A.M. Best Downgrades Reliance to C

August 17, 2000

A.M. Best has downgraded the financial strength rating of Reliance Insurance Group, New York, from B to C and revised its under review status from developing to negative. The action follows the release of second-quarter earnings and a review of stress scenario analyses related to the group’s capital and liquidity margin subsequent to its strategic shift from active operations to an asset sale/run-off mode for many of its units.

Despite the fact that the group’s runoff margin appears adequate to meet its current obligations to policyholders, the financial strength of the group is weak. The vulnerable rating reflects the increased uncertainty related to its loss-reserve adequacy as demonstrated by the substantial reserve charge taken in the second quarter of 2000, its second in two years.

Further, the company has a reduced liquidity margin stemming from negative cash flows that have been exacerbated by the significant fall-off in premium volume recently. Further, the C 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.

If Reliance cannot reach an acceptable agreement with its debtholders, there is an increased likelihood that Reliance Group Holdings will file for federal bankruptcy protection. Since the vast majority of the group’s assets and liabilities are held by the statutory entities, A.M. Best believes there would then be an increased probability of regulatory intervention. In a separate action, the B (Fair) financial strength rating of Reliance National Insurance Co. (Europe) Ltd. has been downgraded to C (Weak) and remains under review with negative implications.

This action, which equals the rating of its domestic affiliates, is largely based on the weak financial condition of its parent, Reliance Group Holdings Inc.

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