Reliance Downgraded by A.M. Best

July 17, 2000

A.M. Best Co. has downgraded the financial strength rating of Reliance Insurance Group, New York, to B (Fair) from B++ (Very Good). The property/casualty group’s rating remains under review with developing implications.

The downgrade applies to the group’s 13 domestic members, led by Reliance Insurance Co. The downgrade into A.M. Best’s Vulnerable category follows a review of the group’s financial condition, its strategic shift from active operations to an asset sale/ run-off mode for many of its units and today’s announcement that Leucadia National Corp. is unwilling to proceed with the current terms of its previously announced acquisition of Reliance.

The downgrade is consistent with risk factors related to the potential non-completion of the Leucadia transaction cited in A.M. Best’s June 8 rating release. The Vulnerable rating reflects A.M. Best’s belief that Reliance will not be able to refinance its bank facility and public debt maturing in the latter half of 2000. Further, as management effectively positions the insurance group as more of a run-off entity, there is increased uncertainty related to its loss-reserve adequacy and reduced liquidity margin stemming from negative cash flows that have been exacerbated by the significant fall-off in premium volume recently.

In a separate rating action, A.M. Best downgraded the A- (Excellent) financial strength rating of Reliance National Insurance Co. (Europe) Ltd. to B (Fair) and revised its under review status from negative to developing. The action, which equalizes its ratings with its domestic affiliates, is largely based on the poor financial condition of its parent–Reliance Group Holdings, Inc.

The ratings will remain under review pending further developments related to an alternative Leucadia deal structure and/or definitive debt restructuring plan with debtholders. Meanwhile, A.M. Best will continue to monitor Reliance’s financial condition and will be reviewing stress scenario analyses related to the group’s capital and liquidity margin.

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