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Equitas: asbestos continues to weigh heavily despite commutations

Equitas announced its annual results for the year ended 31 March 2004 on 8 June, revealing a £296mn increase in gross discounted reserves for asbestos claims.

Accumulated surplus after tax fell £67mn from £527mn to £460mn, but the reinsurer's solvency margin - the accumulated surplus stated as a proportion of net claims outstanding - rose from 8.7 percent to 9.8 percent.

Equitas chairman Hugh Stevenson commented: "The results are explained principally by the interaction of five factors: the need once again to increase our reserves for asbestos claims, the progress which we have made in resolving major claims and reinsurance exposures, the performance of our investments, the control of our costs and the weakness of the US dollar."

Established by Lloyd's in 1996 as a run-off vehicle for its pre-1993 liabilities, Equitas is one of the largest asbestos reinsurers and the increase in reserves could be seen as a sign that the industry has yet to see the last of asbestos reserve charges.

Morgan Stanley equity analyst Vinay Saqi noted: "The key conclusion, in our opinion, was that asbestos claims could continue to be an issue for the industry - even for those companies that recently recorded charges."

"Some companies - ACE, St Paul Travelers, for example - are scheduled to update their year-end reserve studies in 2004, and we wonder whether these trends were already captured in their prior work or if they will wind up leading to additional reserving actions," Saqi suggested.

Equitas continued its policy of commutations and settlements, initiating policy buyouts with seven policyholders covering three of the five largest asbestos exposures. The most recent saw Equitas shell out $245mn to settle all outstanding liabilities with US property casualty insurer Travelers, now merged with St Paul.

"We believe such agreements are in the interests of both parties, delivering certainty, reducing transaction costs and eliminating credit risk. We are ready to complete more of these agreements. Our track record gives us confidence that our reserves will support agreements with realistic counterparties," said Equitas CEO Scott Moser.

The deals led to Equitas paying out nearly $1bn, and resulted in the release of at least $2.8bn in policy limits, according to the reinsurer.

But Saqi commented that parties due amounts from Equitas view its financial health and willingness to pay "a bit more seriously" than a few years ago.

Saqi also noted that Equitas is settling policies at a fraction of the amount the (re)insured claims is due, but still continues to have to raise overall reserves.

"That could imply that Equitas might not have been reserving for the full claim that the counterparty thought was due (disagreements on the amounts due or claims covered could explain this)," he added.

Using the $575mn Halliburton settlement as an example, Saqi said this was only 60 cents in the dollar of the estimated recoverable, and suggested that if the difference between what Halliburton thought was due and the settled amount proved to be a valid claim, it could have hit surplus to the tune of £200-210mn.

"This points to the fact, we believe, that any one large claim could have a severe impact on Equitas' financial condition. It also points to why claimants seem willing to take a discounted value of their potential claim today for resolving the future uncertainty," he continued.

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