October 3, 2001
State will liquidate its assets and try to pay off $5 billion in claims and liabilities. Experts say insurance consumers will pay higher premiums.
By Joseph N. DiStefano
Philadelphia-based Reliance Insurance Co. has been declared insolvent by the Pennsylvania Insurance Department, which will liquidate the giant business insurer and attempt to pay at least $5 billion in claims and other liabilities.
The company's financial failure comes as U.S. property insurers are bracing for at least $20 billion in losses due to the destruction of the World Trade Center -- a disaster that is expected to force some smaller insurers out of business and force insurance premiums for homes, businesses and autos, which have already been rising, still higher.
"You and I are going to pay for this," said Homer Rhule, head of the Pennsylvania Property and Casualty Insurance Guaranty Association, one of 51 U.S. bailout funds that collect money to pay failed insurers' claims by assessing solvent insurers, who typically pass the costs to their customers in the form of higher property, auto and workers' compensation premiums.
The decision by Pennsylvania insurance commissioner Diane Koken ends the state's attempt to "rehabilitate" Reliance, which suffered losses of up to $2 billion last year, according to financial statements filed by its former owner, New York-based Reliance Group Holdings.
The state took control of Reliance last spring, ending 30 years of control by New York investor Saul J. Steinberg.
Analysts blame Reliance's collapse on the massive debts the company
incurred during Steinberg's management and on an ill-fated aggressive expansion
during the 1990s, in which the company wrote billions of dollars in high-risk
policies at bargain prices, then found itself responsible for massive unexpected
October 3, 2001
Reliance Insurance will be unable to pay some of its $10 billion in liabilities, state Insurance Commissioner Diane Koken said.
By Joseph N. DiStefano
The Pennsylvania Insurance Department has abandoned its attempt to reorganize Reliance Insurance Co., and is shutting the Philadelphia insurer, which faces a deficit of more than $1 billion and losses of $2 million to $4 million a day.
Reliance will be unable to pay some of the $10 billion in claims, debts and other liabilities owed by the insurer and its affiliates in all 50 states, state Insurance Commissioner Diane Koken said.
The state's most recent estimate of the deficit is $1.05 billion; that number is expected to rise.
"You and I are going to be paying this," said Homer Rhule, head of the Pennsylvania Property and Casualty Insurance Guaranty Association.
Part of the deficit will be paid by Rhule's fund and 50 other U.S. property and workers' compensation guaranty funds. These funds bail out failed insurers from money collected with fees imposed on solvent insurance companies - which typically pass the expense along to homeowners, drivers, employers, and other policyholders by raising premiums.
Rhule's fund is already imposing its legal maximum 2 percent surcharge on Pennsylvania insurers because of previous failures.
To cover the rest of its deficit, Reliance will likely be forced to renege on some debts to its contractors, and to cancel some of its contracts to provide reinsurance for other insurers.
"The financial condition of the company was clearly worse than what we had thought when we took over" in April, Koken said yesterday after securing an order to liquidate Reliance from Common Pleas Court Judge James Gardner Colins in Philadelphia.
Colins' order stops legal claims involving Reliance's 75,000 policyholders for the next 90 days. But Koken said the state would attempt to speed settlement of workers' compensation and personal-injury claims.
Reliance canceled its remaining policies, giving its remaining customers - mostly businesses - up to 30 days to find new coverage.
Koken thanked the company's 250 remaining Philadelphia workers and the lawyers she has contracted to run the company, and asked for their help in liquidating its assets.
The company's financial failure comes as U.S. property insurers are bracing for at least $20 billion in losses from the destruction of the World Trade Center, which is expected to increase insurance premiums for homes, businesses and other property.
Koken said the World Trade Center attack had crippled operations at big reinsurance companies, which Reliance had counted on to help pay its claims. That, plus court reversals in her attempts to seize Reliance funds in other states, speeded Koken's decision to liquidate Reliance.
Pennsylvania took over Reliance in April as Saul P. Steinberg, an investor from New York, relinquished control of the company, whose dividends and executive-pay packages had funded his career as a multimillionaire stock speculator, arts patron, and Wharton School benefactor since he bought Reliance in 1968.
Former Steinberg aides blame the company's financial collapse on the crushing debt load that Steinberg imposed on Reliance, along with the failure of his aggressive attempts to build up the company in the 1990s by offering high-risk insurance policies at bargain prices.
Starting in 1998, the company reported massive losses in workers' compensation, environmental and construction policies and business arrangements.
After Koken's department cut Reliance's dividends to try to stanch the losses, Steinberg's holding company, Reliance Group Holdings Inc., defaulted on its bonds and bank debt and was delisted by the New York Stock Exchange last year.
But Reliance Insurance continued to bleed money. In April, Reliance estimated its deficit through Dec. 31, 2000, at $220 million, according to court papers made public yesterday.
But by August, state analysts had boosted that figure by half a billion dollars as new claims came in and Reliance investments in such companies as Symbol Technologies Inc. declined, according to the documents.
On Sept. 28, Koken said, a new analysis by the accounting firm Ernst & Young showed that the deficit had grown to $1.05 billion by March 31, 2001. Expenses since then have risen, while income from reinsurers that help Reliance pay its claims has fallen sharply.
Reliance's troubles have renewed calls - by Maurice Greenberg, chairman of American International Group, among others - for replacement of the current network of state insurance regulation by a national regulator.
But Koken said the Insurance Department had responded appropriately
to Reliance's problems and remained "up to the challenge."
Major 2002/2003 Insolvencies
During 2001/2002 several new multi-state
insolvencies were initiated.There
are also others, not listed, with an impact on only one or a few states.The
major new insolvencies are: