Reliance Staves Off Bankruptcy For Now

Reliance Group Holdings Inc. was granted 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 insurers’ 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, 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 ratings, as well.

Things began quickly unraveling for Reliance when Chief Executive Saul Steinberg stepped down in February after 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 coverages; short-term, individual and global medical insurance; dental coverage; group accident; student accident (grades K-12); and high-limit disability insurance business. In 1999, A&H represented less than 10 percent of Reliance’s net premiums written.

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. Recent reports suggest Warren Buffett’s Berkshire Hathaway is preparing a reinsurance deal that would take some of Reliance’s liabilities. While the deal could reassure Reliance creditors, it is not a sure bet.

At the time of this writing, Berkshire Hathaway had not confirmed the possibility of such a transaction.