Judge James Gardner Collins issued the order Friday to the Pennsylvania
Insurance Department, which took over Reliance on May 29. Regulators have three
months to reorganize the troubled insurer or declare that it can no longer pay
customers' claims - which likely would boost property-insurance costs across the
country.
Reliance, with headquarters in
Center City, faces 200,000 claims and 15,000 lawsuits directed at some of its
75,000 clients. The claims range from worker's compensation filings to
construction liability and securities fraud complaints.
Reliance Insurance is not related to Reliance Standard Life Insurance Co., a
profitable Philadelphia health insurer.
Observers blame Reliance's troubles on the debt its longtime chairman Saul
Steinberg accumulated during his 33 years in control and on the risky expansion
of several Reliance affiliates (recently consolidated under the name Reliance
Insurance Co.). These units were hit with massive losses on worker's
compensation, environmental and construction claims in the late 1990s.
Judge Collins turned up the heat as Reliance faces these mounting demands for
cash:
Pennsylvania regulators are scrambling to make sure the company can pay up to
$10 billion in insurance and reinsurance liabilities.
J.P. Morgan Chase & Co. and other banking giants are trying to collect
hundreds of millions of dollars in unpaid Reliance loans and bonds.
The federal Pension Benefit Guaranty Corp., which insures corporate
retirement plans, says it may have to raise more than $100 million to cover a
shortfall in Reliance's pension plan.
The IRS has asked federal prosecutors to help investigate $46 million in
questionable tax refunds Reliance Group received last year.
Pennsylvania House Majority Leader John Perzel (R., Phila.) wants the state
Insurance Department to resume severance payments to 340 laid-off Reliance
workers that state Insurance Commissioner Diane Koken suspended in an attempt to
save $8 million.
The University of Pennsylvania may cancel some planned endowed faculty chairs
because Reliance and Steinberg, a major Penn donor, have not come through with
promised grants.
If the state declares Reliance insolvent, a portion of the company's claims
would be paid by a nationwide network of insurance bail-out funds and,
ultimately, through higher consumer insurance rates.
"The big issue is how much cash does Reliance have? How long can they
continue to pay claims?" said Tony Grippa, executive director of the Workers
Compensation Guaranty Association of Florida, one of dozens of funds designed to
bail out failed insurers with money collected from surcharges on business and
consumer insurance policies.
Grippa said his fund plans to charge insurance companies in his state the
legal maximum 2 percent extra next year - mostly to pay losses he expects will
be generated by claims against Reliance customers in Florida.
Pennsylvania home and business insurers already pay the state's 2 percent
maximum surcharge because of previous insurance company failures, such as the
1998 insolvency of Physicians Insurance Co. Many companies have passed the cost
directly along to consumers.
Pennsylvania guaranty-fund officials have said they were unsure how they
would meet any increased bail-out costs.
In their quest for cash, lawyers for the state Insurance Department are
scheduled for a face-off Wednesday against some of the nation's most powerful
financial companies in a New York bankruptcy courtroom.
After writing off its investment in Reliance Insurance last spring, the
Reliance Group now wants Judge Arthur Gonzalez to approve a bankruptcy plan that
would apply its remaining assets to creditors whose Reliance loans and bonds
defaulted last year. The plan is endorsed by J.P. Morgan Chase, Wells Fargo and
other creditors.
But Pennsylvania wants that money to pay claims. The state has asked Gonzalez
to deny bankruptcy protection.
If Gonzalez allows Reliance Group to go ahead with its bankruptcy plan, it
will be more difficult for Pennsylvania to get that money back - or to get money
from Steinberg if he is later found responsible for the company's problems,
state officials said.
Pennsylvania is not the only entity with a lot at stake:
The IRS has asked New York's top federal prosecutor, Mary Jo White, to
monitor the bankruptcy case while it completes an audit of $46 million in
"tentative" federal tax refunds that Reliance Group collected last year.
The federal Pension Benefit Guaranty Corp., which also has a lawyer
monitoring the bankruptcy, estimates it will have to pump $106 million into
Reliance's pension funds so it can maintain pensions for 7,700 current and
future Reliance retirees. Reliance's guaranteed-benefit retirement plans have
assets of $172 million and liabilities of $281 million, according to corporation
spokesman Gary Pastorius.
Perzel wants Insurance Commissioner Koken to restore canceled severance
payments to 340 laid-off Reliance employees. "The department has not taken the
welfare of these individuals into consideration," Perzel wrote to Koken Aug. 23.
Penn anticipates the possible cancellation of a number of endowed
professorships that Steinberg and Reliance promised.
However, unlike the IRS or J.P. Morgan Chase, Penn is unlikely to sue,
spokeswoman Lori Doyle said.
Reliance "made a $600,000 pledge to the Penn School of Medicine, and
naturally we're following the bankruptcy proceedings," Doyle said Thursday.
In a statement released Friday, Doyle added, "Saul Steinberg has been a
generous contributor to the university. His most significant contributions to
Penn were made in the late '80s.There are some outstanding pledges."
Starting in the late 1970s, Steinberg and Reliance pledged $36 million to
Penn, mostly through the Saul and Gayfryd Steinberg Foundation, Doyle said. The
university declined to say how much of the total has been collected.
Two buildings at the Wharton School, which Steinberg attended, are named for
him.
Steinberg funded his philanthropy in part with his income from Reliance. He
collected an average of more than $10 million a year in dividends, salary and
company-subsidized stock options during the 1990s.
Joseph N. DiStefano can be reached at 215-854-5957 or jdistefano@phillynews.com.
Pa. battles for Reliance
Insurance Co. assets
(August 8, 2001)
The insurer's owners and
investors also want the money. The state would use it to pay claims against
policyholders.
By Joseph N. DiStefano
INQUIRER STAFF WRITER
In a high-stakes battle for disputed cash, the
Pennsylvania Department of Insurance is fighting troubled Reliance Insurance
Co.'s owners and investors for assets that would help pay an estimated $8.7
billion in claims against its customers.
The state is even fighting for control of $900 million of
Reliance's estimated losses - which, under corporate accounting rules, could be
converted into lucrative tax benefits.
And, at the same time, the department is seeking to preserve
its right to seek damages from longtime Reliance chairman Saul Steinberg and
other former Reliance officials while it investigates whether they "caused
injury" to the company.
The business insurer is juggling 200,000 claims and 15,000
lawsuits directed at some of its 75,000 clients. The claims range from workers'
compensation filings to construction liability and securities fraud complaints.
After a two-month suspension, most of the lawsuits resumed
moving through the nation's courts last week, although securities fraud cases
involving big Reliance bank and hospital clients remain on hold.
The legal disputes and financial problems do not involve
Center City-based Reliance Life Insurance Co., a profitable health-benefits
provider that is not related to Reliance Insurance.
State regulators took control of Reliance Insurance two months
ago amid mounting losses.
The insurer's corporate owner, Reliance Group Holdings,
defaulted on its bank loans and bonds, and was delisted last year by the New
York Stock Exchange. The company had become squeezed between debt incurred under
Steinberg, its chairman, and higher-than-expected workers' compensation,
environmental and specialized-liability claims.
Department spokeswoman Rosanne Placey said regulators did not
yet know whether they would be able to find enough money to pay all Reliance
costs and claims.
If not, states would seek to pay the claims through insurance
guaranty funds, which are subsidized by other insurers and, ultimately, by
insured businesses and homeowners.
Pennsylvania's lawyers have asked federal Bankruptcy Court
Judge Arthur Gonzalez in New York to throw out a bankruptcy filing in June by
Reliance Group.
Pennsylvania argued last month that Reliance Group's
bankruptcy filing was part of a "bad faith" effort to transfer money from
Reliance policyholders to the company's bankers and investors at the expense of
policyholders, and to shield Steinberg and his associates from paying potential
damages.
"It is likely that any plan proposed by [Reliance creditors]
will have a provision for the release of the debtors' officers, debtors and
professionals" from financial responsibility, the state complained in a motion
before the judge.
Pennsylvania also opposed a Reliance offer of $17 million to
settle a shareholders' complaint.
In a lawsuit filed in June, Pennsylvania also demanded the
return of $95 million in tax benefits and payments it contends that Reliance
Group wrongly took from Reliance Insurance last year.
The state also contends that Reliance Group is trying to claim
Reliance Insurance's losses as its own so it can benefit from federal tax
breaks.
"We dispute their allegations," Reliance spokesman Doug Morris
said. The company declined further comment on the state's complaints.
There are signs of progress under the state's watch. A
two-month court-ordered stay on litigation against companies insured by Reliance
expired last week. With some exceptions, the 15,000 cases "are going forward,"
David Simon, chief counsel for the insurance department, said.
The exceptions are 17 complex cases where complainants are
demanding sums "dramatically greater than $5 million" each, Simon added.
Under a court order issued Thursday by Commonwealth Court
Judge James Gardner Collins, proceedings in those 17 cases were suspended for
six months.
The delayed cases include stock-fraud complaints against big
Reliance clients such as Bank One Corp., Bank of America Corp., Cendant Corp.,
Columbia/HCA Healthcare Corp., Fruit of the Loom Inc., United Companies
Financial Inc. and Xerox Inc., as well as smaller companies such as
Horsham-based Cell Pathways Inc.
Also suspended is Reliance's participation in the litigation
against Allegheny Health Education and Research Foundation, the state's biggest
hospital group before its 1999 bankruptcy.
Laura Ellsworth, an attorney for the Allegheny creditors'
committee, said Reliance had liabilities of up to $25 million related to the
case, but added that the six-month stay was unlikely to affect a settlement
under negotiation.
Another court order by Collins cleared the way for
Pennsylvania to collect $334 million that Reliance had deposited with other
state insurance departments as a requirement of doing business across the
country.
One-third of that money is held by California, which had
opposed Pennsylvania's attempts to apply the money to Reliance claims.
California officials have not yet seen the order or decided
whether they will fight it, Scott Edelen, deputy California insurance
commissioner, said.
In
the Region - Pa. seeks dismissal of Reliance bankruptcy petition (August 4,
2001)
The Pennsylvania Department of Insurance has asked the U.S.
Bankruptcy Court in New York to dismiss Reliance Group Holdings' bankruptcy
petition and plan to give its assets to its bondholders and bankers. The
department wants Reliance's assets so it can pay claims and expenses for the
company's Philadelphia-based Reliance Insurance Co. subsidiary. Also,
Pennsylvania has asked Commonwealth Court to enable it to take over Reliance
Insurance deposits in other states.
Loose
Change (July 24, 2001)
By Joseph N. DiStefano
INQUIRER STAFF WRITER
And the buyer is . . .
Last week's item about the sale of the former Reliance
Insurance Co. headquarters at Cherry Street and the Benjamin Franklin
Parkway focused on the $46 million the transaction raised for the seller, which
is in rehabilitation by Pennsylvania.
But two readers said they still wanted to know who's buying
the red-brick, 20-story building.
The purchaser, pending financing, is Amstar Group Ltd., a
Denver real estate firm. Amstar hired Trammell Crow "to manage and
lease" the building, which is more than two-thirds empty, according to the
commercial real estate newspaper published by Bucks County-based IPGdirect.com.
Pennsylvania
sells Reliance's headquarters
By Joseph N. DiStefano
INQUIRER STAFF WRITER
The Pennsylvania Insurance Department, digging for cash in
its effort to stave off a threatened liquidation of Reliance Insurance Co.,
has raised $46 million from the July 3 sale of the company's Three Parkway
headquarters in Philadelphia.
The money will go to pay Reliance's customer claims and
operating costs, Rosanne Placey, a spokeswoman for the department, said. The
state insurance department took control of Reliance last month and is attempting
to "rehabilitate" the $12 billion-asset property insurer.
The property deal allows Reliance's dwindling workforce to
keep using a small part of the space for up to five years, Placey said.
As recently as 1999, Reliance employed more than 1,000 in the
red-walled 550,000-square-foot Parkway building. The site is now down to 250
workers. Reliance consolidated its 167-year-old Center City operations at that
site in 1997, thanks in part to tax breaks valued at $8 million to $9 million
from the City of Philadelphia.
But Reliance's financial problems - which the department
blames partly on debts run up during its 33 years under the control of New York
investor Saul Steinberg - have resulted in the closure or sale of most Reliance
businesses.
Reliance
Group files for Chap. 11
The move comes shortly after Pa. regulators were allowed to take over a
subsidiary, Phila.'s Reliance Insurance.
By Joseph N. DiStefano
INQUIRER STAFF WRITER
Reliance Group Holdings Inc. has filed for Chapter 11 bankruptcy protection in
New York, ending 33 years as the engine of Saul Steinberg's increasingly
debt-laden investment empire.
Reliance's request for credit relief comes amid a fight
between Pennsylvania regulators and Reliance management for control over nearly
$100 million - and potentially much more - in Reliance assets.
In a complaint filed Monday in Commonwealth Court, the state
contends that Reliance Group wrongly took or withheld that money from federal
tax funds and refunds belonging to its troubled subsidiary, Reliance Insurance
Co. of Philadelphia. The company denies the accusation.
The Pennsylvania Insurance Department was given permission to
take over Reliance Insurance on May 29. That came eight months after the
business insurer had stopped filing financial statements as losses mounted from
unexpected workers' compensation and environmental claims.
Reliance Group said yesterday that it had worked out a plan to
hand control of the company to its banks and other creditors, whose investment
values have crumbled since the company defaulted on its debts and was delisted
by the New York Stock Exchange last year. The plan is subject to federal
Bankruptcy Court approval.
But Pennsylvania regulators have refused to endorse the plan.
They say it does not do enough to make Reliance Group's
remaining funds available to pay claims for Reliance Insurance customers, which
include Philadelphia-area hospitals, Florida workers' compensation plans, Texas
port facilities, and California construction companies, among others.
Reliance Group has depended for most of its income on payments
from Reliance Insurance, one of the nation's biggest and oldest
property-and-casualty insurers.
Reliance Group reported $12.9 billion in liabilities and $12.6
billion in assets in its bankruptcy petition, with such banks as Wells Fargo
& Co. and the Anglo-Chinese financial giant HSBC Holdings P.L.C. topping the
creditors' list.
The more money Pennsylvania can collect from Reliance Group,
the more it hopes to reduce the likelihood, or the potential cost, of having to
declare Reliance Insurance insolvent. (Reliance Group and Reliance Insurance are
not related to Philadelphia-based Reliance Standard Life Insurance Co., a
profitable health insurer.)
An insolvency would force other insurers to pay Reliance's
unfunded claims, which could reach $2 billion, according to the guaranty funds
that bail out failed insurers. Such a payout would be a record for having to
cover a single property-and-casualty insurer. These costs would be passed on to
homeowners, drivers, employers, and other insurance-policy owners.
Pennsylvania's lawsuit alleges that Reliance Group wrongly
removed or withheld $95.6 million that belonged to Reliance Insurance.
In a statement announcing the bankruptcy filing, Reliance said
it "disputes the allegations" in Pennsylvania's complaint. A Reliance
spokesman, Doug Morris, noted that Pennsylvania's lawsuit had been stayed by the
bankruptcy filing. He denied that the bankruptcy came in response to the
complaint.
According to the suit, Reliance Group officials in New York
collected $50 million from Reliance Insurance last June, ostensibly to pay a
federal tax liability.
But after scrutinizing Reliance Insurance's books, the
Insurance Department found that "there [was] no liability" for federal
taxes, and the money was never paid to the Internal Revenue Service, said Arthur
F. McNulty, deputy general counsel for the Insurance Department.
Instead of owing federal taxes, Reliance Group collected a
$45.65 million federal tax refund last year, McNulty said.
Pennsylvania maintains that that money belongs to Reliance
Insurance and should be used to pay policyholders' claims.
Reliance says the state has been increasingly inflexible. The
Insurance Department and the company "had held a series of constructive
discussions, but once they put [Reliance Insurance] into receivership, they
began to take a more adversarial position vis-a-vis the parent company" and
its assets, Reliance's Morris said.
One Reliance investor, R. Allen Cooke of California-based
InterFirst Capital Corp., said Reliance Group bondholders had refused to support
Pennsylvania's requests to return a $20 million share of the money that the
state argues belongs to policyholders.
Cooke says the bondholders were short-sighted. "Good
relations with the regulator are important. And it's not that much anyway,"
compared with Reliance's other assets, he said.
Cooke said there were disputes over the value of Reliance's
information-technology unit and other potentially profitable businesses. In the
long term, he insisted, "Reliance looks strong. There are still a lot of
assets."
Asked whether the state would identify funds it wanted
Reliance Group to return besides the tax money, McNulty said he "would
speculate it's a start," and noted that the demand came in the first two
weeks of a rehabilitation that the state expects could take six months or
longer.
Steinberg, who resigned as Reliance Group chairman last month,
borrowed heavily to buy Reliance in the late 1960s and increased its debt to
finance his career as a corporate raider, in which he targeted such big
companies as Chemical Bank and Walt Disney with unwanted takeover attempts.
In the 1990s, Reliance began a costly campaign to write
low-priced insurance in high-risk markets that other companies found
unattractive.
Regulators were encouraged by the new business' helping the
company begin to reduce its debt.
But as claims increased in the late 1990s, and Steinberg
continued to pay himself millions of dollars in cash and stock each year, the
company's surplus withered and regulators were forced to move in.
"Anyone who can lose as much money as [Steinberg] has,
yet still pay himself $6 million a year, deserves some kind of an award,"
joked Steven Schiff, editor of Schiff's Insurance Observer.
Schiff is a longtime critic of Reliance. He titled a 1992
article about Steinberg "Would You Buy a Used Car From This Man?" In
August, despite reassuring words from company spokesmen, Schiff predicted the
company's financial failure in a piece titled "Bankruptcy Ahoy!"
Schiff said yesterday that regulators should have acted years
ago to reduce payments by Reliance Insurance to Steinberg's holding company.
Pennsylvania sharply reduced such payments as the company's finances
deteriorated early last year.
Pa.
given permission to take over Reliance (05/30/2001)
The state's insurance commissioner remains "fairly optimistic that all of
the claims of the policyholders will be satisfied."
By Joseph N. DiStefano
INQUIRER STAFF WRITER
Citing Reliance Insurance Co.'s "bad business decisions, bad luck,"
and big debts under longtime chairman Saul Steinberg, Pennsylvania Insurance
Commissioner Diane Koken won court permission yesterday to take over management
of the nationwide, Philadelphia-based business insurer.
The state is undergoing one of the biggest takeovers in the
history of the U.S. insurance business in an attempt to prevent losses that
industry observers say could top $2 billion if Reliance proves unable to pay its
claims.
Such losses would make Reliance the most expensive
single-company failure in the history of the property-and-casualty insurance
business. A team including William Taylor, deputy insurance commissioner, and
David Brietling, former Philadelphia Reinsurance Corp. and Colonial Penn
insurance group executive, will sort through Reliance's complex insurance and
reinsurance policies in hopes of assessing the damage and projecting an orderly
rehabilitation.
Koken remains "fairly optimistic that all of the claims
of the policyholders will be satisfied." But "that may change" as
state consultants work through Reliance's books, she said.
Administrative costs will be paid first, then policyholders'
claims, then Reliance reinsurance customers. Anything left over could be claimed
by the company's bank and bond creditors, and only then by shareholders, who
lost billions as the company's stock collapsed from 1998 to 2000.
If Reliance cannot pay its policyholders' claims, the company
will be declared insolvent and will be liquidated. Unpaid claims would in many
cases be covered by states' guaranty funds, which would pay the costs from an
assessment on solvent insurance companies. In the long run, such costs are
typically paid by employers, homeowners and drivers in the form of higher policy
fees.
"We recognize the importance of doing this as quickly as
we can," Koken said. "This is a $10 billion [asset] company, and in
order to do that properly, it could take us - I'm guessing - about six months to
make the decision about whether we can pursue a plan of rehabilitation."
Almost half of Reliance's business is spread among the six
largest U.S. states - California, New York, Texas, Florida, Pennsylvania and
Illinois. Policies range from insuring smaller workers' compensation plans to
such specialties as long-haul trucking and construction defects, Koken said.
The Reliance order, signed by Commonwealth Court Presiding
Judge Joseph Doyle in Harrisburg, did not cancel existing Reliance policies.
More than 2,000 workers will continue to report to Reliance
and its affiliates in Philadelphia and other cities. Koken plans to begin
visiting such workers today.
But the order gives regulators the right to cancel Reliance's
service contracts with landlords and other contractors at its Parkway
headquarters and other offices. And it freezes litigation against the company
for 60 days.
"They've got a period of time to assess the situation
without being threatened by lawsuits," said Peter Bickford, cochair of the
insurance department at the Philadelphia-based law firm Cozen & O'Connor.
Koken said Pennsylvania had subjected Reliance to increasing
levels of scrutiny, especially since its capital dropped to alarming levels last
spring. "I think we did everything that could be done. We acted very
aggressively," she said. "We understood all the ramifications. We
consulted with other states on an ongoing basis."
Noting in a news release that Reliance "has been unable
to restore itself to sound financial condition," Koken said the company's
"corporate decisions and risk-taking events" were "not subject to
regulatory oversight or review."
Bickford said Pennsylvania tends to attempt to rehabilitate
companies rather than liquidate them - and that Pennsylvania rehabilitations can
take several years, "which may very well be enough to restore financial
stability to the entity."
He added, "But there are also things that can go wrong:
Claims can continue to increase" unexpectedly, for example.
Given Reliance's "unbelievable" size and complexity,
"this will swallow the [Pennsylvania insurance] department," predicted
Zachary Grayson, a former liquidation lawyer who has been defending the owners
of the failed PIC Insurance Co. against civil fraud charges filed by Koken's
office.
"How are they going to manage Reliance?" he asked.
"I'm going to assume this is Step One to liquidation. But this at least
gets them physically in control" of the company.
What went wrong at Reliance? "We've seen a lot of
companies fail because of the long bear market for property-and-casualty
insurance," said Matthew Coyle, an analyst at Standard & Poor's Corp.
who has been watching Reliance unravel.
"There's been a lot of underpricing the business,
under-reserving the business, and not having the financial resources to
stabilize the ship when they need it most," Coyle said, adding that
Reliance's troubles had helped competitors justify higher prices.
"I don't think it was just that they had rapid growth.
They had a lot of debt at the parent company," said Hannah Leavitt, chief
counsel and chief of litigation at the Pennsylvania Insurance Department from
1978 to 1987.
"I feel the sorriest for the long-term employees, people
who worked for a generation here" and saw the company's market value tumble
from more than $2 billion in 1998 to essentially zero today, Leavitt said.
Joseph N. DiStefano can be reached at
215-854-5957 or jdistefano@phillynews.com.
Reuters
UPDATE
1: Insurer Reliance Files for Bankruptcy (June 13, 2001)
Reliance
Group delays quarterly report, sees loss (May 15, 2001)
U.S. News & World
Report
Business & Technology
Beauty
and the beast Takeover artist Saul Steinberg is taken down
Kit R. Roane
06/25/2001
(Copyright 2001)
Reliance Group Holdings, the engine that powered
Saul Steinberg 's corporate raiding and kept his wife, Gayfryd, in
diamonds and pearls, has finally seized up. The holding company declared
bankruptcy last week, taking down the first family of go-go '80s opulence and
leaving creditors, including thousands of policyholders in the group's insurance
arm, worried whether their share can be picked from the meager remains.
Steinberg , 61, was a member of a small brat pack of
feared greenmailers and takeover artists that included the likes of Carl Icahn
and T. Boone Pickens. When Steinberg loaded up on Disney stock in the
1980s and threatened hostile action, the media giant was forced to pay him a $60
million premium for his shares just to walk away. For 30 years, Reliance Group
and junk bonds gave Steinberg the leverage to stalk corporate prey. But
all the while, debt and bad management were bleeding the company. Steinberg stepped
down recently and insurance regulators forced the company to cancel its
dividend, cutting off a source of his income.
Gone are the days of wine and roses, as well as the Park
Avenue apartment (sold for $37 million), the 61 Old Masters paintings (worth $50
million), and the rest of the couple's knickknacks and furniture (auctioned for
$12.5 million). Steinberg , who suffered a stroke in 1995, now has only
his memories. Among them: the company's Boeing 727, replete with five bedrooms,
cashmere blankets, and crystal glassware; and the audacious $1 million affair
Gayfryd threw for his 50th birthday, highlighted by nude models posing as
characters from his favorite paintings.
Slumming. The future doesn't look much better for the couple. Steinberg
's mother alleges in a lawsuit that he owes her $4.7 million. They are now
living in a three-bedroom apartment, close quarters for a fallen titan. They
apparently are surviving on his pension of $635,000. Pennsylvania regulators are
suing Reliance for allegedly siphoning funds that should have been used
to pay insurance claims. And Steinberg 's old rival, corporate raider
Icahn, is circling the Reliance carcass.
" Steinberg raided this fine old Philadelphia
insurance company, then he and his family turned it into their own personal
bank," says Samuel Hayes, professor emeritus at Harvard Business School.
"He reaped what he sowed."
Wall Street Journal
Dow Jones Newswires
WASHINGTON -- Reliance Group Holdings Inc. expects to report a
$20 million second-quarter loss and a $47 million loss for the first six months
of 2001.
In a filing with the Securities and Exchange Commission
Wednesday saying that it won't file its quarterly report on time, the company
said that the losses primarily reflect accrued interest on its outstanding debt
and corporate overhead, and not results of its Reliance
Insurance Co. unit.
The figures are subject to an ongoing audit for fiscal 2000 by
accountant Deloitte & Touche LLP. Reliance Group said the audit may result
in changes in the estimated results.
As of Dec. 31, Reliance Group expected to write off its
investment in the insurance subsidiary. Also, interest Reliance Group's
outstanding debt of about $6 million a month ceased to accrue after the company
sought Chapter 11 bankruptcy protection on June 12.
Reliance Group, of New York, has filed for Chapter 11 in the
U.S. Bankruptcy Court in Manhattan, listing in its petition assets of $12.59
billion and liabilities of $12.87 billion as of Sept. 30, 2000.
The company reached an agreement in principle on the major
economic terms of a reorganization plan with holders of the majority of its
Reliance Financial Services Corp. unit's bank debt. The agreement also included
an ad hoc committee consisting of holders of about half of the outstanding
principal amount of the company's 9% senior notes and holders of about half of
the outstanding principal of its 9.75% senior subordinated debentures.
Under the terms of the agreement, Reliance Financial's lenders
will receive new 10-year notes that will bear interest in kind at the unit's
option and be payable from dividends or other distributions received from Reliance
Insurance.
Reliance Group said it has incurred significant changes of its
operational, corporate and organizational structure and staffing because of its
decision to discontinue its insurance business. Because of these changes,
Deloitte & Touche have been unable to complete its audit for fiscal year
2000.
Until the audit is complete, Reliance Group said, it wouldn't
be possible to prepare its quarterly report. The company didn't give any
indication in the SEC filing of when it expected the audit to conclude.
-Bob Braine, Dow Jones Newswires; 202-628-8916; bob.braine@dowjones.com
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
California's workers-compensation insurance
market, plagued by insurance-company insolvencies and escalating medical costs,
faces the prospect of footing part of the bill for Reliance
Group Holdings' downfall. Reliance Group
Holdings, which filed for protection from creditors under Chapter 11 of the U.S.
Bankruptcy Code last week, obtained about 14% of its insurance
premiums from California, its biggest market. That means if the Philadelphia
insurer has trouble paying claims, California is likely to feel it the most.
|
![[Go]](Front-is.gif) Reliance
Files for Bankruptcy Protection, Outlines Plan for Financial
Restructuring (June 13)
|
It couldn't happen at a worse time, particularly
when it comes to workers-compensation insurance.
California's guaranty fund, which has the task of paying claims when an insurer
can't, has had to go to the state's legislature to ask that assessments on other
insurers be doubled to 2% of workers-compensation premiums from 1%, in the wake
of the liquidation of Superior National Insurance
Group Inc. of Calabasas, Calif., only recently the state's second-biggest
private workers-compensation insurer.
Lawrence Mulryan, executive director of the
California Insurance Guarantee Association,
said if the bill passes, the association would have enough to "skate
through the liabilities that we have before us." Reliance's liabilities,
however, aren't part of that equation.
The Pennsylvania Insurance
Department, which last month placed Reliance's insurance
operations under an order of rehabilitation, said last week it expected
Reliance's assets would be sufficient to pay all direct policyholder claims.
Others in the industry are bracing for a liquidation, figuring that Reliance's
books will continue deteriorating, which may mean there won't be enough money
from the assets to cover all claims. "The sense we have is that it's
significantly insolvent," Mr. Mulryan said.
Reliance,
whose problems stem from lax underwriting and fiercely competitive pricing
during an expansion effort during the 1990s, was the seventh-largest writer of
workers' compensation in California during 1999, the latest year for which
figures are available. Reliance, which sold
policies in 50 states with coverage ranging from general liability to
construction defects, had a 3.2% share of California's workers-compensation
business, generating $184 million in premiums during 1999.
![[Chart]](workcomp06212001222344.gif)
Mr. Mulryan said Reliance
has about $365 million in total liabilities outstanding for its California
workers-compensation business. To help cover those obligations, it has $250
million on deposit with the California Insurance
Department, he said. A potential problem is that Pennsylvania regulators are
asking California, as well as other states that have Reliance
money on deposit, to make such deposits available to pay claims as they come in
to the Pennsylvania department. Norris Clark, a deputy insurance
commissioner in California, said the California department hasn't decided on the
request.
The turmoil in California's workers-compensation
market can be traced to 1995, when the state deregulated its
workers-compensation rates. With the elimination of minimum rates, several
carriers battled it out for market share, including California Compensation Insurance
Co., later acquired by Superior National, Fremont General Corp. in Santa Monica,
Calif., and, later, Reliance, says Robert
Mike, president of the Workers Compensation Insurance
Rating Bureau, a non-profit association of workers-compensation companies. Mr.
Mike said he knew as early as 1997 that the companies' prices didn't adequately
reflect rising medical expenses and a rapid escalation in the cost of disability
claims.
The departure of companies such as Superior and Reliance
from the market has many companies turning to California's State Compensation Insurance
Fund, a nonprofit public enterprise that provides affordable workers'
compensation in the state. The state fund writes about 26% of the state's
workers-compensation premiums, and questions have arisen about its pricing
strategy.
Insurance-ratings firm A.M. Best recently
downgraded the fund to single-B-plus from double-B-plus. "Our view is,
given the market conditions and loss-cost trends, that their prices are
inadequate and they're deteriorating [the state fund's] capital position,"
said Matt Mosher, vice president of specialty lines at A.M. Best. The fund
maintains its prices are adequate and it is financially sound with $1.25 billion
in statutory surplus, the cushion above and beyond reserves used to pay claims.
Write to Christopher Oster at chris.oster@wsj.com
Money & Investing
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
Reliance Group Holdings
Inc.'s troubled insurance business, under
the rehabilitation of the Pennsylvania Insurance
Department, should be able to meet all obligations to the corporate customers
who hold its property and casualty policies, but the regulators are delaying
payment of as much as $1.4 billion to insurance
companies that were reinsured by Reliance, a
top regulator said.
Stephen Johnson, deputy insurance
commissioner for the state, said regulators, as they continue to assess the
adequacy of Reliance Insurance
Co.'s claims reserves, are trying to figure out whether they will need to
liquidate the operations. The decision could take six months, he said. The
unit's woes prompted Reliance Group on
Tuesday to file for bankruptcy protection in federal court in New York.
Reliance Insurance's
claims reserves have been dwindling rapidly during the past year, Mr. Johnson
said, as larger-than-expected claims have arrived. To ensure that there are
enough funds to cover Reliance's primary policyholders -- mostly midsize to
large companies across the country, with coverages ranging from workers'
compensation to construction defects -- the regulators are setting aside money
that otherwise would go to insurance
companies that obtained reinsurance coverage from Reliance.
Under a reinsurance contract, an insurer assumes some of the risk of an insurance
policy sold by another company.
Among Reliance's largest reinsurance customers were American
Reinsurance Co.; Empire Fire & Marine Insurance
Co., a Zurich
Financial Services Group subsidiary; and Legion Insurance
Co., according to a filing by Reliance with
state regulators in 1999, the most recent one available.
In addition to selling reinsurance to cover other insurers'
risks, Reliance also obtained reinsurance on
much of its own business. The company's claims reserves also are shrinking
because some reinsurers are dragging their feet in paying Reliance,
Mr. Johnson said.
Reliance Insurance
boosted its claims reserves last year by about $800 million to $3.2 billion,
including a $332 million increase in the third quarter. That left Reliance
with $624 million in statutory surplus, the cushion-above established loss
reserves that a company can draw upon to pay claims. Since then, however, the
company expected to add as much as $400 million more to the reserves, according
to recent Reliance Group filings with the
Securities and Exchange Commission.
Write to Christopher Oster at chris.oster@wsj.com
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
Reliance Group Holdings Inc. filed for Chapter 11
bankruptcy-court protection, the latest development in the stunningly quick
meltdown of what only several years ago was one of the nation's biggest sellers
of property-casualty insurance.
![[steinberg hedcut]](Steinberg_Saul-ET01608152000194845.gif)
Reliance's filing, in U.S. Bankruptcy Court for the Southern
District of New York, listed assets of $12.59 billion and liabilities of $12.87
billion as of Sept. 30. The New York-based company, long controlled by financier
Saul Steinberg, said it reached an agreement with a majority of its bondholders
and bank-debt holders to restructure the company.
The company is the parent of Reliance
Insurance Co., which has been under
increased levels of supervision by the Pennsylvania Department of Insurance
since late summer of last year. The regulators moved the unit closer to a
possible liquidation late last month, placing the unit under an order of
rehabilitation.
The regulators said Tuesday they haven't been able to fully
determine whether Reliance will be able to pay claims to all of its
policyholders. Those holders are mostly midsize to large companies across the
country, with coverages ranging from workers' compensation to construction
defects. "We can't make that assessment at this point," said Art
McNulty, deputy general counsel at the Pennsylvania Department of Insurance.
Reliance's woes reflect both the unique style of its
longstanding controlling shareholder, the famously high-living Mr. Steinberg,
and broader industry problems.
Mr. Steinberg consistently took honors as one of the insurance
industry's highest-paid executives. As its shareholders have since learned, the
expansion strategy that Reliance undertook in the 1990s to help finance both the
lavish compensation and a robust stock dividend came during a period of fierce
competition and falling premium rates. To grab market share, industry executives
said, Reliance underpriced its business, and its losses have mounted in recent
months as a result.
Under terms of the agreement with its creditors, the holders
of Reliance's $237.5 million in bank debt will receive new 10-year notes issued
by a reorganized Reliance Financial Services, a unit of Reliance Group, and 86%
of the unit's voting power. The plan also calls for the holders of $463.5
million in bonds to receive the new common stock and the distribution, following
payment of administrative expenses, of excess cash from Reliance Group.
As for the policyholders, if the insurance unit's claims
reserves prove inadequate, state insurance-guaranty funds would be called upon
to help pay Reliance's shortfall. Those guaranty funds obtain their money by
assessing other insurers operating in their state. How much an insurer would
contribute depends on how similar its business lines are to those of Reliance.
For that reason, rivals such as American
International Group Inc., Chubb Corp. and St.
Paul Cos. would be among those who would pay the biggest share, analysts
said.
Regulators said it could be months before they are able to
decipher Reliance's insurance books. Several factors already appear to have
contributed to Reliance's rapid unraveling in recent months. Analysts said part
of the problem is that policyholders, worried that Reliance might run out of
money, have brought claims to Reliance more quickly than the company or
regulators anticipated, settling for cents on the dollars instead of full policy
limits, in an effort to ensure they obtain at least some payment quickly. Such
quick settlements send money out the door that otherwise would generate
investment income for Reliance.
"In the interest of getting payment from Reliance, they
might be settling for less than their coverage limit," said Eric Simpson,
senior vice president at ratings agency A.M. Best.
Reliance twice last year announced it was strengthening claims
reserves, adding $800 million to boost them to $3.2 billion. The company has
since disclosed that it will have to increase the reserves by an additional $200
million to $400 million, further cutting into the company's so-called statutory
surplus, which is the cushion -- above its established loss reserves -- that a
company can draw upon to pay claims. In September, the most recent time Reliance
listed its surplus in documents filed with Pennsylvania insurance regulators,
the company had $624 million in statutory surplus.
In a sign the cushion was rapidly disappearing, Reliance Group
last month took the extraordinary step of writing off its insurance operations.
In effect, the parent company abandoned any hope of getting any money out of the
insurance operations, analysts said.
Early last month, Mr. Steinberg stepped down as chairman of
the parent company, which he had controlled since 1968.
Reliance stopped writing new insurance policies almost a year
ago, so many of its policies already have expired. Even so, Reliance -- or the
guaranty funds that step in if Reliance does run short of money -- will pay
claims for years into the future. The bulk of Reliance's business was in
liability coverage, under which claims can take years to be resolved and paid.
And under workers' compensation coverage, for instance, an injury might trigger
insurance payments for more than 20 years.
Reliance sold insurance in all 50 states in 1999, with 14% of
its premiums derived in California, followed by New York, 10%, Florida, 8%,
Texas, 6%, and Pennsylvania, 5%.
The Pennsylvania regulators haven't approved the bankruptcy
plan. On Friday, they filed a complaint in a Pennsylvania state court seeking
the return of $95.7 million to the insurance company from the parent.
Meanwhile, financier Carl Icahn, who snapped up Reliance's
bond and bank debt starting in November, isn't part of the group that approved
the restructuring plan. He couldn't be reached to comment.
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
The Pennsylvania Insurance Department put Reliance Insurance,
the insurance operation of Reliance Group Holdings, under an order of
rehabilitation, moving the company one step closer to a possible liquidation
that could force other insurers to foot part of the bill for Reliance's past
aggressive underwriting.
The rehabilitation order gives the department direct authority
to oversee Reliance Insurance's finances and operations, while the Philadelphia
company continues to pay policyholders' claims. In a news release, M. Diane
Koken, Pennsylvania's insurance commissioner, said she took the step to protect
policyholders "as the company has been unable to restore itself to sound
financial condition."
The release said the department would evaluate Reliance
Insurance's financial situation and then determine the viability of a plan of
rehabilitation. Analysts said that plan might include the sale of part or all of
the company's assets to other companies or the rehabilitation of one or more of
Reliance's insurance lines.
"This is the interim step to liquidation," says
Matthew Coyle, director of financial services at ratings agency Standard &
Poor's. "If things don't work out and they can't successfully rehabilitate,
then liquidation is the closure." Mr. Coyle noted, however, that
liquidation is by no means the only possible outcome.
For other insurers, a Reliance Insurance
liquidation is likely the least palatable resolution, as they would be tapped by
various state guarantee funds to pay claims that Reliance couldn't. The
Pennsylvania department said the states with the largest number of Reliance
policyholders are California, New York, Florida, Pennsylvania, Illinois and
Texas. Reliance's major insurance lines included workers' compensation,
commercial-auto and commercial-liability coverage.
Pennsylvania insurance regulators have had a hand in
Reliance's operations since August, when the company agreed to obtain approval
from the regulators for some transactions and to file periodic reports with
them. In January, the state named a deputy insurance commissioner to supervise
Reliance.
Reliance Group Holdings, until recently controlled by
financier Saul Steinberg, has been hobbled by a large debt load, poor
underwriting and bloated management salaries and stock dividends. Earlier this
month, Mr. Steinberg, who purchased the New York company through a leveraged
buyout in 1968, stepped down as chairman of Reliance Group Holdings and the
insurance subsidiary.
Write to Christopher Oster at chris.oster@wsj.com
Money & Investing
Associated Press
PHILADELPHIA -- Saul Steinberg, the 1980s corporate raider and
financier, has stepped down as chairman of troubled Reliance
Group Holdings Inc. and its Philadelphia subsidiary, Reliance Insurance Co.
Mr. Steinberg and George Baker, interim chief executive
officer of Reliance Insurance, resigned on Tuesday, according to Rosanne Placey,
a spokeswoman for the Pennsylvania Department of Insurance.
Mr. Steinberg had stepped down two years earlier as chief
executive officer amid mounting losses at Reliance. The state appointed David S.
Breitling last month to oversee the company.
Reliance Group Holdings and Reliance Insurance aren't related
to the profitable Reliance Standard Life Insurance Co. in Philadelphia.
Reliance Group told the Securities and Exchange Commission
last month it expected an audit by Deloitte & Touche L.L.P. to determine
that its Philadelphia-based insurance division lost $2 billion to $2.2 billion
on commercial- and auto-insurance operations for 2000 and that it would have to
increase its loss reserves by $1 billion to $1.2 billion.
Reliance Insurance's surplus totaled only $624 million as of
its last report to the state Sept. 30, raising the possibility of a
multimillion-dollar shortfall.
Mr. Breitling's appointment in early April came more than
three months after Reliance agreed to accept state supervision at its
Philadelphia and New York offices. Ms. Placey said Howard Steinberg, a Reliance
executive not related to Saul Steinberg, was named acting president.
Joel Weiden, a Reliance spokesman, said permanent replacements
for Messrs. Steinberg and Baker hadn't been named.
Mr. Weiden said Reliance executives didn't expect that the
company would have to be bailed out by other companies through
state-administered funds. Pennsylvania property-and-casualty insurance companies
currently pay a 2% premium surcharge to cover losses from other failed insurers.
Mr. Weiden said the company is discussing plans with the
insurance department to continue in business servicing existing policies but not
writing new policies. Under those conditions, he said, "We believe our
reserves are adequate to pay claims that we receive."
Reliance Group defaulted on more than $500 million in bond and
bank debt last year and was delisted by the New York Stock Exchange. The company
stopped writing new policies, and has sold some businesses to Citigroup
Inc. and other insurers. Reliance stock was listed at 2.2 cents a share Thursday
on the OTC bulletin board.
