operation was split, claims Gabriel Moss, lawyer for the liquidator. Ahmed ElAmin reports A review of Bermuda Fire accounts by US National Association of Insurance Commissioners (NAIC) found that under US accounting rules the company was insolvent in 1989, two years before the profitable domestic operation was split off to become BF&M Ltd., a court heard yesterday.

As the review was done only a few months before the 1991 split was made, the company's directors on the finance committee, accountant and legal advisor should not have gone ahead in separating Bermuda Fire's operations, lawyer Gabriel Moss charged in Supreme Court.

Mr. Moss, who is appearing for liquidator Ernst & Young, said yesterday the NAIC threatened in 1991 to remove Bermuda Fire from the list of companies allowed to underwrite in the US after reviewing the 1989 financial accounts.

NAIC revaluated the company's balance sheet, and estimated that Bermuda Fire had a negative net worth of $3.5 million, compared to the company's estimate that it had a $6 million surplus. Mr. Moss noted the US accounting standard used was more conservative than the UK standard used by Bermuda Fire.

Faced with the threat Bermuda Fire voluntarily withdrew as a US admitted insurer. Mr. Moss said the NAIC review showed that Bermuda Fire as a whole was insolvent in 1989. Without the domestic operations to support the losses from the international business, the review made it even more obvious to the directors that Bermuda Fire was insolvent when the split was made in 1991, Mr.

Moss alleged.

The NAIC estimates of the 1989 accounts took $4 million off the assets on the Bermuda Fire balance sheet as the organisation said the funds were only available to the company's life and health business policyholders under the Island's laws.

NAIC also said the company's $2.75 million added on to the balance sheet after a revaluation of its land holdings was not allowed under US law. Credit for reinsurance recoverables in dispute and overdue balances were also omitted under the NAIC review.

The organisation did not support the discounting method used by Bermuda Fire in estimating the loss reserves needed for future claims from its international policyholders.

The NAIC also noted that the company's stop-loss policy -- reinsuring Bermuda Fire once total claims reached $32 million and up to $50 million -- was listed as an asset without a corresponding liability for millions of dollars in premiums.

The premiums were instead put down as a yearly expense on the net income statement. NAIC said the premiums should have been put down as a corresponding liability on the balance sheet.

On the positive side the NAIC credited back $5.2 million on to the balance sheet for adjustments the company had taken off for bad debt.

Mr. Moss is in the sixth day of his opening argument before Supreme Court Puisne Judge Vincent Meerabux, going through documents he will use to attempt to show that the 1991 split was a "fraudulent conveyance'' of property intended to defraud creditors of the international business. Mr. Moss also outlined yesterday the minutes of a May 29, 1991 Bermuda Fire finance committee meeting during which Charles Collis, Donald Lines and Gregory Haycock noted a Tillinghast report which estimated that the company had to increase undiscounted reserves by $10.3 million in 1990 to meet future claims.

"A pretty stunning figure your Lordship may think, a record deterioration, again a devastating blow to what was already a hopeless and fatal scenario,'' Mr. Moss said to Mr. Justice Meerabux.

He also charged that the directors had specifically asked Tillinghast to exclude estimates for future pollution claims even though they were aware of the potentially billions in claims about to hit the world insurance market.

The exclusion of claims for pollution skewed Bermuda Fire figures in a more positive light helping the directors to get the split past local regulators.

"It's a completely false and inaccurate scenario without figures from pollution,'' Mr. Moss said.

Bermuda Fire then went ahead with the split in September 1991, estimating the company had a $12 million surplus without the domestic operations. Bermuda Fire went into liquidation in 1993, eventually owing creditors $450 million.

Judge Vincent Meerabux Gabriel Moss