Lloyd’s of London is a market, not an insurer. Dozens of syndicates trade in the market, with about twenty extensively involved in North American reinsurance. Each syndicate is a separately managed, competitive business. Lloyd’s is the dominant reinsurer in the London market and has been since well before the first Catastrophe Excess contract was written by Mr. Cuthbert Heath in 1906. Lloyd’s has paid all covered losses presented since its founding in 1688. Lloyd’s syndicates performed well in the 2004 and 2005 hurricanes, paying their losses for Holborn clients relatively promptly and efficiently.

Equitas is the reinsurer of Lloyd’s liabilities for the 1992 and prior underwriting years. On October 20, Equitas and Berkshire Hathaway announced a two-phase transaction in which Berkshire would first reinsure and then in a second phase acquire Equitas, including staff and assets, and also separately release the former Lloyd’s capital providers from their liability. Although the second phase is subject to court review, Holborn believes that both phases of the transaction will likely be approved and executed during 2007. Holborn has discussed the transaction with Lloyd’s, Berkshire Hathaway, Lloyd’s names and other market sources to evaluate the effect on current and prior Lloyd’s reinsureds, as well as for Lloyd’s future reinsurance security.

Lloyd’s Before 1993

Lloyd’s is, and always has been, a market where investors join together as syndicates to insure and reinsure business. Today, there are over 40 managing agencies, even more syndicates and well over a thousand current capital providers. However, in the last 15 years much has changed. Prior to the “reconstruction and renewal” process begun in 1993, the basic structure of the market had been
unchanged for 300 years.

Until recently, all underwriting at Lloyd’s was done as an unlimited obligation of individual persons, known as “Names.” Syndicates are groups of names who agree to accept together shares of the business written on their behalf. A syndicate is staffed by a managing agency, and its business is bound by a designated “Active underwriter” or other officer of the agency. Most names were not active underwriters in the market, and are advised by members’ agents on their participation in their various syndicates. All active underwriters and most other officers of syndicates, brokers and members’ agents were all also names.

Participation in a syndicate is an agreement for one underwriting year at a time. Each name’s share of a syndicate is agreed prior to the beginning of the year. Syndicates can write business up until the last trading day of the underwriting year, with coverage continuing for a full second year (or in some cases, as much as five more years). With extensions, trip coverages or policies-attaching reinsurance, names’ exposures often extend past a third year. But at the end of three years, the syndicates calculated their underwriting year results and distributed their profits (or losses) to the names.

An important part of this annual closing process is a “reinsurance to close” that each underwriting year of each syndicate purchases to cover their remaining liabilities, including unearned premiums on inforce policies. Since each year’s business includes this reinsurance from the syndicate’s earlier years, and those closed years includes reinsurances of years before that, etc., the reinsurances to close included contingent liabilities going back to the very earliest days of Lloyd’s.

In the 1970s, Lloyd’s began to receive an increasing number of long-term liability claims, particularly from U.S. insureds and reinsureds. Three notable sources of these claims were: Asbestos, “Superfund” pollution cleanup costs, and Products Liability for pharmaceuticals and similar personal products. Dates of loss for these long-term exposures are contentious, but allegations frequently go back to the 1930s, and in some cases even to the 19th century. Holborn has received claims going back over fifty years from the date when first reported.

As a result, during the 1980s, IBNR losses appeared on old closed years with disturbing frequency. These new and contentious losses passed through successive reinsurances to close, and began to effect the “open” years. By 1992, many syndicates recognized that latent injury claims from prior years made it impossible to close their most recent underwriting years. A new approach was required.

Reconstruction and Renewal

Equitas was created as a reinsurer of names’ old year liabilities and began operations in 1996. Names paid to Equitas their reserve funds at Lloyd’s, additional premium payments in many cases, and the reinsurance protection of any personal stop-loss contracts that they had purchased. Equitas then netted out the personal stop losses and the reinsurances ceded among the syndicates, and took on responsibility for settling the old-year claims and collecting external reinsurances. This consolidation eliminated intricate accounting processes within the market. Equitas currently protects about 28,000 names.

Equitas established discounted reserves for the names’ liabilities, and thus reported a positive net worth at its first year end. As results emerged and Equitas had the benefit of investment returns, there have been profits most years and Equitas has slowly grown its capital base. More important, Equitas has been able to discharge a significant portion of its liabilities through both normal claims payments and agreed commutations and policy buybacks. Equitas has become a smaller, but more stable, entity. Asbestos remains the largest area of volatility for Equitas, as other exposures have shown development as expected, or even favorably, and some potential liability concerns have not yet materialized

The old year names are mostly U.K. taxpayers, who pay individual taxes on their profits and losses. Thus, Equitas does not receive corporate tax benefits on their losses.

The Corporation of Lloyd’s and the Central Fund never guaranteed Equitas. If Equitas were ever to find itself unable to meet the names’ prior obligations, Equitas would settle the remaining claims pro rata, to the best of its resources. Names would then re-assume their continuing individual liability to policyholders and reinsureds. The on-going syndicates at Lloyd’s have a potential liability to a shortfall by Equitas, but only in certain limited ways:

• Names who participated in both the old and new Lloyd’s have old-year exposure which might go beyond Equitas’ resources. Their ability to support their current writings depends on the adequacy of Equitas’ support for the pre-1993 years.


• Current foreign premium trust funds arguably could be attached to pay old year losses. This could cause a shortfall on the new years.


• There are two specific reinsurance contracts with definite policy limits where new year capital protects old years’ names.

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