Troubled Bermuda company Mutual Risk Management has been hit by its US insurance units being placed in "rehabilitation" by Pennsylvania insurance regulators.

The move puts the companies - Legion Insurance Company and Villanova Insurance Company - which have been plagued with difficulties over reinsurance recoverables in the past year, in run-off and could lead to their liquidation.

Pennsylvania insurance commissioner Diane Koken said: "We are taking these actions, with the consent of the companies, in an attempt to halt further financial deterioration of the insurance companies and to see that policyholders are protected."

Following the announcement, the US companies also received further rating downgrades from AM Best to E (under regulatory supervision) from B (fair).

Legion had already suffered a rating downgrade from A- (excellent) to B (fair) in February after Mutual Risk (MRM) posted $100 million in fourth-quarter losses. The downgrade in turn has affected Legion's financial stability as business dropped off.

Pennsylvania's deputy insurance commissioner Stephen Johnson was reported in The Philadelphia Inquirer as having said that the flow of new premium business "dropped dramatically" after the February downgrade.

Mr. Johnson said further: "That sent the company (Legion) basically into a death spiral. Brokers were not sending business to the companies, so the premium cash flow dropped dramatically," he said.

The order of rehabilitation - which took effect from yesterday - was filed with the consent of the boards of directors of the Legion Companies.

As part of the process no new policies will be bound, and under the regulator's management, policyholders are to be notified that policies will not be renewed.

The companies employ about 500 persons and the regulator predicted some job cuts.

"We will start making determinations of how many employees to keep. Obviously, if they are not selling any more insurance, we don't need underwriting and marketing people," Mr. Johnson said.

In addition, AM Best downgraded its financial strength rating of MRM's Legion Indemnity Company (Illinois) to E (under regulatory supervision) from B (fair) for to reflect its affiliation with Legion and Villanova, in reflection of uncertainty regarding the status of reinsurance recoverables from these affiliates.

The three companies have operated under an intercompany reinsurance pooling arrangement since 1996. Additionally, they have operated as the fronting carriers for most of the Bermuda-based IPC Group rent-a-captive programs.

AM Best has also placed the B+ (Very Good) rating of IPC Group (Bermuda) under review with negative implications pending discussions with management on the collateralised nature of its loss reserves, strategic alternatives including finding another quality fronting carrier and other related issues.

Meanwhile, MRM last month sold off its Bermuda-based fund administrator Hemisphere Management for $130 million. The sale was said to be in a bid to service debt.

The company also saw five of its directors - including three XL executives - resign. XL is an MRM debenture holder following a $112.5 million investment in the company last April. The resignations of the XL executives was reportedly in an effort to avoid any conflict of interest as MRM looks at how to meet its debts, including with XL as a creditor.

There has been no word, so far, on any action being taken by XL to reclaim its investment in the ailing company.

At the time of the sale, MRM also said it had retained Greenhill & Co., an investment bank to advise it on "strategic alternatives".

Following its US units being put in to rehabilitation, MRM announced it is "evaluating the financial accounting implications of this development and continuing to evaluate strategic alternatives with Greenhill & Co".

The company also announced its interim CFO of less than three months, James Kelly, was being replaced by Angus Ayliffe. Mr. Kelly replaced former CFO Andrew Cook who left MRM for one of Bermuda's newest insurers, AXIS Speciality Ltd. Mr. Ayliffe was previously Mutual Risk's controller and principal accounting officer.

MRM's shares - the company is listed on the New York Stock Exchange - yesterday fell nearly 30 percent to close at 60 cents with trading of 1,800 shares. The company's 52-week low was 43 cents while its high was $12.30.