Lloyd’s Change to Annual Accounting Creates $4.45 Billion Loss Estimate for 2001

Lloyd’s decision to begin reporting the profits and losses of its syndicates on an annual basis, rather than over three years, produced some costly results, with last year’s losses estimated at £3.11 billion ($4.45 billion) overall, and WTC loss estimates rising slightly to £1.98 billion ($2.83 billion).

Lloyd’s Chief Executive Nick Prettejohn explained that, “The move to annual accounting is a fundamental step in our strategy of reform. It makes us more accessible and transparent, and enables us to report results that can be compared easily to those of other insurers.”

He called 2001 “an exceptional year by any measure,” and admitted that the “loss is large in absolute terms,” but he also indicated that “relative to other major property and casualty insurers the Lloyd’s combined ratio of 140% was comparable to the performance of our global peer group.”

The announcement stated that the losses were due to “the exceptional catastrophe record for the year, which included not only the September 11 attacks on the US, but also the attack on the Air Lanka fleet, the losses in the energy market of the Petrobras oil rig and the Toulouse plant. In common with many others in the industry, the results also reflect deterioration in prior years’ reserves.” The report also noted that while the number of catastrophes last year was comparatively small, they “were very costly and often in classes in which Lloyd’s is a market leader.”

The projected results for 1999 and 2000 were also released using Lloyd’s traditional three-year accounting system. Loss projections for 1999, a truly catastrophic year, rose to £1.95 billion ($2.78 billion), an increase of around $400 million over previous estimates. 2000 operations are now projecting losses of £1.72 billion ($2.46 billion), an increase of around $330 million.

Lloyd’s indicated that under the three year system a loss of £1.56 billion ($2.23 billion) would be the preliminary estimate for 2001.

Despite the huge loss estimates, nearly $10 billion for the three years in question, Lloyd’s announcement stressed that its solvency was not at risk. It listed its global assets as of December 31, 2001 as follows:
— £13.5 billion of reserves in the premium trust funds
— £7.7 billion of capital held as Funds at Lloyd’s
— £327 million of additional capital in other members’ assets
— £363 million as central assets at Lloyd’s

It also detailed the steps it has taken, including raising the premium levy it takes from the syndicates to maintain its Central Fund, to assure that there will be sufficient funds available to assure claims payments.

Prettejohn, and Lloyd’s Chairman Sax Riley both expressed optimism for the current year, and for the future, noting the significant rise in premiums, projected to be around 62 percent above year 2001 rates, and the increase in Lloyd’s capacity to £12 billion ($17.16 billion) as assurances that the market will return to profitability.

Riley also indicated that Lloyd’s would continue to reform its procedures, as a necessary step to remain competitive. “The significant improvement in current market conditions cannot, however, serve as an excuse for putting off reform,”he stated. “It is long overdue. We are addressing the major weaknesses in some of the ways Lloyd’s does business. These changes, building on our existing strengths, will ensure that we remain a major force in international insurance.”

Topics Profit Loss Excess Surplus Lloyd's