Equitas Reports Small Surplus Decline, Increase in Solvency Margin

June 21, 2002

Equitas, the Lloyd’s vehicle set up in 1992 to run off asbestos and environmental claims from prior years, reported a slight drop in its overall surplus of £21 million ($ 31.4 million) to £679 million (slightly over $1 billion), while its solvency margin increased from 9.5 percent to 10.3 percent.

The report for Equitas’ fiscal year, which ended March 31, is one of the few encouraging signs on the asbestos front. Chairman Hugh Stevenson explained that,”The decrease in surplus is primarily due to technical additions to reserves for a number of categories of business, including a re-estimation of future reinsurance recoveries. Notwithstanding the decrease in surplus, however, the solvency margin has risen as a result of the significant fall in net claims outstanding during the year.,”

“Asbestos claims continue to be the greatest single threat to the stability of Equitas,” Stevenson continued. “In the two years ended 31 March 2001, Equitas had increased gross undiscounted provisions for future asbestos claims (undiscounted asbestos reserves) by a total of £3.2 billion. However, “on the basis of the Group’ s experience during the past year, which included both positive and negative developments, we have concluded that it is not necessary to make any further overall increase in the gross discounted provisions for future asbestos claims payments.”

CEO Michael Crall summed up the current situation, particularly a continuing stream of asbestos bankruptcies, a large number of high profile court awards and no relief from the pace of new claims filings. He indicated, however, that “after taking into account the expected impact of our own claims management strategies and a more favourable assessment of inwards reinsurance estimates,” there was no need to “adjust the level of discounted asbestos reserves at the year end.

The claims management strategy Crall referred to was announced a year ago, and seem to be having a positive affect in reducing claims. The announcement explained how the new “Document Requirements” (DR’s) work: “Before London Market insurers, including Equitas, will reimburse an asbestos bodily injury claim presented by a policyholder, the policyholder must document the existence of a genuine asbestos related injury that was caused by the policyholder’ s products or premises.

It also noted that, “Last year, London Market insurers expanded on the DRs by adopting what are known as reinsurance documentation requirements (RDRs) for asbestos claims presented by cedants which purchased reinsurance coverage from Lloyd’ s syndicates and other London Market insurers.”

” Equitas believes the DR’s and RDRs will have a significant impact on the reimbursement of claims filed by unimpaired persons. The limited experience to date with the DRs has been encouraging. There is evidence that the requirements are beginning to change at least some policyholders’ willingness to settle unimpaired claims and the willingness of some claimants’ lawyers to pursue such cases.”

“Gross claims paid for all types of coverage, which includes claims resolved through commutation agreements as well as the Group’ s operating costs, amounted to £1.4 billion in the year ended 31 March 2002, down from £2.1 billion in the previous year,” said the announcement.”The decrease in claims paid reflects not only the gradual reduction in Equitas’ claims activity over time but also the fact that many of the largest claims managed by Equitas have been closed.”

Equitas balance sheet sowed total assets of £8.77 billion ($13.1 billion) as of the end of the fiscal year.

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