HARRISBURG, Pa.-The widening impact of the terrorist attack on the World Trade Center now includes hastening the slide of Reliance Insurance Co. into liquidation.

The Pennsylvania Insurance Department last week gave up on its four-month effort to rehabilitate Reliance, placing the insurer in liquidation after concluding that it was insolvent by $1.05 billion as of last March 31 and will run out of cash to pay claims before the end of this year.

Among the factors triggering the liquidation, Pennsylvania regulators cited a further slowdown in reinsurance collections, the insurer's main source of cash, since the Sept. 11 catastrophe. Reliance brokers Aon Corp. and Marsh & McLennan Cos. Inc. had offices in the Trade Center towers.

"The company has experienced a liquidity problem by a slowdown in payments due from its reinsurers," Pennsylvania Insurance Commissioner Diane Koken said in a statement. "This was exacerbated by recent events at the World Trade Center that have made collections more difficult."

"Reinsurance collections since Sept. 11 have slowed up substantially," agreed Dale Stephenson, president of the Indianapolis-based National Conference of Insurance Guaranty Funds. Mr. Stephenson said he had expected Reliance to be liquidated eventually but was surprised by the speed with which the liquidation followed the terrorist attack.

The liquidation order triggers coverage of Reliance claims by state guaranty funds, which Mr. Stephenson said will be easily able to handle the losses. Reliance will pay roughly $2 billion in claims in 2001 and "substantially less" next year, the NCIGF estimated. While saying that he has not yet projected the guaranty funds' exposure to the ongoing claims, Mr. Stephenson noted the funds collectively can assess insurers up to $4 billion a year.

Reliance's financial condition was revealed in recent weeks to be far worse than believed when the insurer entered voluntary rehabilitation May 29 (BI, June 18). At that time, the insurer had not yet filed a year-end 2000 financial statement but reported a $220 million deficit in policyholder surplus as of Dec. 31. Reliance finally produced an unaudited 2000 statement two months ago showing surplus of negative $730 million, and a first-quarter 2001 report on Sept. 29 showed that the insolvency had widened to $1.05 billion as of March 31, court filings say.

Of $8.81 billion in assets as of March 31, $5.91 billion, or 67%, consisted of reinsurance recoverables, including $4.67 billion recoverable on direct insurance business, $852.9 million on paid losses and expenses and $385.8 million on assumed reinsurance business, court filings show.

Reinsurance recoveries also represented about 65% of the insurer's cash receipts, but those recoveries have slowed since the start of the year, and the Sept. 11 attack made things worse, regulators say.

Aon Re Worldwide acted as Reliance's reinsurance broker, while other Aon units provided premium collection and third-party administration services, an Insurance Department spokeswoman said. Marsh also collected premiums, while Hartford Insurance Co. acted as a Reliance TPA and SCOR U.S. Corp. was a Reliance reinsurer. All had offices in the World Trade Center.

Among Reliance's more than 1,000 reinsurers are many that face huge losses from the attack, which may slow Reliance's own recoveries in the future, the spokeswoman said.

For September, when reinsurance recoveries fell short of expectations, Reliance's paid losses and operating expenses totaled more than $111 million, while its cash receipts, including some asset sales, totaled only $80 million, leaving a $31 million shortfall, court filings report. Regulators expect even larger deficits for the rest of this year as reinsurance recoveries slow further and claims-including some arising from 170 lawsuits against Reliance policyholders scheduled for trial by the end of November-increase.

Meanwhile, Reliance faces other problems. One of its largest assets, for example, is a block of 11.2 million shares of Symbol Technologies stock that was worth $285.3 million as of March 31 but has since plummeted to less than half that value. Regulators are also trying to recover $95 million in tax refunds they say Reliance is owed by its parent, Reliance Group Holdings Inc., which is in Chapter 11 reorganization.

The Pennsylvania Department will notify Reliance policyholders within the next several weeks of claims-filing procedures and deadlines, which cannot be less than a year after notice of the liquidation order, the spokeswoman said.