Accounting Differences Essay Research Paper General Comments — страница 4

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item clouding the financial condition of Reliance group is was the potential loss surrounding what is referred to as Unicover. Unicover was a program administered by Reliance National where Insurance policies were written on Reliance paper (issued by Reliance) and the risk was 100% reinsured. For this, Reliance National would receive substantial fees, without taking any risk. Workman’s compensation insurance has two basic components, the wage loss component and the health insurance benefits. The idea was to separate these two risks and sell them to separate re insurers. The Health portion of the risks were sold to Life and Health companies and it soon became apparent that these risks would have combined ratios far exceeding any ratio in which these companies could make a

profit. Despite having legally binding re-insurance contracts, these insurers claimed they were mislead when they agreed to reinsure the risks and sought to void the reinsurance contracts. If they were successful, Reliance would be responsible for an estimated $1.1 billion in future claims. While Reliance’s position is they have legally binding contracts with these re-insurers, they cannot afford the long legal battle that would subsequently erupt. Having this cloud over the financial condition of the company influenced A.M. Best’s review of the company. In the first quarter of 2000, Reliance settled the Unicover claim for approximately $100m. -Inside information. According to sources we are not at liberty to disclose, in order to maintain the A- rating, Reliance Group has to

raise enough capital to restore the balance sheet to the pre reserve adjustment strength. With Unicover and the poor results in the third quarter, that would mean they would have to raise about $400m. (Important to note here that Reliance has yet to suspend the quarterly dividend that costs approximately $35m per year and that the Steinberg family owns over 40% of the common stock). Reliance Group Holdings has delivered very poor. The fall out has been substantial. The entire management of Reliance National has been fired. Robert Steinberg was forced out as president and Chief Operating Officer and an outside president was brought in to run the company. - More Inside Information. These results potentially cost Saul Steinberg the company he bought in a leveraged buyout when he was

28 years old. Unfortunately for the shareholders, none of the 14 companies that review Reliance were apparently willing to take on the risk in Reliance National. In short, these potential suitors are not convinced that all the losses have been adequately reserved. As management significantly influences losses for reserves, if investors do not have faith in that management, they have no basis of support for the numbers produced by the accountants. Reliance Group announced on February 28, 2000 the sale of their one consistently profitable profit center, Reliance group holdings for $xxxxm. This sale will provide the company with the capital required to maintain the A- rating from the A.M. Best Company. Bibliography Travelers Property and Casualty Annual Report 1998 Reliance Group

Holdings Annual Report, 1998