
<S>                                                                   <C>
(In thousands)
American Re-Insurance Company.......................................  $  133,324
Hertz International Reinsurance Ltd.................................      63,259
Swiss Reinsurance America Corporation...............................      56,455
Commercial Risk Re-Insurance Company................................      46,512
Zurich Reinsurance Centre, Inc......................................      45,954
General Reinsurance Corporation.....................................      45,280
Kemper Reinsurance Company..........................................      43,547
Everest Reinsurance Company.........................................      33,485
Lloyd's of London...................................................      30,827
Cedar Hill Assurance Company........................................      30,755
</TABLE>
 
The Company has entered into aggregate excess of loss reinsurance agreements.
These agreements indemnify the Company for ultimate net property and casualty
insurance losses in excess of a specified retention for the 1995 and 1996

accident years up to a maximum aggregate limit of $100,000,000 for each year. No
premiums or losses have been ceded under these agreements.
 
11. OTHER INSURANCE EXPENSES
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                           1996          1995          1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>           <C>
(In thousands)
Salaries and commissions................................................  $   630,777   $   563,680   $   704,254
Taxes, other than income taxes..........................................       41,564        48,603        34,849
Rent....................................................................       61,305        55,848        54,863
Policyholders' dividends................................................        3,158         7,065         2,630
Other...................................................................      175,866       150,967       163,308
                                                                          -----------   -----------   -----------
                                                                          $   912,670   $   826,163   $   959,904
                                                                          -----------   -----------   -----------
                                                                          -----------   -----------   -----------
</TABLE>
 
                                       19

<PAGE>

12. POSTRETIREMENT BENEFIT PLANS
 
Retirement benefits under the Company's noncontributory trusteed defined benefit
pension plans are paid to eligible employees based primarily on years of service
and compensation. Plan assets principally consist of corporate and government
debt securities and 1,247,400 shares of Reliance Group Holdings, Inc. common
stock.
 
Pension cost includes the following components:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                             1996         1995         1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>         <C>          <C>
(In thousands)
Service cost--benefits earned during the period.............................   $ 10,755    $   7,959    $  10,255
Interest cost on projected benefit obligation...............................     15,006       13,689       12,941
Actual return on plan assets................................................     (7,889)     (28,748)       8,920
Net amortization and deferral...............................................    (10,731)      13,303      (26,252)
                                                                               --------    ---------    ---------
                                                                               $  7,141    $   6,203    $   5,864
                                                                               --------    ---------    ---------
                                                                               --------    ---------    ---------
</TABLE>
 
A reconciliation of the funded status of the plans with the accrued pension cost
included in accounts payable and accrued expenses is as follows:

 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31        1996         1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>          <C>
(In thousands)
Actuarial present value of benefit obligation:
     Vested.............................................................................   $ 165,359    $ 158,753
     Nonvested..........................................................................       7,504        9,971
                                                                                           ---------    ---------
Accumulated benefit obligation..........................................................     172,863      168,724
Effect of anticipated future compensation levels........................................      32,781       36,022
                                                                                           ---------    ---------
Projected benefit obligation............................................................     205,644      204,746
Plan assets at market value.............................................................    (175,438)    (164,877)
                                                                                           ---------    ---------
Projected benefit obligation in excess of plan assets...................................      30,206       39,869
Unrecognized net asset at date of adoption..............................................       6,835        8,455
Unrecognized net loss...................................................................     (13,277)     (25,166)
                                                                                           ---------    ---------
Accrued pension cost....................................................................   $  23,764    $  23,158
                                                                                           ---------    ---------
                                                                                           ---------    ---------
</TABLE>
 
Contributions under the Company's noncontributory trusteed defined benefit
pension plans were $6,535,000 and $3,391,000 in 1996 and 1994. No contributions
were made during 1995.
 
The assumptions used to measure the projected benefit obligation at December 31,
1996 and 1995 include a discount rate of 8.0% and 7.5% and a weighted average
rate of compensation increase of 4.0% and 4.5%. The expected long-term
investment rate of return on plan assets for the years ended December 31, 1996
and 1995 was 10.0% and 9.5%.
 
Contributions under the Company's defined contribution plans were $5,727,000,
$4,105,000 and $5,095,000 in 1996, 1995 and 1994, respectively, and were based
on a formula specified in the plan agreements.
 
The Company offers unfunded postretirement medical and life insurance plans to
certain employees of a subsidiary. Postretirement benefit cost includes the
following components:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                             1996         1995         1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>         <C>          <C>
(In thousands)
Service cost--benefits earned during the period.............................   $    168    $     167    $     226
Interest cost on accumulated postretirement benefit obligation..............        622          713          715
Net amortization and deferral...............................................        754          624          790
                                                                               --------    ---------    ---------

                                                                               $  1,544    $   1,504    $   1,731
                                                                               --------    ---------    ---------
                                                                               --------    ---------    ---------
</TABLE>
 
                                       20

<PAGE>

The components of the accumulated postretirement benefit obligation are as
follows:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31        1996         1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>          <C>
(In thousands)
Accumulated postretirement benefit obligation:
     Retirees...........................................................................   $   5,020    $   5,597
     Other active plan participants.....................................................       3,241        3,618
                                                                                           ---------    ---------
Accumulated benefit obligation..........................................................       8,261        9,215
Unrecognized net gain...................................................................         671           92
Unrecognized transition obligation......................................................      (7,204)      (7,963)
                                                                                           ---------    ---------
Accrued postretirement benefit cost.....................................................   $   1,728    $   1,344
                                                                                           ---------    ---------
                                                                                           ---------    ---------
</TABLE>
 
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1996 was 10.0% for 1997
decreasing until it reaches 6.0% in 2007, after which it remains constant. A
one-percentage-point change in the assumed health care cost trend rate for each
year would change the accumulated postretirement benefit obligation as of
December 31, 1996 and the 1996 net postretirement health care cost by
approximately 3.0% and 1.8%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1996 and 1995 was
8.0% and 7.5%.
 
13. STATUTORY INFORMATION
 
Statutory net income is as follows:
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                           1996          1995          1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>         <C>           <C>
(In thousands)
Property and casualty insurance operations................................   $121,665    $  225,989    $  123,970
Title insurance operations................................................     40,094        12,439        32,421
</TABLE>

 
Statutory policyholders' surplus is as follows:
 
<TABLE>
<CAPTION>
                                                                           DECEMBER 31         1996          1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>           <C>
(In thousands)
Property and casualty insurance operations (1)........................................   $1,187,056    $1,128,336
Title insurance operations............................................................      199,587       182,167
</TABLE>
 
(1) Includes Reliance Insurance Company's investment in title insurance
    operations. Also reflects a reduction in statutory loss reserves of
    $93,700,000 and $98,800,000 at December 31, 1996 and 1995, representing
    discounts of workers' compensation reserves in excess of GAAP discounts.
 
14. CONTINGENCIES AND COMMITMENTS
 
LEGAL PROCEEDINGS
 
The Company and its subsidiaries are involved in certain litigation arising in
the course of their businesses, some of which involve claims of substantial
amounts. Although the ultimate outcome of these matters cannot be ascertained at
this time, and the results of legal proceedings cannot be predicted with
certainty, the Company is contesting the allegations of the complaints in each
pending action against it and believes, based on current knowledge and after
consultation with counsel, that the resolution of these matters will not have a
material adverse effect on the con-
solidated financial statements of the Company. In addition, the Company is
subject to the litigation set forth below.
 
In March 1987, the Superintendent of Insurance of New York (the
'Superintendent'), as liquidator of Union Indemnity Insurance Company of New
York ('Union Indemnity'), formerly a wholly-owned subsidiary of Frank B. Hall &
Co. Inc. ('Hall') which the Superintendent took possession of in 1985, commenced
an action in the Supreme Court of the State of New York seeking damages of not
less than $140,000,000 against Hall, various subsidiaries of Hall, Hall's and
Union Indemnity's independent auditors and certain individuals who were former
officers and directors of Union Indemnity. The Superintendent sought to hold the
defendants liable for the insolvency of Union Indemnity alleging, among other
claims, that Hall breached fiduciary and other duties owed to Union Indemnity
and violated provisions of the New York State Insurance Code, that Union
Indemnity did not
 
                                       21

<PAGE>

have a separate operating identity, and that Hall and the Hall subsidiaries
named as defendants constituted a single enterprise which was liable for Union
Indemnity's obligations to its policyholders and other creditors.
 

In July 1987, American Centennial Insurance Company, International Fidelity
Insurance Company, and Ranger Insurance Company (the 'American Centennial
Plaintiffs') commenced an action in the Supreme Court of the State of New York
against Hall, two subsidiaries of Hall, and certain individuals who were former
officers and directors of Union Indemnity seeking to hold the defendants liable
for certain alleged reinsurance obligations of Union Indemnity, certain
misrepresentations concerning Union Indemnity's financial position and the
breach of certain duties owed to the American Centennial Plaintiffs. The
American Centennial Plaintiffs sought damages of at least $54,900,000 and
punitive damages against all defendants.
 
The action brought by the Superintendent was settled by an agreement, dated June
2, 1989, under which Hall, now known as Prometheus Funding Corp. ('Prometheus'),
will make an initial payment of $19,000,000 and additional payments aggregating
$29,000,000 over a ten-year period without interest as follows: $1,500,000 each
in years one and two; $2,000,000 each in years three and four; $5,000,000 in
year five; $4,500,000 each in years six and seven; $4,000,000 in year eight; and
$2,000,000 each in years nine and ten. The settlement agreement provides for the
entry of an order by the court barring other claims against Hall relating to
Union Indemnity, including the claims by the American Centennial Plaintiffs
described above. The settlement agreement was submitted to the court for
approval in October 1989 and objections were filed and continue to be pursued by
various parties. The Superintendent has informed Prometheus that he intends to
pursue court approval of the settlement. The settlement agreement will not
become effective until final approval by the court and there is no assurance
that such approval will be obtained. Prometheus has recorded a reserve of
$36,000,000 representing the initial payment of $19,000,000 and the present
value of the additional remaining annual payments over a ten-year period.
Prometheus has received an aggregate of $20,000,000 in insurance proceeds in
connection with this matter from its insurance carrier.
 
COMMITMENTS
 
A subsidiary of Reliance Insurance Company, Saul P. Steinberg and other
executives of the Company are partners in a partnership which owns
certain real estate properties. At December 31, 1996, the partnership's
total outstanding debt was $172,167,000. As of December 31, 1996, the
Company guaranteed $38,000,000 of the partnership's outstanding debt
which matures on June 30, 1997. The Company believes that, to the extent
such debt cannot be fully refinanced at maturity, the partnership will
seek additional financing from other sources, which may include the
Company. The Company receives a fee of .5% per annum on the average
outstanding debt covered by the guarantee. Reliance Group Holdings,
Inc. has issued a line of credit to the partnership in the amount of
$13,000,000. Borrowings under the line of credit mature on June 30,
2005 and bear a fixed interest rate of 10%. At December 31, 1996,
borrowings of $9,829,000 were outstanding under the line of credit.

 
LEASE COMMITMENTS
 
The Company and its subsidiaries lease certain office facilities and equipment
under lease agreements that expire at various dates through 2011. Rent expense

for the years ended December 31, 1996, 1995 and 1994 was $93,700,000,
$92,300,000 and $92,400,000, respectively.
 
At December 31, 1996, future net minimum rental payments required under
noncancelable leases are as follows:
 
<TABLE>
---------------------------------------------------------
<S>                                              <C>
(In thousands)
1997..........................................   $ 60,947
1998..........................................     45,540
1999..........................................     37,739
2000..........................................     17,703
2001..........................................     10,482
2002 and thereafter...........................     21,642
                                                 --------
                                                 $194,053
                                                 --------
                                                 --------
</TABLE>
 
                                       22
<PAGE>

15. BUSINESS SEGMENT INFORMATION
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                         1996           1995          1994
----------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>             <C>           <C>
(In thousands)
REVENUES:
Property and casualty insurance:
     Premiums earned.................................................   $ 1,800,854     $1,774,591    $1,777,318
     Net investment income...........................................       257,133        247,343       232,299
     Gain on sales of investments....................................        49,264         27,381         8,702
                                                                        -----------     ----------    ----------
                                                                          2,107,251      2,049,315     2,018,319
                                                                        -----------     ----------    ----------
Title insurance:
     Premiums earned.................................................       780,157        671,947       856,774
     Net investment income...........................................        30,455         27,946        26,613
     Gain on sales of investments....................................           346          1,729           516
                                                                        -----------     ----------    ----------
                                                                            810,958        701,622       883,903
                                                                        -----------     ----------    ----------
Other................................................................       186,820        171,159       156,473
                                                                        -----------     ----------    ----------
                                                                        $ 3,105,029     $2,922,096    $3,058,695
                                                                        -----------     ----------    ----------
                                                                        -----------     ----------    ----------
INCOME BEFORE INCOME TAXES AND EQUITY IN INVESTEE COMPANY:

Property and casualty insurance
     Underwriting (1)................................................   $  (172,387)    $  (45,644)   $  (97,343)
     Net investment income...........................................       257,133        247,343       232,299
     Gain on sales of investments....................................        49,264         27,381         8,702
                                                                        -----------     ----------    ----------
                                                                            134,010        229,080       143,658
                                                                        -----------     ----------    ----------
Title insurance......................................................        38,580         14,012        31,326
                                                                        -----------     ----------    ----------
Other................................................................         7,703         12,291         2,058
                                                                        -----------     ----------    ----------
                                                                        $   180,293     $  255,383    $  177,042
                                                                        -----------     ----------    ----------
                                                                        -----------     ----------    ----------
IDENTIFIABLE ASSETS AT YEAR-END:
Property and casualty insurance......................................   $ 9,639,186     $9,100,210    $8,541,019
Title insurance......................................................       614,440        572,267       550,160
Other................................................................       256,994        223,443       246,586
                                                                        -----------     ----------    ----------
                                                                        $10,510,620     $9,895,920    $9,337,765
                                                                        -----------     ----------    ----------
                                                                        -----------     ----------    ----------
</TABLE>
 
(1) The 1996 results include a charge of $134,000,000 to increase net loss
    reserves for asbestos-related and environmental pollution claims for
    business written in or before 1987.
 
Income before income taxes and equity in investee company relating to property
and casualty insurance underwriting has been reduced by policyholders' dividends
and other income and expense. Income before income taxes and equity in investee
company by segment is before allocation of corporate interest expense. The
pre-tax results of RCG International, Inc. (a subsidiary of the property and 
casualty insurance operations) are included in Other.
 
Identifiable assets by industry segment are those assets which are used in the
Company's operations in each segment.
 
                                       23

<PAGE>

16. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                                    1996 Quarter
----------------------------------------------------------------------------------------------------------------
                                                                 First        Second         Third        Fourth
----------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>           <C>
(In thousands)
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
Interest income from parent company......................        4,954         5,144         5,437         5,677
Other....................................................       37,549        40,048        41,608        46,403
                                                            ----------    ----------    ----------    ----------
                                                            $  727,555    $  771,323    $  797,607    $  808,544
                                                            ----------    ----------    ----------    ----------
                                                            ----------    ----------    ----------    ----------
NET INCOME (LOSS)(1).....................................   $   45,407    $  (25,677)   $   60,257    $   59,514
                                                            ----------    ----------    ----------    ----------
                                                            ----------    ----------    ----------    ----------
</TABLE>
 
(1) Includes a second quarter after-tax charge of $87,100,000 to increase net
loss reserves for asbestos-related and environmental pollution claims for
business written in or before 1987.
 
<TABLE>
<CAPTION>
                                                                                                    1995 Quarter
----------------------------------------------------------------------------------------------------------------
                                                                 First        Second         Third        Fourth
----------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>           <C>
(In thousands)
Revenues:
Premiums earned..........................................   $  604,666    $  599,957    $  618,831    $  623,084
Net investment income....................................       69,378        66,362        68,727        70,822
Gain on sales of investments.............................        8,286         7,669        10,187         2,968
Interest income from parent company......................        4,917         5,362         5,166         4,963
Other....................................................       37,817        40,657        36,512        35,765
                                                            ----------    ----------    ----------    ----------
                                                            $  725,064    $  720,007    $  739,423    $  737,602
                                                            ----------    ----------    ----------    ----------
                                                            ----------    ----------    ----------    ----------
Income from continuing operations........................   $   44,402    $   46,386    $   50,464    $   39,023
Loss on disposal of discontinued operations of investee
  company................................................           --            --        (4,497)           --
                                                            ----------    ----------    ----------    ----------
Income before extraordinary item.........................       44,402        46,386        45,967        39,023
Extraordinary item--early extinguishment of debt.........           --        (3,363)           --            --
                                                            ----------    ----------    ----------    ----------
Net income...............................................   $   44,402    $   43,023    $   45,967    $   39,023
                                                            ----------    ----------    ----------    ----------
                                                            ----------    ----------    ----------    ----------
</TABLE>
 
                                       24


<PAGE>

INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
 
Board of Directors and Shareholder
Reliance Financial Services Corporation
New York, New York
 
We have audited the accompanying consolidated balance sheets of Reliance
Financial Services Corporation (a subsidiary of Reliance Group Holdings, Inc.)
and subsidiaries as of December 31, 1996 and 1995, and the related statements of
income, changes in shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reliance Financial Services
Corporation and subsidiaries at December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
Deloitte & Touche LLP
New York, New York
February 14, 1997
 
                                       25


<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
 
FINANCIAL REVIEW
--------------------------------------------------------------------------------
 
OVERVIEW
 
The Company had income from continuing operations, before gains on sales of
investments, of $107.3 million in 1996. Operating results in 1996 include an
after-tax charge of $87.1 million to increase property and casualty insurance
net loss reserves for asbestos-related and environmental pollution claims for
business written in or before 1987. Excluding the effects of this charge, income
from continuing operations, before gains on sales of investments, was $194.4
million compared to $159.7 million in 1995 and $132.5 million in 1994. The
improved results in 1996 and 1995 reflect the continued strong performance of
the property and casualty insurance operations. In addition, the 1996 results
benefitted from improved title insurance operations. After-tax gains on sales of
investments were $32.2 million in 1996 compared to $20.6 million in 1995 and
$6.0 million in 1994.
 
Net income in 1996 was $139.5 million. Excluding the effects of the charge to
strengthen asbestos and environmental net loss reserves, net income in 1996 was
$226.6 million, compared to $172.4 million in 1995 and $138.5 million in 1994.
Net income in 1995 included a loss of $4.5 million on the disposal of
discontinued life insurance operations by Zenith National Insurance Corp.
('Zenith'), an investee company, and an extraordinary loss of $3.4 million from
the early extinguishment of debt.
 
PROPERTY AND CASUALTY INSURANCE OPERATIONS
 
Based on a study of their asbestos-related and environmental pollution reserves,
the property and casualty insurance operations recorded a charge of $134.0
million in the second quarter of 1996 to increase net loss reserves for
asbestos-related and environmental pollution claims for business written in or
before 1987. The study entailed an extensive and detailed review of the
Company's claims, analysis of new industry data, review of policies and classes
of business written by the Company and the industry at large, and new actuarial
methodologies for projecting ultimate losses based on payment patterns and
claims analyses. The loss reserve levels established represent the Company's
estimate of ultimate losses, based on current information and actuarial
methodologies. Excluding the effects of the $134.0 million charge to strengthen
asbestos and environmental net loss reserves, property and casualty insurance
pretax operating income was $218.7 million in 1996 compared to $201.7 million in
1995 and $135.0 million in 1994. Pretax gains on sales of investments were $49.3
million in 1996 compared to $27.4 million in 1995 and $8.7 million in 1994.
 
Net premiums written and premiums earned for each line of property and casualty
insurance are as follows:
 
<TABLE>
<CAPTION>
                                              1996                      1995                      1994

----------------------------------------------------------------------------------------------------------------
                                            Net          Net          Net          Net          Net          Net
YEAR ENDED DECEMBER 31                 Premiums     Premiums     Premiums     Premiums     Premiums     Premiums
(In thousands)                          Written       Earned      Written       Earned      Written       Earned
                                     ----------   ----------   ----------   ----------   ----------   ----------
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>
General Liability..................  $  466,636   $  437,634   $  468,951   $  451,867   $  423,377   $  427,864
Automobile.........................     265,206      260,735      239,819      236,592      244,000      251,038
Workers' Compensation..............     249,638      276,938      265,882      290,241      312,808      323,891
Multiple Peril.....................     211,857      200,301      184,600      180,166      180,074      170,230
Surety.............................     159,183      147,416      139,298      127,355      117,989      108,833
Reinsurance........................     151,099      140,334      118,969      119,921      125,597      132,694
Ocean and Inland Marine............     129,148      123,352      118,757      115,590      103,865       95,103
Fire and Allied....................      64,250       63,020       68,118       61,430       49,977       56,495
Accident and Health................      61,873       60,394       58,426       58,636       51,976       49,550
Involuntary........................      44,229       50,489       81,006       88,734      113,483      115,963
Other..............................      43,080       40,241       35,214       44,059       41,144       45,657
                                     ----------   ----------   ----------   ----------   ----------   ----------
                                     $1,846,199   $1,800,854   $1,779,040   $1,774,591   $1,764,290   $1,777,318
                                     ----------   ----------   ----------   ----------   ----------   ----------
                                     ----------   ----------   ----------   ----------   ----------   ----------
</TABLE>
 
                                       26

<PAGE>

Premiums written and earned in 1996 benefitted from increased writings in the
commercial multiple peril and automobile lines and increased reinsurance
premiums resulting from new casualty treaties. Net premiums written and earned
in 1996 and 1995 also benefitted from growth in surety premiums, resulting from
a higher level of construction activity by insureds and growth in small
contractor business. These increases were partially offset by declines in
involuntary premiums as well as a decline in workers' compensation premiums
resulting from the shift by insureds to captive insurance programs and other
arrangements that reduce net premium retention.
 
The underwriting loss in 1996 was $172.4 million and the combined ratio
(calculated on a GAAP basis), after policyholders' dividends, was 109.0%.
Excluding the effects of the charge to strengthen asbestos and environmental net
loss reserves, the 1996 underwriting loss was $38.4 million and the combined
ratio was 101.6%, compared to an underwriting loss of $45.6 million in 1995 with
a combined ratio of 101.8% and an underwriting loss of $97.3 million in 1994
with a combined ratio of 104.4%. The strong underwriting results in 1996 and
1995 reflect continued underwriting profits in workers' compensation, surety and
accident and health lines of business, partially offset by underwriting losses
in automobile lines. The Company has undertaken several initiatives to improve
automobile underwriting results including, (i) elimination of certain
unprofitable programs, (ii) increasing prices and deductible limits, and (iii)
strengthening the automobile claims function. The 1996 underwriting results also
benefitted from improved results in general liability, as well as in multiple
peril, reinsurance and fire and allied lines of business, reflecting lower
catastrophe losses which were $19.9 million ($26.1 million before reinsurance)
in 1996, $25.7 million ($78.5 million before reinsurance) in 1995 and $50.1

million ($134.0 million before reinsurance) in 1994. The low level of
catastrophe losses reflects the Company's efforts to reduce its catastrophe
exposures by exiting homeowners' coverage, reducing property coverage in the
reinsurance line of business and establishing rigorous underwriting criteria in
catastrophe prone regions. The 1995 and 1994 underwriting results included
charges of $4.0 million and $11.6 million, respectively, relating to the
Company's settlement with the California Department of Insurance resolving its
total liability for refunds and interest under Proposition 103.
 
The property and casualty insurance operations assume and cede reinsurance in
the normal course of business. The Company's aggregate reinsurance recoverables
were $3.58 billion at December 31, 1996, representing estimated amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but not
reported, unearned premiums and paid claims. The Company is subject to credit
risk with respect to its reinsurers, as the ceding of risk to reinsurers does
not relieve the Company of its liability to insureds. In order to minimize
losses from uncollectible reinsurance, the Company places its reinsurance with a
number of different reinsurers and utilizes a security committee to approve, in
advance, the reinsurers which meet its standards of financial strength. The
Company holds substantial amounts of collateral to secure recoverables from
unauthorized reinsurers. See note 10 to the consolidated financial statements.
 
Policy claims and settlement expenses include a provision for insured events of
prior years of $138.7 million in 1996 compared to $38.5 million in 1995 and
$22.4 million in 1994. The provision for all years includes adverse development
related to prior year asbestos-related and environmental pollution claims, which
primarily affect general liability, multiple peril and reinsurance lines of
business, and includes a pretax charge of $134.0 million in 1996 to increase net
loss reserves for asbestos-related and environmental pollution claims for
business written in or before 1987. The 1996 provision also includes adverse
development in the automobile line, offset by favorable development in workers'
compensation. The 1995 provision also included adverse development in other
general liability, automobile and reinsurance lines, partially offset by
favorable development in workers' compensation. The 1994 provision also included
adverse development in other general liability lines, partially offset by
favorable development in workers' compensation.
 
                                       27

<PAGE>

The Company records involuntary assessments when such assessments are billed by
the respective state insurance facilities. These assessments are subject to
large variations in timing and amount and, accordingly, the Company cannot
reasonably estimate a minimum amount of liability prior to billing. While the
amount of any involuntary assessments cannot be predicted with certainty, the
Company believes that future assessments will not have a material effect on its
liquidity or capital resources.
 
The liability for property and casualty insurance loss reserves at December 31,
1996 was $6.27 billion compared to $5.86 billion at December 31, 1995. This
liability is based on an evaluation of reported claims in addition to
statistical projections of claims incurred but not reported and loss adjustment
expenses. Estimates of salvage and subrogation are deducted from the liability.

Reinsurance recoverables of $2.95 billion and $2.68 billion at December 31, 1996
and 1995, respectively, are included in the liability.
 
The establishment of loss reserves requires an estimate of the ultimate
liability based primarily on past experience. The Company applies a variety of
generally accepted actuarial techniques to determine the estimates of ultimate
liability. The techniques recognize, among other factors, the Company's and
industry's experience with similar business, historical trends in reserving
patterns and loss payments, pending level of unpaid claims, cost of claim
settlements, product mix and the economic environment in which property and
casualty companies operate. Estimates are continually reviewed and adjustments
of the probable ultimate liability based on subsequent developments and new data
are included in operating results for the periods in which they are made. In
general, reserves are initially established based upon the actuarial and
underwriting data utilized to set pricing levels and are reviewed as additional
information, including claims experience, becomes available. The Company
regularly analyzes its reserves and reviews its pricing and reserving
methodologies so that future adjustments to prior years reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be more or less than such
estimates indicate. Estimation of loss reserves for long tail lines of business
is more difficult than for short tail lines because long tail claims may not
become apparent for a number of years, and a relatively higher proportion of
ultimate losses are considered incurred but not reported. As a result, variation
in loss development is more likely in long tail lines of business. The Company
attempts to reduce these variations in certain of its long tail lines, primarily
directors and officers liability and professional liability, by writing policies
on a claims-made basis which mitigates the long tail nature of the risks. The
Company also limits the potential loss from a single event through the extensive
use of reinsurance.
 
PROPERTY AND CASUALTY INSURANCE INVESTMENT RESULTS
 
Net investment income of the property and casualty insurance operations
increased to $257.1 million in 1996 from $247.3 million in 1995 and $232.3
million in 1994. These increases reflect growth in the size of the fixed
maturity investment portfolio.
 
Gains on sales of investments were $49.3 million in 1996 compared to $27.4
million in 1995 and $8.7 million in 1994. Gains on sales of investments in 1996
resulted from sales of equity securities.
 
                                       28

<PAGE>

TITLE INSURANCE OPERATIONS
 
The title insurance operations reported pretax income, before gains on sales of
investments, of $38.2 million in 1996, $12.3 million in 1995 and $30.8 million
in 1994.
 
Premiums and fees were $780.2 million in 1996 compared to $671.9 million in 1995
and $856.8 million in 1994. The increase in premiums and fees in 1996, when

compared to 1995, resulted from an increase in residential resale and new home
sale activity reflecting a strong economy and favorable mortgage interest rates.
In addition, the title insurance operations achieved a record level of
commercial title insurance premiums. Premiums and fees in 1994 benefitted from
increased agency revenues reflecting the strong real estate market conditions
that existed in late 1993 and early 1994.
 
Agency commissions represent the portion of premiums retained by agents pursuant
to the terms of their agency contracts and are the title insurance operations'
single largest expense. Agency commissions, which fluctuate in direct relation
to agency premiums, were $355.8 million in 1996 compared to $310.7 million in
1995 and $432.0 million in 1994. Other expenses of the title insurance
operations include personnel costs relating to marketing activities, title
searches, information gathering on specific properties and preparation of
insurance policies, as well as costs associated with the maintenance of title
plants. Other expenses were $355.4 million in 1996 compared to $318.4 million in
1995 and $344.7 million in 1994. The expense ratio of the title insurance
operations (which includes agency commissions) was 90.5% in 1996 compared to
93.1% in 1995 and 90.0% in 1994. The decline in the expense ratio in 1996, when
compared to 1995, resulted from an increase in direct title insurance premiums
and effective expense control measures. The provision for policy claims was
$61.1 million in 1996 compared to $58.5 million in 1995 and $75.9 million in
1994. The title insurance operations have benefitted from favorable claims
experience in recent years, a trend which is expected to continue. Paid claim
losses have declined to $37.1 million in 1996 from $45.8 million in 1995 and
$52.5 million in 1994.
 
INVESTMENT PORTFOLIO
 
At December 31, 1996, the Company's investment portfolio aggregated $4.18
billion (at cost), of which 10% was invested in equity securities. The Company
seeks to maintain a diversified and balanced fixed maturity portfolio
representing a broad spectrum of industries and types of securities. At December
31, 1996, no one issuer comprised more than 3.0% of the fixed maturity and
short-term investment portfolio. The portfolio is managed to achieve a proper
balance of safety, liquidity and investment yields.
 
The Company's fixed maturity portfolio consists of investment grade securities
(those rated 'BBB' or better by Standard & Poor's) and, to a lesser extent,
non-investment grade securities and non-rated securities. The risk of default is
generally considered to be greater for non-investment grade securities, when
compared to investment grade securities, since these issues may be more
susceptible to severe economic downturns. At December 31, 1996, the carrying
values of non-investment grade securities and securities not rated by Standard &
Poor's were $499.5 million (13% of the fixed income portfolio) and $93.6 million
(2% of the fixed income portfolio), respectively. At December 31, 1995, the
carrying values of non-investment grade securities and securities not rated by
Standard & Poor's were $299.0 million (8% of the fixed income portfolio) and
$64.4 million (2% of the fixed income portfolio), respectively. Substantially
all of the Company's non-investment grade and non-rated securities are
classified as available for sale and, accordingly, are carried at market value.
See note 2 to the consolidated financial statements.
 
                                       29


<PAGE>

At December 31, 1996, approximately 31% of the Company's fixed maturity and
short-term investment portfolio was comprised of securities issued by utilities,
the vast majority of which are rated investment grade and are first mortgage or
senior note secured bonds. The utility portfolio is widely diversified among
various geographic regions in the United States and is not dependent on the
economic stability of any one particular region. No other industry group
comprises more than 10% of the fixed maturity and short-term investment
portfolio.
 
OTHER OPERATIONS
 
RCG International, Inc. ('RCG'), a subsidiary of the Company, primarily provides
technical services in the information technology industry. Information
technology revenues were $136.7 million in 1996, $106.5 million in 1995 and
$90.0 million in 1994. The increase in revenues in both 1996 and 1995 resulted
from increased assignments from existing clients and new clients. Information
technology operating expenses were $134.4 million in 1996, $101.0 million in
1995 and $84.6 million in 1994. RCG's revenues and expenses are included in
other revenues and other expenses in the accompanying consolidated statement of
income. For the years 1995 and 1994 other revenues and other expenses included
certain consulting operations which were sold in 1995.
 
At December 31, 1996, the Company's real estate operations had holdings with a
carrying value of $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.
 
EQUITY IN INVESTEE COMPANY
 
Equity in investee company income was $8.9 million, $7.8 million and $9.5
million in 1996, 1995 and 1994, respectively, from the Company's investment in
Zenith. The increase in equity income in 1996, when compared to 1995, reflects
improved underwriting results due, in part, to lower catastrophe losses. The
decline in equity income in 1995, when compared to 1994, reflects an increase in
Zenith's property and casualty underwriting losses, particularly in workers'
compensation. In 1995, the Company recognized an after-tax loss of $4.5 million
on the disposal of discontinued life insurance operations by Zenith.
 
                                       30

<PAGE>

OTHER MATTERS
 
The Company has a revolving credit facility and term loan agreement with various
banks. On November 8, 1996, the Company increased term loan borrowings by $25
million to $162.5 million. The additional borrowings were used to redeem all
outstanding ($25 million principal amount) 9.48% senior reset notes. The
revolving credit facility provides for aggregate maximum outstanding borrowings
of $100 million. At December 31, 1996, borrowings aggregating $35 million were

outstanding under this facility. In addition, at December 31, 1996, the Company
guaranteed $38 million of partnership debt. See note 14 to the consolidated
financial statements.
 
The National Association of Insurance Commissioners has a risk-based capital
requirement for the property and casualty insurance industry. Risk-based capital
refers to the determination of the amount of statutory capital required for an
insurer based on the risks assumed by the insurer (including, for example,
investment risks, credit risks relating to reinsurance recoverables and
underwriting risks) rather than just the amount of net premiums written by the
insurer. A formula that applies prescribed factors to the various risk elements
in an insurer's business is used to determine the minimum statutory capital
requirement for the insurer. An insurer having less statutory capital than the
formula calculates would be subject to varying degrees of regulatory
intervention, depending on the level of capital inadequacy. All of the Company's
statutory insurance companies have statutory capital in excess of the minimum
required risk-based capital.
 
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities and the
agencies that rate insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could result
in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or downgrades in an insurer's ratings.
 
--------------------------------------------------------------------------------
 
MARKET AND DIVIDEND INFORMATION FOR COMMON STOCK
 
Reliance Group Holdings, Inc. owns 100% of the common stock of the Company.
Dividends on common stock, which are subject to agreements governing the
Company's Credit Facility and senior reset notes, were $110.0 million in both
1996 and 1995.
 
                                       31

<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION
 
--------------------------------------------------------------------------------
 
DIRECTORS
 
GEORGE R. BAKER(2)
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)
Dean of the Wharton School
University of Pennsylvania
 
JEWELL JACKSON MCCABE
President, Jewell Jackson
McCabe Associates
 
IRVING SCHNEIDER(2)
Executive Vice President
Helmsley-Spear, Inc.
 
BERNARD L. SCHWARTZ(1)
Chairman & CEO of
Loral Space & Communications Ltd. and
Chairman & CEO of Globalstar
 
RICHARD E. SNYDER
Chairman and
Chief Executive Officer
Golden Books Family Entertainment, Inc.
 
THOMAS J. STANTON, JR.(2)
Chairman Emeritus
National Westminster Bank NJ
 
ROBERT M. STEINBERG(1),(3)
President and
Chief Operating Officer
Reliance Group Holdings, Inc.
 
SAUL P. STEINBERG(1),(3)
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 Member
(2) Audit Committee Member
(3) Finance Committee Member
 
                                       32


<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION
 
--------------------------------------------------------------------------------
 
OFFICERS
 
CORPORATE
 
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
 
HENRY A. LAMBERT
Senior Vice President
Real Estate Investments
and Operations
 
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
 
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
 
Title Insurance
 
HERBERT WENDER
Chairman and Chief
Executive Officer
Commonwealth Land Title
Insurance Company
 
RCG Information Technology
 
ROBERT P. BUTTACAVOLI
President and
Chief Executive Officer
RCG Information Technology, Inc.
 
                                       33

<PAGE>

RELIANCE FINANCIAL SERVICES CORPORATION
 
--------------------------------------------------------------------------------
 
CORPORATE DATA
 
RELIANCE INSURANCE GROUP
 
PROPERTY AND CASUALTY INSURANCE
 
Reliance Insurance Company
Reliance National Insurance Company
Reliance Reinsurance Corp.
Reliance Surety Company
 

TITLE INSURANCE
 
Commonwealth Land Title Insurance Company
Transnation Title Insurance Company
 
CONSULTING
 
RCG Information Technology, Inc.
 
CORPORATE OFFICES
 
Reliance Financial Services Corporation
A subsidiary of Reliance Group Holdings, Inc.
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
(212) 909-1100
FAX (212) 909-1864
 
INDEPENDENT AUDITORS
 
Deloitte & Touche LLP
New York, NY
 
LISTED SECURITY
 
The Company's 7.866% Senior Reset Notes, due 2000,
are listed on the New York Stock Exchange
 
                                       34