Lloyd’s Change to Annual Accounting Results in $4.5 Billion Loss Estimate

By | May 13, 2002

Lloyd’s decision to begin reporting its syndicates profits and losses on an annual basis, rather than over three years, proved costly. Last year’s losses are estimated at £3.11 billion ($4.5 billion) overall, and WTC loss estimates rose slightly to £1.98 billion ($2.87 billion).

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 percent was comparable to the performance of our global peer group.” According to figures supplied by the RAA, Hong Kong & Shanghai Bank and the Insurance Information Institute, European reinsurers had a combined ratio of 129 percent in 2001, while their U.S. counterparts registered 142 percent. Lloyd’s ratio was higher than Munich Re’s 135 percent, but lower than General Re (175%) CNA Re (263%) and XL Re (161%).

The bulletin stressed the “exceptional catastrophe record for the year, which included not only the Sept. 11 attacks on the U.S., 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. “It 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.”

Lloyd’s breakdown for Sept. 11 related losses shows that an overwhelming 71 percent involve property claims, including business interruption, while 14 percent were related to aviation losses and 15 percent to “liability and other.” According to Lloyd’s, its 52 percent increase in its loss estimates isn’t as great as “the movement experienced by key peers of the Lloyd’s market, namely the ten non-Lloyd’s reinsurance groups (as ranked by Standard & Poor’s according to net reinsurance premiums in 2000). Since September 2001, the total estimated net loss of this peer group with regard to September 11th has increased by approximately 67%.”

The elevated loss figures obtained by the change to annual accounting appear to be due primarily to bad timing. “We’ve been planning this for a long time,” said Lloyd’s spokeswoman Sara Chorley, “long before Sept. 11 and the NAIC audit.” The change has been sought by the major players in the Lloyd’s market, the insurance companies and brokers who supply roughly 85 percent of its capacity, as they report their profits and losses yearly, and working with Lloyd’s three-year system makes it difficult to extrapolate annual figures.

Lloyd’s also released projected results for 1999 and 2000, using its traditional three-year accounting system. Losses for 1999, a truly catastrophic year, rose to £1.95 billion ($2.83 billion), an increase of around $400 million over previous estimates. Losses of £1.72 billion ($2.49 billion) are projected for 2000, an increase of around $330 million. The report indicated that if the losses for 2001 were calculated under the three year system they would be around £1.56 billion ($2.26 billion).

Despite the huge losses, nearly $10 billion for the three years in question, Lloyd’s maintained that its solvency is not at risk. It listed its global assets as of Dec. 31, 2001 as follows:

* £13.5 billion ($19.58 billion) of reserves in the premium trust funds
* £7.7 billion ($11.16 billion) of capital held as Funds at Lloyd’s
* £327 million ($474 million) of additional capital in other members’ assets
* £363 million ($526 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.

The combination of additional capital and Lloyd’s strong asset position has seemingly satisfied the NAIC’s reinsurance committee, headed by Georgia Insurance Commissioner John Oxendine. They accepted the auditor’s report and approved the actions Lloyd’s has taken to assure that its syndicates can pay all of the Sept. 11 and other claims. “Based on the work concluded to date, the task force believes the approach by Lloyd’s managing agents was reasonable,” Oxendine said in a statement reported by Reuters.

Prettejohn and Lloyd’s Chairman Sax Riley both express optimism for the current year and for the future, noting that 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) are assurances that the market will return to profitability.

Current figures confirm the increases. As an example, ACE Ltd., the largest player in the Lloyd’s market, increased its capacity by 38 percent this year to £896 million ($1.297 billion). The second largest player, Australia’s QBE, maintained its previous capacity at £651 million ($942.6 million). Most of the other top twenty capital providers increased their commitments. Only Cox Insurance, which is restructuring its business to emphasize retail operations, and Markel decreased their provisions.

Lloyd’s also announced that, according to a study to be released at the end of April, its “share of net premium income in London has risen from 55.6% in 1998 to 70.1 percent in 2000—the highest figure in recent history. On a gross basis, Lloyd’s market share over the same period has risen from 50.4 percent to 59.3 percent. ”

Despite the strain on its finances posed by three years of billion dollar plus losses, Lloyd’s move to annual accounting doesn’t seem to create an additional problem. “We said at the time [when the change was first announced] that we’re very confident in our ability [to remain competitive] said Chorley, “and we continue to be so.”

Lloyd’s is continuing to make other changes as well. Riley indicated that it 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.”

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