Lloyd’s Equitas Reports Fiscal Year Results

Equitas, the runoff vehicle established by Lloyd’s in 1996 to handle claims liabilities prior to 1992, principally asbestos and environmental claims, announced decreases in its reserves for the fiscal year ended 31 March 2003.

While Lloyd’s syndicates largely escaped the adverse effect of the decrease in equity values over the last two years, Equitas did not. The fund’s announcement noted that “Accumulated surplus after tax decreased by £152 million [$251 million] from £679 million [$1.12 billion] to £527 [$871.6 million].” It also said that its solvency margin (accumulated surplus stated as a percentage of net claims outstanding) “decreased from 10.3% to 8.7%.” As of September 1996, when Equitas formally commenced operations, the solvency margin was 5.6%.

Equitas investment returns fell into the loss category during the fiscal year, as they produced a deficit of £72 million [$119 million], compared to a surplus of £95 million [$157 million] generated in the year ended 31 March 2002.

Commenting on the results, Chairman Hugh Stevenson observed: “When I wrote to Reinsured Names last December, I stated that it was possible that we would have to strengthen our asbestos reserves at the end of the year. I also referred to the falls in the UK and US equity markets and to the impact of exchange losses on the portion of our surplus held in US Dollars. These three factors have combined to produce the decrease in both our accumulated surplus and our solvency margin. Asbestos remains the greatest single threat to Equitas. We have once again had to strengthen our asbestos reserves, adding £399 million [$660 million] on a gross discounted basis.”

In an additional explanation of the results the announcement said: “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 £1.1 billion [$1.82 billion] in the year ended 31 March 2003, down from £1.4 billion [$2.32 billion in the previous year. In addition to the gradual reduction of claims activity over time, the decrease in claims reflects the fact that many of the largest claims have been closed, either through policy buyout or commutations.”

It also explained that “Because Equitas discounts its liabilities to take account of the time value of money, the investment performance measure most important to the financial health of the Group is the amount by which investment return varies from the unwinding of the discount applied to claims liabilities. Since the first full year that we reported results this measure had never been less than £95 million [$157 million] positive, and in the first six years of Equitas’ existence, up until 31 March 2002, investment return exceeded the unwinding of the discount by a total of some £680 million ($1.124 billion]. In the year just ended, however, and notwithstanding positive bond portfolio performance, investment returns fell £72 million [$119 million] short of the unwinding of the discount. This shortfall was wholly due to the fall in the value of our equity holdings.”

While acknowledging that “the balance sheet of Equitas is weaker than it was a year ago, and we still face significant uncertainties arising from matters over which we have little or no control,” Stevenson also drew attention to some encouraging signs in the area of asbestos claims. Equitas policy of accepting only claims with documented illness is having an affect on overall claims. Policy buyouts had decreased the number of potential claims, and, perhaps most importantly, the magnitude of the problem was finally being recognized in the U.S. and the U.K., which could produce legislation to address the crisis.

Commenting on Equitas’ investment performance CEO Michael Crall stated: “Notwithstanding the adverse results of the past year, we continue to believe that our investment policies are appropriate. Our perspective needs to be geared to the long term and our strategy should not be unduly swayed by short term market swings”. This year, while fixed income bonds performed well, the gains were offset by a £114 million [$188 million] overall loss in the equities portfolio; however, as the equity markets have generally been rising since the end of March, some of that has been recovered.

Reflecting on a very eventful year in the evolution of asbestos claims, Crall noted that “a number of major US and international insurance companies have announced well publicised increases in their asbestos reserves. A detailed analysis of these reserve adjustments supports the view that these companies are, in effect, acknowledging the asbestos situation which Equitas recognised in its accounts two and three years ago, when we increased our gross asbestos reserves by a total of £3.2 billion.” He expressed confidence that Equitas’ “reserving methodology had been reinforced by comparing its own reserves to the reinsurance asset disclosed by US insurance companies, after the increases to reserves, as being payable by Equitas.”

As previously announced in March, Crall will retire as CEO in November 2003 and will be replaced by Scott Moser, currently Equitas Managing Director.