Leucadia National Corp. is pulling out of its planned deal to buy beleaguered New York insurer Reliance Group Holdings, as the insurance company's stock spirals downward.

On May 30, Leucadia agreed to buy Reliance for $293 million in stock, or $2.55 per share. Because Reliance was trading at 50 cents per share Friday and had a market capitalization of around $57 million, Leucadia announced Friday that it would not proceed on the acquisition on the agreed terms. At the time of the initial agreement, Reliance was trading at $2.375. "With Reliance trading where it is, the original proposition was not going to happen," said Keith Trauner, an analyst for Fairholme Capital Management in Short Hills, N.J. "Obviously, the market was saying it shouldn't happen at that price."

In a press release issued by Leucadia, the New York company said "the parties are discussing alternative transactions." Neither company would comment further.

"The deal was always contingent on due diligence, and Leucadia had a 30-day window in which they looked over the books and decided against moving forward," said James Auden, senior director for Fitch Inc. in Chicago.

Mr. Trauner said he doubts any other company will swoop in and buy Reliance on the cheap.

"At this point, the rest of the industry is going to assume it's a black hole," Mr. Trauner said. He added that Leucadia could take working control of the reorganization of Reliance by owning far less than 100% of common equity.

"Leucadia has been very good at taking on risks other companies have been afraid of," Mr. Trauner said. "Then again, they've walked away from other deals before."

Even since Leucadia announced it would buy the company, Reliance has been in turmoil. A group of shareholders filed suit against the company alleging it gave "false and misleading statements" about its financial prospects. Ratings agencies lowered the ratings on Reliance's debt. In June, the company sold off its inland marine and excess and surplus insurance lines to The Hartford Financial Services Group for an undisclosed amount.

"Reliance was in a position where they had to get something for that book of business, so they went ahead and did it," Mr. Auden said.

Matthew Coyle, director of insurance at Standard & Poor's in New York, said, "Any time you start selling other books of businesses after you announce that you're being acquired, it raises questions."

"When they first announced the deal, [Leucadia] hadn't finished their due diligence," said analyst Mike Paisan of Keefe, Bruyette & Woods Inc., New York. "During that process, Reliance essentially sold all of their good assets. What's left is really the commercial middle-market stuff that causes most of the problems."

In addition, while Reliance has sold its renewal rights to Hartford, it has retained the liabilities of that business, he said.

Mr. Paisan said he believes Leucadia won't try to get better terms. "I don't think Leucadia is going to do it. It's too risky," Mr. Paisan said.

Leucadia is a financial services holding company that owns insurance, banking, and mining interests, including American Investment Bank.

Reliance reported an operating loss of $36.5 million on revenues of $1.02 billion for the first quarter.

The insurer also took a hit in the Unicover Managers debacle last year, when a workers compensation insurance facility failed, causing losses throughout the insurance industry.

In January, Reliance settled Unicover-related lawsuits with several insurers for $111 million after taxes. Reliance is alleging fraud in a suit against Unicover, the managing general agent that put together the workers' compensation facility.

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