Equitas has released its financial results for the year ended 31 March 2005. The group reported an increase in accumulated surplus of £16m from £460m to £476m. Solvency margin (accumulated surplus stated as a percentage of net claims outstanding) rose from 9.8% to 12.2%. When Equitas began operations in 1996, its solvency margin was 5.6%.
During the year the group completed agreements during the year to close out asbestos claims for three of its five largest direct asbestos exposures at 1 April 2004. Gross discounted reserves for asbestos claims were strengthened by £167m.
“Equitas still faces considerable uncertainties. However, we have made good progress in the year. We have again been successful in resolving a substantial number of claims by reaching settlements on acceptable terms”, Chairman Hugh Stevenson said. “Despite our encouraging operational results, asbestos remains the greatest single threat to Equitas. In these accounts we have strengthened our asbestos reserves by £167m on a gross discounted basis. This has been caused by the need to increase reserves for inwards reinsurance – i.e. claims submitted by other insurers – and for non-US asbestos claims.”
Scott Moser, Chief Executive Officer, said the small increase in surplus should be considered “neutral” but that the stable surplus, reduced liabilities and improved solvency margin meant that “Equitas is in a slightly stronger financial condition than it was a year ago.”
Reflecting on another successful year for the group in resolving claims with major policyholders, Mr Moser said “during the last year we have completed policy buyouts with 25 policyholders, including three of our five largest asbestos exposures, and we commuted with 85 reinsurers. We believe policy buyouts and commutations are in the interest 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 we can continue to reach agreements with realistic counterparties.”
Commenting on proposals for federal asbestos tort reform in the US, Mr Moser said: “Prospects for a trust fund bill remain decidedly uncertain. Whether such a bill would be good or bad for Equitas depends on how much Equitas is assessed by the commission contemplated by the bill. However, we believe our reserves are appropriate and that a fair minded commission will seek from Equitas no more, and possibly less, than we have available for such claims.”
Because Equitas discounts its liabilities, its key measure for investment performance is a comparison of the investment return with the unwinding of the discount. In the current year, the investment return exceeded the unwinding of the discount by £88m (compared with £123m in 2004). Gross claims paid for all types of coverage, an amount which includes claims resolved through commutation agreements as well as the Group's operating costs, amounted to £1.0bn in the year, down from £1.4bn in the previous year. Operating costs were £81m, down 11% from the previous year. Since inception in 1996, Equitas has paid claims of over £16bn, cutting undiscounted liabilities by 70%; collected over £6bn of reinsurance asset; generated investment returns of £820m in excess of the unwinding of the discount; and reduced the annual cost of running the business from over £240m to £81m. During the same period, gross discounted reserves have been increased by £1.5bn.
