June 21, 2000
The Honorable Diane Koken Dear Commissioner Koken: We are writing with regard to Pennsylvania-based Reliance Insurance Company, and its ability, now and in the future, to satisfy policyholder claims brought against it. Heavily in debt and facing mounting claims from its failed reinsurance activities, Reliance has put itself on the auction block in an attempt to raise the cash it needs to meets its obligations. However, fears that actual future claims will far exceed current estimates have depressed the value of its stock and undermined its ability to raise the funds it needs. In light of the very serious difficulties facing the company, we are interested in learning what you are doing to protect the policyholders of Reliance Insurance Company. We also want to hear your explanation of how Reliance was allowed to engage in the risky practices that now put its policyholders in jeopardy, and as well, what you are doing to prevent insurers from taking these risks in the future. Reliance recently agreed to be acquired by Leucadia National in a stock swap deal that would yield Reliance only $359 million. This sales price represents a market capitalization loss of $1.941 billion since mid-1998 when Reliance’s market value reached a high of $2.3 billion. Justifying this below-book-value sales price for Reliance, Alison Jacobowitz, a Merrill Lynch & Company analyst, commented that "We weren’t convinced that their problems were behind them." (Wall Street Journal, June 13, 2000, "Reliance Group Holdings to Be Sold to Leucadia National for $359 Million", by Deborah Lohse) Indeed, future claims arising from the relationship Reliance has with the Unicover Reinsurance Pool alone are daunting. While Reliance has already agreed to pay certain of its Unicover partners $100 million to settle claims against it, estimates are that the company may be liable for $1 billion in claims if other participants in the Unicover Reinsurance Pool refuse to pay claims. In addition, Reliance’s current liabilities are reported to include more than $8 billion in unpaid claims and related expenses (MotleyFool.com, May 26, 2000, "Reliance: Burned by the Leverage Game", by Brian Graney). The most fundamental responsibility of an insurance underwriter is to manage its losses effectively. Reliance Insurance Company appears to have failed in this, its most fundamental duty. It is, therefore, incumbent on those charged with regulating this industry and protecting consumers to ensure first that claims against Reliance are honored and then to determine why this happened, so that we can prevent it from happening in the future. We have enclosed a number of questions that we hope will contribute to the kind of thorough understanding of this matter we all must have. We ask that your written responses to these questions be delivered to the Committee offices no later than close of business Monday, July 24, 2000. If you have any questions regarding this matter, please contact us, or you may have your staff contact Bruce Gwinn of the Committee staff at (202) 226-3400. Thank you for your assistance and cooperation. Sincerely,
JOHN D. DINGELL RON KLINK
Questions for Commissioner Diane Koken
(1) When did your department first become aware that the Pennsylvania-based Reliance Insurance Company was involved in the Unicover Reinsurance Pool? (2) It has been reported that Reliance assumed responsibility for $1.75 in eventual claims for every dollar of premium it received in the Unicover Reinsurance Pool. How would you characterize this ratio of claims to payments – is it high, low, typical of other reinsurance pools? Please explain. (3) As of January 1999, Unicover handled $2.6 billion worth of reinsurance on $8 billion worth of workers’ compensation policies. When did your department first become aware that the Unicover Reinsurance Pool was in trouble? (4) "All told, more than $500 million in fees and brokerage commissions (including Unicover’s cut) would be drained out of that $2.6 billion of reinsurance premiums." (FORBES, January 10, 2000, "Passing the Trash" by Robert Lenzner and Bernard Condon) How would you characterize the ratio of fees and commissions to reinsurance premiums, in this case – high, low, typical of other reinsurance pools? (5) As you know, Reliance Insurance Company was left "holding the bag" for up to $1 billion in losses, or almost all of its statutory book value, when two of the participants (Sun Life and Phoenix Home Life) in the reinsurance vehicle Reliance managed for Unicover refused to pay claims.
(6) In the Unicover deal, most of the risk was transferred to life insurance companies. Is it common practice for life insurance companies to reinsure workers’ compensation policies even though such policies are underwritten by property and casualty insurers? (7) In response to the problems with Unicover, the insurance commissioner in Connecticut has prohibited life insurance companies from participating in workers’ compensation reinsurance pools. Has your department taken similar action? Please explain. (8) It has been reported that a PaineWebber analyst, Alice Schroeder, said of the Unicover failure, "This is shaping up to be one of the worst scandals in the history of the [insurance] industry." (FORBES, January 10, 2000, "Passing the Trash" by Robert Lenzner and Bernard Condon)
(9) In response to the question "Did Unicover do anything wrong?", the authors of the above-referenced article in FORBES said, "This much is clear: For a small, young firm, Unicover had extraordinary powers over the handling of reinsurance on $8 billion of insurance. It was, among other things, the manager of a pool of five companies and was able to underwrite, price, quote, bind and issue contracts of reinsurance on behalf of the pool."
(10) According to the July 25, 1999, edition of IBNR Insurance Weekly, an off-shore managing agent, Centaur Management in Bermuda, was responsible for getting Sun Life and Phoenix Home Life involved with the Unicover Reinsurance Pool.
(11) According to reports, Leucadia National has made an offer to buy Reliance Group Holdings (parent of Reliance Insurance Company) in a stock transfer that would give the company’s current shareholders $2.88 for every share of their stock, even though the current book value of Reliance Group stock is nearly ten dollars a share.
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