Equitas, the Lloyd's reinsurance vehicle burdened with much of the market's asbestos liabilities, saw its surplus fall as it was forced to increase provisions.

It added £399m to asbestos reserves, sending its surplus falling by £152m from £679m to £527m for the year ended 31 March 2003.

It is the third time Equitas has boosted its asbestos reserves, which stood at £3.7bn at year-end compared to £3.6m the year before.

But the operation was also hit by falling stock markets, which produced a loss of £114m. Overall investment returns produced a deficit of £72m, compared to a surplus of £95m in the year to 31 March 2002. Its overall solvency margin, the accumulated surplus stated as a percentage of net claims outstanding, fell to 8.7% from 10.3%. The solvency margin when Equitas was launched in September 1996 was 5.6%.

Chairman Hugh Stevenson said: "Asbestos remains the greatest single threat to Equitas."

But chief executive Michael Crall said Equitas had recognised two to three years ago the asbestos situation which had led to reserve strengthening across the industry in the past 12 months.