By now most of us have received notices of the Equitas-Speyford Part VII transfer. A court hearing to approve the transaction will take place in London on June 24^th and the transaction is to take effect on the 30^th of June. The letter asks policyholders to set forth any objections by June 9^th: “If you intend to make written representations and/or appear at the Court hearing, either in person or by Counsel, you are requested to provide the written representations or written notice of your intention to appear at Court and details of your concerns as soon as possible, and preferably by no later than 9 June 2009.”

The Names seemingly are the big winners from this deal, although policyholders will get the benefit of an additional $1.3 billion in reinsurance limits from Berkshire Hathaway’s National Indemnity Company.

Hugh Stevenson, Equitas chairman, said: “This transfer and reinsurance will … mean that the Names will finally be able to walk away under English law.

“We would like to say to the Names that as best we can judge you no longer have to worry.”

According to Equitas’ letter to the Names advocating the transaction:

In the very unlikely event that Equitas subsequently becomes insolvent, no policyholder with an unsatisfied claim will be able to recover it from any Name anywhere in the European Economic Area – that is all of the European Union, together with Iceland,Norway and Liechtenstein.

We are still considering the extent to which it is practicable to seek recognition of the Part VII transfer in other major overseas jurisdictions, in particular the United States of America.

The independent actuary’s report ― of course, with none of the underlying data available for review ― says that policyholders will be better off with the additional reinsurance than with access to the Names. However, policyholders have (a) no way to verify that the reserve level for pending and future claims is adequate and (b) no valuation of the assets of the Names that they are being asked to give up their rights to.

So if we assume, as the independent actuary asks us to, that the impact of this on policyholders is more theoretical than real [Which policyholders have the appetite to go after the Names individually?], what is the harm?

Think about the next step for Speyford. Under UK law, the Names, and hence Equitas, could not implement a Solvent Scheme of Arrangement (a unique process to shut down solvent insurance companies permitted only by the UK). Speyford, on the other hand, can. The pull to do a Solvent Scheme will likely become irresistible, and indeed there appears to be no reason for the proposed transfer other than to clear the way for an eventual Solvent Scheme. Equitas claims that it has no present plans to do a Scheme but will not promise not to do one.

The advent of a solvent scheme for Speyford is when policyholders with large IBNR {incurred but not reported) claims will be really devastated. The valuations of IBNR under both solvent and insolvent schemes of arrangements ― with no realistic appeal rights ― often pitifully undervalue the risks that policyholders assume when these schemes wipe out policyholder rights under policies purchased decades earlier. Coverage that cannot be replaced. This process was bad enough when it happened with individual London Market companies, but think about it writ large, across the millions of Lloyd’s policies sold prior to 1993.