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Reliance: Insurance Commissioner 's Statement

Reliance Insurance Company Rehabilitation
Official Statement by Pennsylvania Insurance Commissioner
M. Diane Koken
Tuesday, May 29, 2001

The decision to take over a troubled company, particularly one the size and scope of the Reliance Insurance Company, is reached only after careful, painstaking review of the relevant facts. The foremost priority in our decision to petition the court to place the Reliance Insurance Company under an Order of Rehabilitation was the preservation of the Company's assets for policyholder protection. This Order of Rehabilitation puts numerous policyholder protections in place and gives the Rehabilitator the opportunity to perform an independent, in-depth financial analysis. In addition, the Order of Rehabilitation places the Company under the statutory control of the Pennsylvania Insurance Department.

The Insurance Department has put together a top-notch rehabilitation team that can effectively implement the Commonwealth Court's Rehabilitation Order. This rehabilitation team, comprised of experienced insurance executives and rehabilitation experts, already is on site and in place at this hour. They will be on site when the doors open at Reliance tomorrow, and they will remain on-site as necessary. The team will be responsible for taking control of the Company, securing its assets, identifying rehabilitation issues, analyzing the Company's financial condition and determining in the weeks and months ahead whether a plan of rehabilitation is feasible, or if liquidation is necessary.

The Reliance Insurance Company was founded in Philadelphia in 1817. In 1968, Saul Steinberg purchased the Company through a leveraged buy-out. As recently as three years ago, the company appeared to be in excellent financial condition. The Reliance Insurance Company's 1998 annual financial statement, submitted in March of 1999, reflected the highest surplus in the Company's history at an estimated $1.7 billion. However, when Reliance filed its 1999 Annual Statement in March of 2000, its capital level was below standard, as determined using Risk Based Capital (RBC) methodology. The Company's level of capital indicated it was at "Company Action Level," a category requiring increased regulatory monitoring.

Risk based capital requirements were enacted here in Pennsylvania as Act 40 of 1997. Risk factors specific to a company's operations, assets, liabilities, loss reserves and other business risks are used in the RBC methodology to determine the adequacy of an insurer's capital. RBC is a powerful tool in the regulator's solvency monitoring process and is used to identify companies that may be in a weakening capital position. In the case of Reliance, RBC provided us an early warning that increased financial monitoring was warranted.

The Insurance Department ordered a financial examination of Reliance Insurance Company on March 2, 2000 -- one day after the 1999 Annual Statement was filed. We also requested an action plan from Reliance to address their declining capital position. The Insurance Department worked aggressively to address the Company's worsening financial condition by:

  • hiring an independent outside actuary to review the Company's reserves;
  • reaching two agreements to increase the company's financial reporting requirements;
  • instituting an order of supervision, which gave the Department additional regulatory oversight;
  • installing an on-site representative to oversee the run-off of the Company's book of business;
  • and now, the current Order of Rehabilitation.

The Department also closely monitored actions taken by the Company to increase capital and mitigate further financial deterioration. These actions included the sale of the Company's surety business; the sale of renewal rights to most of its insurance business; the discontinuation of writing most new or renewal business; and the outsourcing of the Company's claims and information technology operations.

The Company, after years of writing commercial accounts, was now seeing larger and more frequent claims in certain types of high-risk business, claims that, in turn, required an increase in loss reserve levels. The Company's A. M. Best financial rating was downgraded in June 2000, in part because of the substantial debt of the parent company, Reliance Group Holdings, Inc. This reduction in financial rating resulted in the loss of the Company's brokered commercial business. Additionally, the Company's Unicover pooling arrangement was a failure. All these factors combined with others to sound the death knell for the future financial stability of Reliance.

Aggressively working with financially troubled companies is a critical part of our regulatory role. In the majority of cases, our work can help put a company back on a stable financial course. In the case of Reliance, however, the Company's financial resources were depleted to such a degree that they could not be appropriately replenished. This necessitated our Order of Rehabilitation.

The Insurance Department will continue to evaluate what went wrong at Reliance, utilizing the additional powers granted to us by the Order of Rehabilitation. Clearly, there are numerous causal factors to consider in this Company's financial decline. And clearly, certain corporate decisions and risk-taking events, decisions and events that were not subject to regulatory oversight or review, combined to create grave financial setbacks from which the Reliance Insurance Company could not recover.

We also will carefully review our own oversight, to see what lessons government regulators can learn from Reliance's fall. The business of insurance is complex, and that complexity will only increase as the sectors of the financial-services marketplace continue to converge. As regulators, we recognize this. We have acted to enhance our scrutiny of loss reserves and reserving practices, and to increase our monitoring of the financial condition of holding companies. We urge the National Association of Insurance Commissioners (NAIC) to continue to take steps to adopt a model framework for improved monitoring of holding company solvency.

We believe that the Order of Rehabilitation is in the best interests of Reliance Insurance Company and its policyholders. My rehabilitation team will focus fully on securing the company's assets, stabilizing the Company's financial condition and securing and maintaining the infrastructure that is needed to continue the Company's remaining day-to-day operations. To assure those matters are progressing as needed, I will travel tomorrow to Reliance's primary offices in New York and Philadelphia, to meet with employees and to receive an update from our rehabilitation consultants.

I also wish to re-assure the Company's many policyholders that we will be responsive to their service needs. It is the Department's intention to have Reliance Insurance Company continue to pay claims under policies as we evaluate the current situation.

I am committed to take any and all steps necessary to protect and recover the assets of the Reliance Insurance Company for the benefit of all policyholders.

Thank you.​​​