The Hartford Financial Services Group may be forced to take a charge amounting to hundreds of millions of dollars if it loses its appeal to collect reinsurance from a number of run-off Lloyd’s syndicates. The syndicates are reinsured into Equitas, the run-off vehicle that contains the pre-1993 liabilities of Lloyd’s of London.
Jimmy Bhullar, equity research analyst with investment bank JPMorgan, believes The Hartford could stomach such a charge. He estimates the company would need to take a charge of $250 million after tax – or $0.80 a share – if it loses its appeal. “The company has a $1bn capital margin, so that would not constrain its capital flexibility and will pose no risk to its dividend,” says Bhullar.
Jay Cohen, analyst with rival bank Merrill Lynch, believes the charge could be between $0.53 a share and $1.23 a share, representing between 1% and 2% of the company’s book value. “The company does have an allowance of $335 million for all of its uncollectable reinsurance receivables in its run-off book,” he adds in a statement.
The reinsurance dispute centres on the definition of what constitutes a single accident under The Hartford’s so-called blanket casualty treaty. This treaty provided excess-of-loss reinsurance coverage to The Hartford between the late 1930s and mid 1980s. The Hartford believed that the $1.15 billion settlement it reached with asbestos insulation distributor and installer MacArthur Company in 2003 qualified it to collect $117 million under that BCT program.
But some of its upper-layer reinsurers, which participated on the programme from the 1950s, refused to pay. They asserted that the claims against The Hartford were multiple events, and could not be combined as a single accident to trigger the higher layers of protection on the reinsurance treaty.
The Hartford retaliated through the courts and later amended its complaint to include further claims that had come in since its first attempt to collect from its reinsurers. Most of the reinsurers said they were not liable for any of the $586m the company estimates it is entitled to under the terms of the BCT program. On Dec. 13 the court ruled in favour of the reinsurers but The Hartford appealed against the decision.
The company admits that, if it loses that appeal, it may be forced to book a big loss. “If the company ultimately is unable to collect asbestos and pollution recoveries under the BCT, an adjustment to decrease the company’s net reinsurance recoverables would be required in an amount that would have a material adverse effect on the company’s consolidated results of operations or cash flows in a particular quarterly or annual period,” it said an 8-K filing dated Jan. 25.
It also conceded that if the December ruling in favour of the reinsurers is affirmed on appeal, it may be unable to collect “not only its billing for the MacArthur settlement but also other current and future billings to which the same relevant facts and legal analysis would apply”.
For now, the company remains upbeat about the outcome of the dispute. Joshua King, a spokesman for The Hartford, says the company intends to carry out its appeal vigorously and is confident about its position. He adds that a final decision on the appeal is not expected until 2006.
But Jon Nash, a spokesman for Equitas, says the likelihood of The Hartford having recourse to its reinsurers remains small. “The court has issued a thorough and well-reasoned opinion and we are confident it will be sustained on appeal,” he says.