RELIANCE’S NEGATIVE SURPLUS IS NEARLY $3 BILLION

HARRISBURG, Pa. (BestWire) - Assets of the failed Reliance Insurance Co. trail the company's outstanding liabilities by nearly $3 billion, and the gap could grow even wider if the company fails to covert a significant portion of its $3.9 billion in reinsurance recoverables, according to the latest filings by the Pennsylvania Insurance Department. 
 
The largest property/casualty company ever to be liquidated in the United States, Reliance was placed in receivership by the department in May 2001 after the company admitted to massive losses. According to the department's quarterly "report of the liquidator" filing with Commonwealth Court Judge James Gardner Collins, the company has total assets of $5.9 billion and $8.7 billion of liabilities, of which $6.6 billion are related to direct business losses and loss-adjustment expenses, and $1.2 billion are related to losses on assumed reinsurance business. 
 
The insurance department's previous estimate of Reliance's negative surplus--the difference between liabilities and assets--had been $1.2 billion (BestWire, May 15, 2003). 
 
Through the first nine months of 2003, the company was able to make reinsurance collections of $133.5 million, bringing the total collected to date to $518.7 million. However, the department predicted in the report that Reliance could have trouble trying to collect on the remaining $3.9 billion in recoverables, for which the company holds $1.2 billion in collateral as security. 
 
"Reinsurer financial strength is a problem and will continue to be a major concern for the duration of the liquidation proceedings," the department wrote. "Reliance has dedicated resources to monitoring the financial condition of its major reinsurers, and where possible, will attempt to settle its overall exposure with distressed companies through commutation. However, significant write-offs for uncollectible reinsurance are expected." 
 
The shortfall is expected to be covered by cutting the claims paid to large commercial property and liability policyholders, though smaller claims on workers' compensation and personal lines have continued to be paid in full with the assistance of nearly a dozen state guaranty funds across the country, according to the filing. The department is also seeking the recovery of $55 million in preferential payments and allegedly fraudulent transfers that were made by Reliance. 
 
However, a number of state guaranty funds filed a lawsuit in July asking to be granted access to money paid to Reliance as deductibles due from policyholders. Reliance didn't withhold the deductibles when it paid claims; instead it was reimbursed for the deductible amount later by the policyholders. An attorney for the state funds estimated they already had stepped in to pay about $875 million in Reliance claims (BestWire, July 7, 2003). 
 
It has cost the department $10 million a month to continue running Reliance, including $4 million in salaries and benefits, according to the filing. Having laid off more than 800 of the company's 1,255 employees, the state had continued to retain slightly more than 400 employees at a Reliance location in Philadelphia and another in New York, but the claims staff has shrunk through attrition to only 177. 
 
The quarterly reports are issued in conjunction with several lawsuits currently before Collins that were filed in 2002 by Pennsylvania Insurance Commissioner M. Diane Koken. The suits accuse Reliance Group Holdings Inc.'s former chairman, Saul P. Steinberg, and 17 other directors and officers of breach of fiduciary duty and professional negligence for causing Reliance to fail (BestWire, June 26, 2002). Before Reliance was placed in rehabilitation, Steinberg was paid more than $3.6 million in severance, bonuses and "consulting" fees. 
 
(By R.J. Lehmann, associate editor: raymond.lehmann@ambest.com)