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LONDON -- Lloyd's of London officials are more upbeat than Lloyd's names about the latest financial results for Equitas Holdings Ltd.

"Reinsured names, the Lloyd's market and its clients can be reassured by the report, which shows a continuation of favorable trends in the Equitas accounts," Lloyd's Chief Executive Officer Ron Sandler said.

Lloyd's names welcome the gains in Equitas' surplus, but are sounding a note of caution about what the distant future may hold.

Equitas, the company created to reinsure names' pre-1993 liabilities, reported a surplus for the year ended March 31, 1998, of L718 million ($1.20 billion).

Apart from being better than had been anticipated two years ago, the surplus was 16% higher than L617 million ($1.04 billion) as of March 31, 1997, and 22% better than Equitas' opening surplus of L588 million ($1 billion) on Sept. 4, 1996.

Gross claims paid were L2.2 billion ($3.68 billion) as of March 31, bringing to L4.76 billion ($8.01 billion) the total claims Equitas has paid since it was launched.

Chief Executive Officer Michael Crall said this was "significantly less than had been originally projected" at the reinsurer's outset and reflected the fact that claims have been coming in more slowly than anticipated.

Equitas recovered L660 million ($1.10 billion) last year from reinsurers. Investment returns totaled L932 million ($1.56 billion).

However, Lloyd's names expressed mixed feelings about the results.

The Lloyd's Names Assn., many of whose members suffered large losses during the years reinsured by Equitas, said it welcomed the improvement in Equitas' solvency margin in the latest accounts.

However, the LNA also warned of its fear that future claims could reach the point where Equitas might be forced to pay them on a proportional basis.

The LNA also said "it is surprising that the increase is not larger, given the surplus that was expected to arise from the unwinding of the double count."

Double counting arises out of the complex nature of some of the claims, causing them to be accounted for more than once in some syndicates' accounts.

The LNA said Equitas' surplus appears to be offset by a recognition that provisions for claims had been too heavily discounted when the reinsurer was created. "Falling interest rates will continue to erode discounting and hence solvency margins," the LNA warned.

It was referring to a comment in Equitas' annual report that as a result of the fall in bond yields, the rate at which its claims liabilities are discounted to reflect anticipated yields on investments has been revised to 5.25% from 6.00% per year.

The LNA also said that with potential increases in asbestos and pollution claims, which make up about 50% of Equitas' claims portfolio, and the threat of the U.S. tobacco settlement unwinding, "Equitas will be likely to trigger proportional insolvency clauses early next century."

However, Mr. Crall said the group's solvency margin -- the ratio of surplus to net outstanding liabilities -- has improved and leaves Equitas in a position to meet obligations to stakeholders, including reinsured names.

He said the real message of the results is that "while at the outset one could have considered it a satisfactory result to hold our own and watch the liabilities come down, the fact is that we've increased the surplus by 22%, and the solvency margin has improved from an initial 5.6% to 8.5%.

Commenting on suggestions that Equitas could someday be forced to pay claims on a proportional basis, Mr. Crall said: "As far as assurance that it will never happen, I don't think that we can do that any more than we could pick a date where we might pay a return premium. . . .I would suggest that the fact that we have been in business for two years, the fact that the balance sheet is improving in strength and the fact that we have in that period of time gained both experience and confidence in handling the book of business is as reassuring to policyholders as it is to reinsured names."

Equitas Chairman David Newbigging also says in the annual report that further progress has been made in the current financial year and that "we have not encountered any major surprises nor have we identified any external event, trend or emerging issue that we believe would endanger the financial stability of Equitas."

Finance Director Jane Barker pointed out a declaration by directors in the Equitas annual report that they "believe that the assets should be sufficient to meet all liabilities in full." She said this statement, which Equitas is required to make each year, applies not just to the following year but to the foreseeable future. "If we believed, as the auditors have pointed out, that there were insufficient means, we could have to take action now," she added.

As anticipated, auditor Coopers & Lybrand again has qualified the accounts because of uncertainties as to the accuracy of provision for claims outstanding of L11.5 billion ($19.35 billion at a current exchange rate), reinsurers' share of claims outstanding of L3.0 billion ($5.05 billion at a current exchange rate) and reinsurance recoveries of L1.5 billion ($2.52 billion at a current exchange rate).

Coopers & Lybrand said, "Further experience may show material adjustments are required to these amounts."

Ms. Barker gave two reasons she believes it is impossible to say when the auditors will be able to approve Equitas' accounts without such a qualification. First, there is the fundamental uncertainty regarding the asbestos, pollution and health hazard claims, which make up some 50% of the reinsurer's claims portfolio.

"I can't tell you, only because I don't know, when we will get to the stage where we really think that fundamental uncertainty has been removed from Equitas," said Ms. Barker.

The second uncertainty arises out of the quality of data inherited by Equitas when it took over the liabilities of some 300 Lloyd's syndicates. From the start, it was acknowledged that Equitas faced difficulties reconciling the syndicates' different ways of accounting and thus of making sense of its liabilities. Ms. Barker said with time and money, this problem can be lessened.

Both Mr. Crall and Ms. Barker said there was no substance to rumors that circulated during the summer that Equitas was in talks that could lead to it being acquired. No such talks have taken place, they said.