Fallout From Independent’s Collapse Continues, Regulators Questioned

What did you know, and when did you know it?” Those questions from the Watergate era are increasingly being asked of the U.K.’s Financial Services Authority, which oversees the country’s insurance industry, in the wake of the spectacular meltdown of Independent Insurance Co. Ltd. after it went into liquidation last June.

Both the size of the losses and the swiftness of the collapse have raised serious questions. Independent’s most recent audit showed liabilities of £1.4 billion ($1.83 billion), and assets of £1.7 billion ($2.39 billion). It was Britain’s 171st largest company, and a fast growing insurer with 500,000 private policyholders and 100,000 commercial policies in force.

In January it announced larger than expected losses, but as recently as April the company said it had had a good first quarter. In May it announced that it expected to make a £150 million ($211 million) rights offering to shore up its capital base. Its actuary, Watson Wyatt, expressed “reservations” about its liability account, the rights offering never materialized, Independent’s shares were suspended from trading on the London Stock Exchange and three weeks later a midnight court order put the company into liquidation.

The sudden collapse shocked the London insurance community, but subsequent revelations unearthed by the liquidators, PricewaterhouseCoopers, have raised even more questions. At least £62 million ($87.2 million) in claims were apparently never recorded on Independent’s books. London’s serious fraud office announced it had launched an investigation.

Several questionable reinsurance contracts were revealed. Apparently founder and ex-chairman Michael Bright concluded at least three roll-over deals with Ireco, a Dublin-based subsidiary of GE Capital, to cover unexpected losses, but the cost of the coverage, and the restrictions on payment further constricted Independent’s finances. Ironically, PwC has indicated the reinsurance agreements may be the most valuable asset Independent has left, even though they are widely blamed for helping push the company over the edge.

Bright owes the Hong Kong and Shanghai Bank £4.28 million ($6.02 million) on a loan secured by, what else, his shares in independent. HSBC has filed suit to try and recover the funds.

While Independent’s private policyholders are largely protected from loss via the Policyholder Protection Board, which can levy up to 1 percent on all insurers’ premiums to satisfy claimants from a bankrupt company, many commercial policyholders aren’t covered. Other companies, mainly Royal & Sun Alliance, have either bought or accepted portions of Independent’s business, but creditors and shareholders are waiting to see what PwC reports.

The FSA has come under increasing criticism for its failure to start an investigation or to take any steps until it was too late. The most recent controversy flared when France’s Commission de Contrôle des Assurance (CCA) chairman Jacques Delmas-Marsalet charged that the FSA had ignored warnings from French regulators about the shaky condition of Independent’s French subsidiaries late last year. The warnings were also contained in a formal report in January, along with evidence that Independent was attempting to hide large losses in France.

The charges echoed those made by London’s financial community and some Members of Parliament who have called for a full inquiry of the way the agency handled audits of Independent’s accounts. It apparently relied on statements by KPMG, the company’s own auditors, rather than conducting a separate investigation.

FSA Chairman Sir Howard Davies has vigorously defended his agency’s conduct, asserting that the French report had added nothing to regulators’ knowledge of Independent’s condition, and chiding the CCA for breaching the unspoken rule that one regulatory body doesn’t openly criticize another.

Davies said the FSA knew of Independent’s under reserving problem in January, and had instructed the company to take steps to increase its capitalization. The unreported claims, the possible fraud, the reinsurance agreements and the extent of the losses only surfaced after the company’s attempt to do this (through the rights issue) failed, Davies indicated.

It’s pretty clear that U.S. regulators would have made sure that such serious problems “surfaced” earlier than the FSA did, and the MPs that are pressing for an investigation may well conclude that tougher U.S. style regulation of Britain’s insurance industry is called for.

Topics London