One difficulty in pursuing London market insurance recovery has been putting together what the actual wording of the insurance contract was. While there have been efforts afoot to move toward “contract certainty,” that is, to finalize the actual wordings in advance of the effective date of the policy, this aspiration seems to remain elusive in implementation. As a result, what one usually has is a “slip,” which is essentially a commitment to contract where syndicates at Lloyd’s indicate the proposed share the syndicate is willing to accept in the proposed policy (as indicated by the underwriter’s “scratch”, i.e., initials or imprimatur) and a general statement of what the policy wording is expected to be (a list of major terms, exclusions, and the like).
A long-rumoured transaction between Equitas and Warren Buffett’s Berkshire Hathaway has been announced. This will be a two-step transaction whereby (1) Equitas will be absorbed into a National Indemnity Company subsidiary in exchange for a cash payment and a promise of providing additional reinsurance and (2) a channeling injunction will be obtained cutting off the exposure of Equitas, Lloyd’s, names, and Berkshire beyond the money in the new vehicle. If consummated, the deal will achieve the long-sought finality for names (the individual investors on the responsible pre-1992 syndicate years of account) and for the current Lloyd’s enterprise.
As part of the Reconstruction and Renewal of Lloyd’s in 1996, various participants in the Lloyd’s enterprise established several companies for the purpose of reinsuring the then-open syndicate years of account and managing the runoff of claims under those and prior years’ insurance policies. In 1997, the liabilities of a Lloyds’ owned-entity called Lioncover were reinsured into Equitas too.
Equitas issues an annual report and accompanying press release that discusses its results to date. Some of the highlights this year:
W. Mark Felt or Hal Holbrook playing him said to “follow the money,” which has proven difficult in the instance of Lloyd’s of London, and a task made all the more important as asbestos and environmental liabilities continue to fall upon corporate policyholders in the US that purchased broad insurance in the 1950s, 60s and 70s through the London market. While lawyers and policyholders may be familiar with Equitas, the reinsurance runoff and claims-handling vehicles set up in the late 1990s to deal with liabilities arising under historical Lloyd’s policies, I have long believed that a key for litigators is something called Lioncover, a reinsurance vehicle originally set up to bailout important players at Lloyd’s who were involved in Peter Cameron Webb “managed” syndicate years of account. Lioncover, which I understand to be a wholly owned subsidiary of the Corporation of Lloyd’s and which houses the PCW business, initially was not reinsured into Equitas when Equitas was set up as part of the “Reconstruction and Renewal” of the Lloyd’s operation. It was later poured into the Equitas structure but also is explicitly backed by the Lloyd’s enterprise itself. Lioncover is a lever one can use to uncover the financial vehicles backing old Lloyd’s policies (which contra to popular myth are not backed solely by the assets of Equitas or by the trust funds in the US). Lloyd’s annual report for 2005 contains a few interesting crumbs worthy of note for Lloyd’s/Equitas watchers.
The price of an insurance policy naturally includes a projection of future payouts under the policy plus a profit margin for the insurer. Rather than giving profit to an insurance company, sometimes corporate policyholders will elect to try to capture that profit by creating a “captive” insurance company. In this way, when the premium is paid to the captive insurance company, the “profit” component is retained on the corporation’s overall balance sheet. There are other reasons to establish a captive: a sense of greater control over the loss-adjustment process; greater certainty of performance; and opportunities for certain tax advantages (not so much from the deductibility of premium expenses as compared to the accrual of reserves but rather from obtaining investment income in a tax-advantaged manner on assets held by (or stuffed into) foreign-domiciled captives).
It is uncommon to find that a company only has a captive program: typically, there is commercial insurance market involvement through excess-layer insurance above the captive or through reinsurance of the captive. (Sometimes the reinsurance relationship is the converse where the insured has commercial insurance that is reinsured into the captive.) When a corporation taps reinsurance markets, what it wants most assuredly is the seamless flow of loss and coverage through the captive to the reinsurer once the retention is exceeded. In this regard, a recent High Court decision in London is important to note, because the decision creates a gap in this flow stemming from of all things a difference in “choice of law” as between the captive-issued policy and the reinsurance policy backing it.
Bankruptcy is one option for insolvent companies to manage their obligations to creditors and to provide an efficient mechanism to marshall assets for their benefit; an insolvent insurance company similarly may enter a bankruptcy-like process and pay the claims of its creditors – its policyholders – and marshall its assets (typically reinsurance). Over the past few years, however, we have seen increasing numbers of solvent insurance companies seek to ring fence their liabilities – and lock in profits or at least circumscribe losses – by entering into bankruptcy-like processes by which they forcibly commute their obligations to their policyholders. In 2002, Rhode Island established legislation permitting this type of solvent runoff, but most of the action in this area has been in England for London-market insurers that wrote substantial North American (especially US) risks under broad occurrence policy forms and that now wish to extinguish the long-tail liabilities that naturally follow. Because of a new English decision, however, the ability of London market insurance companies to forcibly terminate their obligations to their policyholders is now in substantial doubt.
As part of the Reconstruction and Renewal of Lloyd’s in 1996, several Equitas entities were created to serve as the final reinsurer-to-close and to manage the run-off of underwriter liabilities for non-life 1992 and earlier business.
On June 7, 2005, Equitas issued a press release on its annual results and more recently made available its Report & Accounts for the year ended 31 March 2005.
As is well known, Equitas Ltd. manages the run off of liabilities under non-life insurance policies issued by underwriters at Lloyd’s, London, prior to 1993, and these policies are exposed to paying for liabilities of US companies for certain asbestos, environmental, and other “health hazard” claims of injury or damage that occurred in the period of their coverage. Each year, Equitas publishes its financial results as of 31 March (for 2004, its Reports and Accounts were released in late June but were dated 3 June 2004) and provides additional commentary via an accompanying press release (dated 8 June 2004).