Highlands Insurance Group to Restructure; Stop Writing Policies

As the Highlands Insurance Group Inc. attempts to restructure itself and return to profitability, it has announced plans to stop writing any new or renewal insurance policies, and is considering selling business or transferring renewal rights to third parties as soon as practical and as permitted by insurance law.

Highlands made the announcement in early December. Last month, the Lawrenceville, N.J.-based company submitted a restructuring plan to the Texas Department of Insurance (TDI) that included ceasing its personal lines in that state. Last year, the company wrote $67.7 million in premiums through 113 agencies in Texas.

Five regional offices—in Lawrenceville; Des Moines, Iowa; Houston, Texas; Raleigh, N.C.; and Woodland Hills, Calif.—have been closed, and two field support centers were established to process their remaining busness.

Various subsidiaries across the country will be affected, including: Highlands Underwriters Ins. Co.; Highlands Casualty Co.; Aberdeen Ins. Co.; Highlands Lloyds; Northwestern National Casualty Ins. Co.; Pacific National Ins. Co., and Pacific Automobile Ins. Co. Two of these units, Northwestern National and its subsidiary NN Insurance Company, entered into a stipulation and order with the Wisconsin insurance commissioner in October that requires prior approval of transactions with affiliates, including dividends and tax sharing payments.

Highlands has also agreed to obtain prior approval from TDI for any transaction of $1 million or higher.

Now, Highlands intends to reduce its overall premiums from more than $400 million this year to less than $200 million in 2002 as it focuses on retaining profitable business and managing expenses. The company also intends to cut its agents from 2,200 to 500 nationwide, and has already reduced 190 positions.

Also in November, A.M. Best Co. downgraded the insurer from “B” (fair) to “C” (weak), citing weak capitalization, poor operating performance, regulatory constraints, and its parent Highlands Insurance Group’s significant near-term debt servicing requirements. A.M. Best also noted that the group’s poor underwriting results and significant dividend requirements have caused substantial declines in its surplus base—about 51 percent—since 1998.

Highlands reported a third-quarter net loss of $30.5 million, compared with a net income of $3 million in the third quarter of 2000. The loss amount includes $27.6 million in reserve strengthening. The company also revealed it was not in compliance with loan covenants on $49 million in debt, which matures in April 2002. Lenders agreed to waive default provisions until Dec. 31. These lenders hold Highlands stock as collateral, and may not agree to refinance or grant further waivers. This could trigger additional defaults on $60.1 million in convertible debentures.

The group’s financial condition has prompted state insurance regulators to limit dividend payments to $1 million in 2001, which does little to alleviate the company’s $4 million annual interest obligations.

The company’s three top officers —chairman and CEO Willis T. King, Jr., CFO Charles J. Bachand, and board member Rufus J. Williams, Jr.—resigned in early November, after which new officers were elected: Stephen L. Kibblehouse as CEO and general counsel; John W. Cowley as president and COO; Albert J. Marino as CFO and treasurer; and Georgean M. Wardzinski as vice president and secretary.

Topics Texas