Fear and Loathing at Reliance

Commentary By Peter van Aartrijk Jr.

Come on, people, he’s personally lost $1 billion as Reliance Group’s majority shareholder. I couldn’t unearth any sorrow.

Former Reliance employees are unhappy with their old CEO. Investors have been feisty since last year; the stock absolutely has been hammered. The rating agencies are nervous. Competitors are eyeing book transfers. Brokers are cranky-they hate these transitions because it’s extra work in the middle of the contract, and they often lose customers to boot. How did it come to this?

The company was heavily leveraged for years. The story of Steinberg’s flashy lifestyle is well chronicled. There were losses in construction, marine, aviation and toxic-waste transportation lines.

The failed Unicover workers’ comp reinsurance pool resulted in a $117-million charge, although it wasn’t just the Steinbergs who were snookered on that business. What a long, strange trip this has been for the Steinberg family, and it’s getting uglier.

The deal with Leucadia National Corp., considered a mini-Berkshire Hathaway, is supposed to make things better. The stock swap arrangement is akin to a fire sale at $293 million. Leucadia plans to refinance all the Reliance debt, but apparently it didn’t impress A.M. Best Co.

Best reduced Reliance’s rating to a “B++” from “A-.” Best may call it “very good” or “secure,” or both, but much of the world doesn’t consider it a usable rating. In huge chunks of ratings-sensitive areas, Reliance is out of the box for major brokers. This includes certain financial products, D&O, E&O and financial institutions.

It’s tough to do business with government entities and banks, as they ordinarily require at least an “A-” rating. So independent agents might be left with a traditional “‘B++’ agency company.” That’s a shame for such a venerable worldwide brand name.

“Companies are calling us to say, ‘We’ll take your book [with Reliance],'” one broker said. “It’s blood in the water. Not a pretty sight.”

The company is being carved up like a Thanksgiving turkey. The Hartford struck early, taking Reliance’s D&O, E&S and inland marine lines-plus a bunch of employees.

From Reliance’s perspective, Best’s timing was dreadful. The downgrade came just a few weeks shy of the scheduled June 30 closing of due diligence in a buyout with Leucadia National Corp. (Due diligence would be the part where the suitor-to-be digs through all those yucky files.) Why did Best officials take the downgrade? Were they unimpressed by year-do-date results? Worried about more losses from run-off business? Pressured from the outside? Felt like sticking it to the Steinberg brothers? Only their hairdressers know for sure. They did say they didn’t expect Reliance’s actions to sell profitable books (such as surety, to Travelers), cut expenses (sell the grand piano) or refinance debt (Leucadia deal) would help matters.

In a statement, Reliance said it strongly disagreed with the Best downgrade. “Reliance is actively pursuing a range of alternatives to further strengthen its financial position,” the company said. “These include reinsurance that would eliminate unprofitable run-off business from its balance sheet, reinsuring certain ratings-sensitive business and asset sales.”

Standard & Poor’s held the Reliance rating at “A-,” but officials there say they’re “closely monitoring” the situation. “Our outlook is still developing,” said Matthew Coyle, a director in the S&P ratings group. With the recent sale of business to The Hartford, will Leucadia walk away? “Our concern-and one that people need to keep their eyes open for-is if Leucadia decides to pull out of the transaction,” Coyle added. “We don’t know if they’re going to do that, but if they do, that’s a huge negative.”

A broker source said the sale to Leucadia-if it goes through-“gets the Steinbergs out of the way, who were taking out way too much dough for themselves. I do not feel the least bit of sympathy for that family.”

Lest anyone get nervous about an insolvency, it ain’t gonna happen. This is not a $300-million company, like a Mission. Reliance has $1.6 billion in surplus, and there aren’t many $1.6-billion companies with a “B++” rating.

For the record, phone calls to Reliance troops in the field dutifully were referred to home office. Attempts to reach the big cheeses there were unsuccessful. (We’re pretty busy these days.) “When you figure out what the hell happened there, let me know,” said a Reliance home office executive who left last year.

Peter van Aartrijk, a 20-year insurance industry veteran, owns a communications firm specializing in the independent agent distribution channel. To comment on this column, send e-mail to ijwest@insurancejournal.com.

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