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LONDON-Equitas Holdings Ltd. has plenty to crow about in the runoff reinsurer's interim financial accounts for its first year.
The results for its first seven months of operation show a marked improvement from the reinsurer's position at the time it was launched, on Sept. 4, 1996.
"The Equitas Group has made a solid start in carrying out its mandate to run off the 1992 and prior liabilities of the Lloyd's syndicates it has reinsured," Chief Executive Michael Crall stated in the group's published accounts last week. "While it is far too early to declare Equitas a success, we have made encouraging progress."
When Equitas in April published its financial accounts as of Sept. 4, 1996, the date of its inception, executives within the Lloyd's of London market complained that the figures painted a grim picture of Equitas' prospects because they were heavily qualified by the auditor and the size of the reinsurer's surplus was questioned (BI, April 14).
However, Equitas' newly published results for the seven months ending March 31 are more upbeat.
The reinsurer's surplus increased 5% to 618 million pounds ($1.02 billion) as of March 31, from 588 million pounds ($920.8 million) as of Sept. 4, 1996. "Although modest, this increase is encouraging," David Newbigging, chairman of Equitas, said in the published results.
Equitas also paid 2.5 billion pounds ($4.13 billion) in claims during the seven months ending March 31.
Claims payments were made at a slower pace than was first calculated by Lloyd's Reserve Project, which established Equitas, though executives would not say how much slower. The slower pace helped boost the group's first reported investment income of 256 million pounds($422.4 million) from original forecasts, though again it was unclear by how much.
The slower claims payments also boosted the benefits of discounting by 162 million pounds ($267.3 million). Equitas has discounted Lloyd's syndicate liabilities by 6% annually to take into account the investment income that will be incurred before mainly long-tail liability claims are paid. Gross claims before discounting totaled 17.7 billion pounds($27.72 billion) as of Sept. 4, 1996, but were reduced to 11.8 billion pounds ($18.48 billion) after discounting.
"There are people out there who are saying Equitas has stopped paying claims," observed Group Finance Director Jane Barker. "Well, 2.5 billion pounds in seven months doesn't sound like we've stopped paying claims. But, it would be fair for them to say that we are admitting in the accounts that we are not paying them as fast as first expected. That's true, too. But we're certainly still paying them."
Equitas also has collected 840 million pounds ($1.39 billion) in reinsurance on paid claims, which again is "better than projected," said Mr. Crall.
The 400 Lloyd's syndicates that reinsured 740 open years of account into Equitas had ceded reinsurance to more than 2,900 reinsurers. About 1.8 billion pounds ($2.97 billion) in reinsurance is still recoverable on paid claims, and Equitas calculates 3.1 billion pounds($5.12 billion) in reinsurance recoverable for incurred-but-not-reported claims.
There are coverage disputes between Equitas and reinsurers, as would occur in the normal course of business, acknowledged Ms. Barker.
However, "the formation of Equitas has not yet given rise to a new form of reinsurance dispute," she said. Ms. Barker was referring to a potential contention by reinsurers that because Equitas assumed the liabilities of their cedents, the reinsurers no longer would have an obligation to pay claims. Some in the market had speculated such an argument would emerge.
Executives at Lloyd's welcomed the improvements in Equitas' accounts.
"I believe that all members of Lloyd's, past and present, together with clients of the market, will be encouraged by the competence displayed by the Equitas management and by the steady progress shown in their accounts," said Lloyd's Chairman Sir David Rowland.
"So far, so good," summed up the Assn. of Lloyd's Members, which also welcomed the group's accounts. "The ALM welcomes the reported financial position, which will provide names with further reassurance."
Despite the encouraging results, auditor Coopers & Lybrand has heavily qualified Equitas' accounts. But that is likely to be the case for several years to come because of the uncertainties surrounding the liabilities reinsured into Equitas, Ms. Barker said.
Coopers & Lybrand stated that it qualified the accounts because "there are significant uncertainties as to the accuracy of the provision for the claims outstanding of 11.8 billion pounds, reinsurers' share of claims outstanding of 3.1 billion pounds and reinsurance recoveries of 1.5 billion pounds."
Future claims experience is likely to differ from the estimated liability, "potentially to a material degree" because the ultimate liability will be influenced by future events that cannot be predicted with certainty, the auditor stated.
These uncertainties, "if adverse in the aggregate, could be material enough to exceed" the group's surplus, the auditor stated.
Ms. Barker believes fundamental uncertainties will mean auditors will qualify Equitas' accounts "for the foreseeable future."
However, Ms. Barker said she hopes auditors might improve their view of the quality of Equitas' data as the reinsurer improves its claims information and systems.
Equitas has several projects under way to streamline claims handling. For example, Equitas plans to reduce the number of runoff management contractors to 44 from 69 by the end of the year.
The Equitas Claims Unit also is surveying hundreds of law firms and other claims service providers that were inherited when it assumed the syndicate liabilities to ensure they meet its performance, cost and efficiency criteria.
Meanwhile, Equitas is only weeks away from assuming the runoff business of Syndicate Underwriting Management Ltd., which manages the runoff of Lioncover Insurance Co. Ltd.
Equitas did not accept 700 million pounds ($1.16 billion) in premium to reinsure Lioncover at the time of Lloyd's reconstruction and renewal plan but has since been negotiating with Lloyd's on how to reinsure the facility.
The ALM welcomed Equitas' caution that Lioncover would only be reinsured "if the terms are in the interests of Equitas."
Equitas also by the end of the year plans to distribute final reinsurance statements to Lloyd's members who accepted the R&R plan and paid their portion of the reinsurance premium.
These certificates, which are not shareholder certificates, will explain to each member what percentage he or she contributed to the reinsurer's total 11.2 billion pounds premium ($17.54 billion).
Equitas also is now looking for a chairman to succeed Mr. Newbigging, who announced he will retire at the end of next year.