NEW YORK-Reliance Group Holdings Inc. has filed for bankruptcy protection only days after Pennsylvania insurance regulators placed its Reliance Insurance Co. operating unit in rehabilitation and sued for control of the parent company's cash assets.

Reliance Group and another subsidiary, Reliance Financial Services Corp., filed for Chapter 11 protection last week, saying they have reached an agreement with a majority of the parent company's bondholders on a restructuring plan.

Under the plan, holders of $463.5 million in Reliance Group senior debt would receive 100% of the stock of the reorganized Reliance Group and a minority stake in Reliance Financial. Reliance Group's bank lenders, owed about $265 million, would receive the majority of Reliance Financial's stock and new Reliance Financial 10-year notes.

Although the plan calls for Reliance Financial to pay interest on the 10-year notes from dividends it may receive from Reliance Insurance, Reliance Group "does not expect to receive any dividends (from Reliance Insurance) in the foreseeable future," according to a bankruptcy court filing by George E. Bello, president of Reliance Group.

Roughly half of Reliance Group's bondholders have approved the deal. The Pennsylvania Insurance Department, however, has not yet approved the plan. The department placed Reliance Insurance in rehabilitation June 4 and must approve any dividends from the insurer.

Last Monday, Pennsylvania regulators sued Reliance Group in a Pennsylvania court for an order that would place the parent's cash assets in trust. The complaint charges that Reliance Group was notified in April 2000 that it would receive a $45 million tax refund for the previous year. Last June, the parent also collected $50 million from Reliance Insurance for projected 2000 tax liabilities that did not emerge, said Art McNulty, the Insurance Department's deputy general counsel.

Reliance Insurance should recover this cash, regulators argue. Reliance Group, though, maintains that the Pennsylvania department should have only an unsecured contractual claim against the bankruptcy estate, according to Mr. Bello's court filing.

Reliance Group's Chapter 11 filing is expected to stay the litigation. Pennsylvania regulators have not determined whether they will ask the bankruptcy court to lift any stay for its case, Mr. McNulty said.

Meanwhile, Pennsylvania regulators will continue to delay payment of about $1.4 billion in assumed reinsurance claims pending reviews by Ernst & Young and the Insurance Department of Reliance's reserve adequacy. Reliance itself had put off these payments before the rehabilitation order, Deputy Commissioner Stephen Johnson said.

Under Pennsylvania law, payment of administrative costs, direct insurance policyholder claims and Internal Revenue Service claims take priority over reinsurance claims, and regulators must assess whether Reliance reserves will cover the higher priority claims, he said.

There have been no delays paying direct policyholder claims, though litigation over claims has been stayed by the rehabilitation order.

In its Chapter 11 filings, Reliance Group reported total assets of $12.6 billion and liabilities of $12.88 billion as of Sept. 30, 2000, including Reliance Insurance. Reliance Insurance suffered an underwriting loss of $1.9 billion to $2.2 billion for year-end 2000 and is expected to record an underwriting loss of $110 million to $150 million for the first quarter of 2001, using generally accepted accounting principles, according to court filings.

Reliance Group expects to write off its investment in Reliance Insurance as of Dec. 31, 2000, though, and the holding company's own first-quarter loss will total about $30 million, mostly reflecting interest on outstanding debt and corporate overhead, the filings report.