After the record losses from the WTC attacks, two cash calls, a buffeting by the rating agencies, a proposed reorganization of its basic financial structure and an audit by the National Assoc-iation of Ins-urance Comm-issioners (NAIC), it appears that Lloyd’s may be battered, but it’s still intact.
Lloyd’s is not alone in having to cope with staggering Sept. 11 losses, but its unique organization and financial structure has made coping a complex task. Each Lloyd’s syndicate underwrites its own risks, and is, therefore, individually responsible for the claims generated on its policies. Thus, Lloyd’s overall net estimate of losses, around $2.7 billion, is the total for all the syndicates in the market. “We do not expect to make any further modification to this figure,” said Lloyd’s media relation’s spokesperson Sara Chorley.
In October 2001, after a preliminary assessment of the situation, Lloyd’s issued a cash call for an additional provision of approximately $1.1 billion. The corporate backers of Lloyd’s individual syndicates—the 894 insurance companies and banks that now provide over 80 percent of Lloyd’s capitalization—paid the bulk of that. The “Names,” individual investors with unlimited liability, paid the rest, around $350 million.
Chorley confirmed that cash calls are made on a quarterly basis. “The syndicates, based on their own accounting, tell us [within a month after the end of the previous quarter] if they need one in order to make good on particular claims.”
The second cash call, at the beginning of February, asked members to provide an additional $800 million to cover net loss estimates for the period 1998 to 2001. While the WTC losses are important, Chorley said that “[$398 million] relates to 1999 and prior years of account and is, therefore, unlikely to be related to Sept. 11.”
The Names were requested to pay around $47,000 each, $117 million in total. The average amount the Names have been asked to pay in the last five months is over $115,000, and that’s a factor in the decline of unlimited liability investors at Lloyd’s. The number of individual Names has continued to fall, from 2,852 last year to 2,490 currently, a 13 percent decrease. It was also a factor when Lloyd’s proposed a series of radical reforms in January (See IJ West; Vol. 80, No. 2; Jan. 28, 2002.)
The attacks on the U.S. seem to have accelerated the Names’ retreat, which continues in spite of sharply rising premium rates. So far it seems to have had no affect on Lloyd’s capacity, which reached a record level of about $17.5 billion for this year, an increase of over 10 percent from 2001. Even so, there are still concerns about Lloyd’s financial stability.
Last November, the NAIC, recognizing a potential liquidity crisis, agreed to give Lloyd’s additional time to raise the cash necessary to fully fund the required deposits to its reinsurance trust fund, managed by the New York State Insurance Department. It completed the transfer of over $2 billion in November.
This represented around 60 percent of the total amount; the remainder is to be paid at the end of March 2002. In exchange, or perhaps as a condition, Lloyd’s agreed to allow NAIC representatives to audit its accounts. Arthur Andersen, the auditors designated by the NAIC to examine them and evaluate reserve levels, completed their review in mid-February, and preliminary reports indicate that Lloyd’s will receive a clean bill of financial health.
A report by Reuters News Agency quoted Georgia’s Insurance Commissioner John Oxendine, head of the NAIC’s reinsurance committee, in charge of overseeing the audit, as stating, “If we had seen any major problems, you probably would have heard about it by now.” At this point, the report is still circulating privately, but it’s expected to be made public soon. Oxendine’s comment is a preliminary indication that no serious deficiencies have been found. He also affirmed that the two cash calls Lloyd’s has now made, which total close to $2 billion, would be sufficient to cover the required deposits.
The proposals to alter the structure of the Lloyd’s market have met general, but cautious, approval from the rating agencies. Moody’s Investors Service noted that while it would address many of the deficiencies, such as cumbersome accounting, lack of transparency, and having to close and reconstruct syndicates each year, it still wasn’t “a panacea for all ills.”
Standard & Poor’s was equally cautious, analyzing the move in terms of capital requirements. While recognizing the respective advantages and disadvantages of both corporate and private capital, S&P stated that “it is not efficient for both types of capital to co-exist.” Underlying its analysis is the assumption that approval of the proposals, which would result in Lloyd’s members becoming the equivalent of franchisees, while designed to strengthen Lloyd’s capitalization, could have some serious unintended consequences.
While noting that removing unprofitable franchises would eventually improve overall profitability, and attract additional capital, S&P said it believes “that there is a risk that the franchisor’s new role might threaten the level of underwriter innovation, for which Lloyd’s has always been widely recognized.”
S&P also pointed out that once Lloyd’s becomes entirely dependent on “corporate capital providers,” it’s also subject to their demands, and the fact that they “have investment alternatives in more lightly regulated jurisdictions.” That point was driven home recently when a major Lloyd’s insurer, Goshawk Insurance Ltd., raised $143 million in additional capital and promptly set up Goshawk Re in Bermuda.
A.M. Best finished its review of Lloyd’s last December, affirming it’s “A-” rating, and removing it from “under review.” Best noted the increased support for underwriting, the size and capacity of Lloyd’s Central Fund, the expected recovery of reinsurance related to the WTC attacks and the stability of the loss estimates, as well as the success of the cash calls and the transfer of the required amounts to the reinsurance trust fund, as reasons to reaffirm the rating despite ongoing loss projections.
S&P wasn’t quite so sanguine. While maintaining Lloyd’s “A” rating, (downgraded from “A+” following Sept. 11), S&P kept it on CreditWatch with negative implications warning, “The extent to which Lloyd’s business position has been impaired by losses over recent years and by the creation of significant new capacity in Bermuda is unclear,” S&P indicated it will wait until at least April, when more information becomes available, before taking any further action.
The only other cloud on Lloyd’s horizon for the moment is an investigation by the European Commission, the Brussels-based body that writes and enforces the EU’s copious regulations. The British government has already been informed that the EC has decided to open “formal proceedings” following a yearlong probe. It’s trying to determine if U.K. regulators—the Treasury until 1998, and the Financial Services Authority after that—may have breached a 1973 directive requiring insurers doing business in the EU to have sufficient reserves to cover potential claims liabilities. The government has said that it fully complied with all regulations, but the investigation could encourage a number of Lloyd’s ex-Names to start asserting claims against the government, which could in turn force it to apply new rules to Lloyd’s. However, most analysts think that’s a very remote