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Bermuda liquidators say reinsurer Hatteras appears to be insolvent


NEW YORK—Five months after taking over Hatteras Reinsurance Co. Ltd., the Bermuda liquidators of the workers compensation reinsurer are still not sure how deep a financial hole Hatteras is in, court filings last week show.

While Hatteras' records and the reinsurer's former managers suggest that the company's net worth amounts to $157.5 million, the liquidators have preliminarily projected that it may actually be insolvent by $6.9 million and possibly much more, according to a draft financial statement filed in U.S. Bankruptcy Court in New York.

The liquidators assume in the filing that Hatteras' principal asset--a $152 million investment in a Delaware entity, Pamlico Enhanced Cash Trust--is worthless. The filing also assumes no recovery on several other potential Hatteras assets, including a $5 million corporate jet allegedly bought with the reinsurer's funds and a $5.25 million investment in the redevelopment of a Rocky Mount, N.C., cotton mill. Both the aircraft and the cotton mill property were bought by companies controlled by Frank P. Meadows III, a Rocky Mount businessman who also founded and controlled Hatteras.

Meanwhile, the liquidators won a court order last week temporarily barring Mr. Meadows from selling shares of The Nottingham Co., a Rocky Mount mutual fund administrator he founded in 1988. Unaudited Hatteras financial statements for 2004 and 2005 report that Mr. Meadows contributed 70,000 Nottingham shares valued at more than $13 million as the reinsurer's initial capital.

Mr. Meadows now asserts, though, that the stock never was actually transferred to Hatteras and that the reinsurer has no ownership interest, confirmed Mr. Meadows' lawyer, Peter Anderson with Sutherland, Asbill & Brennan in Atlanta.

A bankruptcy judge scheduled a Nov. 21 hearing on the stock dispute.

Mr. Meadows could not be reached for comment. Questioned about Hatteras operations in an August deposition by lawyers for the liquidators, Mr. Meadows invoked his Fifth Amendment right against self-incrimination, according to the liquidators' court filings.

Mr. Meadows incorporated and licensed Hatteras in Bermuda in mid-2004. Within a few months, Bermuda regulators had granted the reinsurer's request to reduce its statutory solvency margin to $120,000 from the required $1 million, on the condition that it stop writing any business not fully secured by collateral. Hatteras also delayed filing an audited financial statement for a year, first by changing its fiscal year-end and then by seeking an additional three-month extension.

Hatteras ultimately failed to file a statement as required by the end of April 2006, in part because its auditor questioned the validity of documents supporting its investment in Delaware-based Pamlico. One of the documents was a Pamlico audit opinion purportedly issued by Deloitte & Touche L.L.P. in the Cayman Islands, which Deloitte denied producing.

Bermuda regulators won an order to liquidate Hatteras in June, and partners of KPMG Financial Advisory Services Ltd. were named joint provisional liquidators.

Hatteras had acted as a reinsurer of captive workers compensation and general and auto liability programs. Its clients included captives insuring Philadelphia-based Aramark Corp.; Electronic Data Systems Corp. of Plano, Texas; a unit of InterContinental Hotels P.L.C. of Windsor, England; and Gevity HR Inc., a Bradenton, Fla., staff leasing company.

Aramark, EDS and InterContinental are protected by funds set aside in segregated trust accounts that are not considered assets of the Hatteras estate (see chart, page 3). Liquidators have agreed to allow workers comp and other claims to be paid from those accounts. The liquidators and Aramark, though, have not yet agreed on how to handle $15 million in another trust securing a loss portfolio transfer of Aramark liabilities from the defunct Reliance Insurance Co., and the two sides are also disputing who is entitled to interest on the trust funds, court records show.

Gevity settled with the Hatteras estate in September, receiving a $3 million cash payment and the right to pursue a $2.2 million unsecured claim against the estate.

Hatteras' rocky financial condition was not apparent in its unaudited 2004 and 2005 financial statements.

The Sept. 30, 2005, statement, for example, reported $264.5 million in assets and $26.1 million in shareholders equity. The assets included $138.4 million in fixed-income funds, previously identified as the Pamlico Enhanced Cash Trust; and $14.1 million in Nottingham stock.

Another 2005 Hatteras statement, prepared as of year-end, included a purported audit opinion from Deloitte's Cayman office and was sent by the company to its Bermuda manager, Independent Management Ltd., and forwarded through another party to Aramark and Gevity's reinsurance broker, Guy Carpenter & Co., according to court filings.

As was the case with the purported Pamlico audit letter, Deloitte Cayman officials denied ever issuing an opinion on Hatteras' financials, the liquidators say in court filings.

The liquidators' own draft summary of Hatteras' financial condition is bleaker, but still uncertain, their court filings indicate.

KPMG officials say they do not expect to recover any of the $152 million most recently reported as the value of the Pamlico investment. The Pamlico Delaware trust was canceled in March 2006, and liquidators say they have been informed that "Pamlico now has funds of just $333," the liquidators' court filings say.

When asked by the liquidators about the purported Deloitte audit of Pamlico, Frank Meadows Jr.--a Pamlico trustee who is also a Rocky Mount lawyer and Mr. Meadows' father--said the Deloitte letter "was printed in error," the liquidators' filings report.

Mr. Meadows Jr. could not be reached for comment.

Meanwhile, Mr. Meadows III has agreed to place in escrow any proceeds from the expected sale of the corporate jet that liquidators say he bought with Hatteras funds. Liquidators report that they are trying to negotiate a similar agreement covering proceeds from any sale of the Rocky Mount cotton mill property, and that they will try to recover more than $1.5 million in loans Hatteras made to Mr. Meadows III, his companies and employees of Nottingham.

Whether unsecured creditors of Hatteras are made whole remains to be seen.

In addition to Gevity's $2.2 million claim, the estate faces a possible $9 million claim from units of ACE Ltd., which acted as primary work comp insurer for Aramark, over funds that may have been removed from Aramark-related trusts, liquidators report.

An ACE spokesman declined to comment.