Equity Red Star: behind the numbers

While Lloyd’s motor insurer Equity Red Star’s condition is improving, its results for the year ended 30 June 2011 shows the level of difficulty the company was in and how much work remains.  

• Combined ratio: Equity Red Star’s combined ratio was 132.4%. This is a big improvement over the 177.9% it posted in the previous financial year, but the company is still losing £1.32 for every £1 of premium it brings in and so still clearly has some way to go.
• Cost of cover: The fact that Equity Red Star has adverse development cover from one of the best-rated reinsurers – Berkshire Hathaway’s National Indemnity –is a plus. But the change has come at a price: The purchase of the cover was one of the reasons sister company Equity Insurance Group has had to inject £299m of additional funding into Equity Red Star over the past two years.
• Growing deficit: While Equity Red Star’s underwriting results and bottom line profitability are heading in the right direction, its capital position is deteriorating. The company had a shareholders’ deficit of £314.3m in the year to 30 June 2011, up 31% on 2010’s deficit of £240.5m.
• Cuts showing: Equity Red Star’s gross written premium dropped 14% to £336.7m, indicating that it is cutting back on unprofitable business.
• Bigger stake: The Companies House filing also reveal that Equity Red Star has taken on a greater proportion of its Lloyd’s syndicate, 218, raising its participation to 64.9%. In connection with this, the company raised a £34m subordinated loan in December 2011.
• On the mend: More recent results from IAG UK, the bulk of which is Equity Red Star, indicate that the insurer’s condition is continuing to improve. IAG UK made a loss of £4.7m in the six months to December 31 2011 and posted a vastly improved combined ratio of 102.8%.