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R&Q share price drops 15 percent after pivotal ruling

The share price of UK-quoted Randall and Quilter (R&Q) had fallen by 15.02 percent to 107.5p at the time of writing in the wake of today's crucial LMX-related High Court judgment against the run-off management firm.

The financial impact to R&Q is as yet unclear, but in his judgment, Mr Justice Gross described the losses on the contracts involved in the case as being of "considerable magnitude".

The landmark decision to allow Equitas to recover reinsurance losses based on modelled calculations of the notorious LMX spiral from R&Q-owned reinsurer Brandywine has sent shockwaves through the market.

In a stock exchange announcement, R&Q expressed disappointment at the ruling, adding that financial advisers are currently assessing the impact, which is also likely to include Equitas' legal costs.

A further hearing will be set to determine the amount of Berkshire Hathaway's run-off vehicle Equitas' claims payable under the decision.

The dispute primarily concerned the recovery of reinsurance relating to losses from the 1989 Exxon Valdez oil spill and the 1990 Kuwait Airways (KAC/Gulf War) loss that whipped through London's then internecine reinsurance market. It is a test case for four arbitrations representing more than 4,000 LMX spiral-related claims that have been stayed pending its outcome.

Judge Gross applied a discount of 25 percent of the ultimate losses for the Exxon Valdez claim and 13.5 percent for Kuwait Airways payable by R&Q Re that were subsequently magnified under the LMX spiral.

R&Q objected to Equitas' unprecedented use of an actuarial model both as a matter of law and more widely, claiming that actuarial modelling could not be utilised at all to establish the Equitas losses.

Explaining his decision to accept the model, Gross said that while it is "plainly necessary to proceed with caution", he is nevertheless satisfied that the models "furnish an acceptable, soundly based route to establishing properly recoverable minimum losses... the models therefore assist in doing practical justice in this case".

The solution, Gross said, was "emphatically preferable" to leaving the losses "to lie crudely where they fall".

Equitas' difficulty in presenting actual losses boils down to the nature of the LMX market in the late 1980s and early 1990s, which was conducted on the basis of good and mutual trust, and comprehensive documentation is non-existent.

"The market, at least in the generality of cases, relied on collection notes - rather than insisting on strict proof of loss," the judgment explains, adding: "To put it at its lowest, it is difficult to reconcile with this market practise, the R&Q submission that... as a matter of law, the reconstruction of the spiral [is necessary]. It involves quite a leap and one for which there is also no precedent".

It is widely anticipated that, in the absence of an appeal, Mr Justice Gross's decision could act as a catalyst to re-start the unwinding of the infamous spiral that has been log-jammed pending the outcome of the proceedings, which effectively act as a test case.

Justice Gross said in the judgment that he hopes the spiral will be "kick-started" by his ruling.

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