Reliance Staves Off Bankruptcy; Troubles Remain

Reliance Group Holdings Inc. was grant- ed more time from creditors late last month to deal with repaying $237.5 million in bank debt.

The troubled insurer said bankers extended the due date to Nov. 10 from Aug. 31. No information was available on whether other terms of the insurer’s debt have been changed, but the extension will give Reliance more time to restructure its debt. It also pushes the maturity date closer to Nov. 15, which is when a $291.7-million bond debt comes due, allowing time for the company to attempt an overall restructuring of debt.

Meanwhile, regulators are trying to establish whether Reliance’s $4.6 billion in cash and securities will be enough to cover an estimated $3.3 billion in claims to be paid out over the next few years.

The Pennsylvania Department of Insurance (PDI), which oversees Reliance’s main operating unit Reliance Insurance Co., has been keeping a close eye on the company over the last several months, according to PDI spokeswoman Angela Yarbrough. The department took extra regulatory power over the unit late last month. But if regulators decide the company cannot pay off claims and debts, the next step will be complete supervision.

Reliance agreed with the department to seek its approval before making major financial transactions, including paying dividends to Reliance Group Holdings, selling assets or making significant withdrawals from bank accounts.

The company maintains it can pay off its debts and stave off bankruptcy, but analysts are skeptical.

“Maybe they could have weathered the storm without this upcoming debt,” said Fitch IBCA senior analyst James B. Auden. “But that’s certainly not going to happen now.”

Standard & Poor’s also views the company as “vulnerable” and has dropped its ratings to “R” (under regulatory supervision) from “CCC” (very weak). Fitch and A.M. Best have lowered their ratings as well.

Things began unraveling quickly for Reliance when Chief Executive Saul Steinberg stepped down in February following the announcement that the company would sell its surety business to Citigroup Inc. for $580 million. In May, the company announced it might be selling to Leucadia National Corp. for a meager $293-million stock swap-just one quarter of the 183-year-old company’s reported book value at the time. But Leucadia backed out of the deal in July, due in part to Reliance’s piecemeal sale of its D&O, E&S and inland marine lines to The Hartford, and the sale of its renewal rights for a portion of Reliance National’s book of business to Kemper.

In mid-August, Reliance reached an agreement with Combined Insurance Co. of America, a life and health insurance subsidiary of Aon Corp., for the purchase of Reliance’s accident and health book. The transaction encompasses Reliance’s university health insurance business; employer stop-loss coverage; short-term, individual and global medical insurance; dental coverage; group accident; student accident (grades K-12); and high-limit disability insurance business.

Last week, Aon agreed to provide claims management services for the majority of Reliance’s outstanding insurance policies. Under the terms of the agreement, Aon and its subsidiaries will not assume any underwriting risk. The agreement contemplates a multi-year arrangement in which Cambridge Integrated Services Group Inc., an Aon subsidiary, will manage claims from investigations through settlements to fulfill the terms of policies issued by Reliance’s wholly owned insurance companies.

Cambridge, a provider of claims and loss cost management services, will employ the majority of Reliance’s claims staff and will manage claims administration from both Reliance’s and Cambridge’s offices under the proposed agreement.

Aon and Reliance plan to finalize a definitive agreement in the near term that will require the approval of Reliance’s board of directors as well as certain insurance regulators.

The selling off doesn’t stop there. On Aug. 30, Markel Corp. announced it would acquire the renewal rights to Reliance’s child care book of business and certain segments of Reliance’s social services and healthcare liability books of business.

Analysts have speculated that other areas of the business could be sold off as well-perhaps some international sectors-in an effort to raise capital.