Leucadia Backs Out of Reliance Deal

July 20, 2000

Leucadia National Corp. terminated its agreement Wednesday to buy Reliance Group Holdings for nearly $1 billion in stock and debt after negotiations with the struggling insurer fell through.

Leucadia backed out of its original acquisition agreement July 13 but remained in discussions with Reliance until last week. The companies were discussing possible alternatives to the agreement penned prior to Reliance selling off chunks of its property/casualty business last month.

Matthew Coyle, an analyst with Standard & Poor’s, said further piecemeal sales are definitely something to watch for, particularly Reliance’s international business.

“At this point, I think it’s fair to assume everything’s on the table,” he said while Leucadia and Reliance were still attempting to rework the deal. Earlier this month, A.M. Best Co. downgraded the financial strength rating of Reliance Insurance Group 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 and is the latest in a string of difficulties experienced by the company over the last several weeks.

Standard & Poor’s lowered Reliance’s rating July 7 because of increasing concerns that the company will fail in its efforts to refinance more than $500 million in debt obligations, which mature in August and November.

Also, the company continues to divest itself of key businesses, which Standard & Poor’s believes weakens the company’s ability to generate the necessary liquidity to meet its ongoing obligations. Another important consideration is that Reliance retains the run-off of reserves on the businesses it has sold.

Meanwhile, Reliance Group Holdings is defending a lawsuit claiming shareholders were harmed by company actions that resulted in falling stock prices. Late last month, the law firm of Wolf Haldenstein Adler Freeman & Herz LLP filed a class action suit on behalf of Reliance Group Holdings security purchasers who bought between Feb. 8, 1999, and May 10, 2000. The action is pending in U.S. District Court in New York.

Along with the company, Saul Steinberg, chief executive officer and director; Robert Steinberg, president and chief operating officer; Howard Steinberg, chief of corporate operations; and Lowell Freiberg, chief financial officer and director, are named as defendants.

The complaint alleges that on March 31, 1999, the defendants, in their financial statement filed with the SEC for fiscal year 1998 operations, claimed the company’s reinsurance contracts were valid, and recovery of the full amount of such coverage was expected.

The lawsuit asserts that the company’s losses for that time period actually exceeded $150 million and the loss should have been reflected as a charge to income. The suit goes on to assert that, in May, the company reported its first fiscal 2000 quarter would see an operating loss of $.31 per diluted share, representing a greater loss than the same quarter 1999. The company’s stock closed that day at $2.62, a decline of more than 40 percent from the period high of $11 per share.

Just prior to the announcement of the suit, Reliance began selling off insurance units piecemeal, first to The Hartford Financial Services Group, then to Kemper Insurance Cos. On June 19, The Hartford announced it had agreed to purchase Reliance’s D&O, E&S and Inland Marine units for an undisclosed amount. The following day, Kemper announced it would acquire the renewal rights to a portion of Reliance National’s book of business.

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