Industry Applauds Lloyd’s Return to Profitability

If it were a sports story, it would be something like the Anaheim Angels winning the World Series last year, so when an insurance company, in this case an insurance market, goes from losing almost $5 billion to making $1.32 billion it’s quite a comeback and quite a story as well.

Lloyd’s management was justifiably proud of the 315-year old institution’s return to profitability, the evident strengthening of its financial position and its excellent combined ratio. (See IJ Website April 2) In a conference call yesterday Julian James, Director of Worldwide Markets pointed out that not only was the £834 million ($1.32 billion) Lloyd’s earned last year the “highest ever” on an annual basis (it’s only the second time Lloyd’s has reported annual earnings), but was also “the highest ever profit on a particular year at Lloyd’s,” measured by the traditional three-year accounting system.

Commenting on the prospects for the market in the immediate future, Chief Executive Nick Prettejohn said in a press release: “The state of the capital markets and the continuing actions by many insurers to increase their reserves for past underwriting means that the Lloyd’s market should enjoy positive trading conditions in the medium term. We are determined that the implementation of our new Franchise arrangements will reinforce these external factors by raising underwriting standards and improving efficiency. These should enable Lloyd’s to sustain today’s positive performance into the future.”

The rating agencies were quick to applaud the results, and what it bodes for the future as well. A.M. Best immediately announced that it had “affirmed the financial strength rating of A- (Excellent) of Lloyd’s after assessing the 2002 results and Lloyd’s potential inability to recover under its Central Fund insurance contract (total aggregate limit of GBP 500 million (USD 800 million)), after the six insurers participating in the Central Fund insurance policy ceased to pay claims.” Best nevertheless “expects Lloyd’s total central resources (including corporation assets) to exceed USD 750 million by the end of 2003.”

The reference concerning the Central Fund is to the arbitration proceedings Lloyd’s has commenced to recover payments from the six companies that insure it, – SR International, a subsidiary of Swiss Re, Employers Re, The St. Paul, Hannover Re, XL and Federal Insurance, a Chubb subsidiary – who have so far refused to pay claims Lloyd’s has made. The maximum amount involved is £290 million ($458 million), and James indicated that Lloyd’s had “a very strong case.”

Moody’s Investors Service, which had already forecast that Lloyd’s would make significant profits, said it welcomed “the return to profitability of the market after the losses of recent years, with a significant profit of 11.2% of capacity (GBP1,484 million) [$2.34 billion] forecast for the 2002 year of account.” It noted that the “forecast profit for the 2002 account and the 2000 account loss of 23.7% (GBP2,397 million) [$3.787 billion] are in line with Moody’s own expectations published in March 2003.”

The rating agency said, however, that “for the 2001 account, affected by losses from the terrorist attacks in the U.S.A., Moody’s notes that a significant difference of 4.7% (GBP520 million) [$822 million] remains between Lloyd’s forecast of a loss of 14.9% (GBP1,653 million) [$2.61 billion] and Moody’s forecast loss of 19.6% (GBP2.2 billion) [$3.476 billion].”

Standard & Poor’s Ratings Services more or less joined the chorus, indicating that “Lloyd’s results announced today are broadly in line with expectations.” It commented on the arbitration proceedings as well, indicating that it “will have no immediate impact on Standard & Poor’s ‘A’ insurer financial strength rating on the Market.”

“As with many arbitration proceedings, Standard & Poor’s expects a commercial settlement to be the most likely outcome, and this is unlikely to have a material impact on the rating,” stated S&P credit analyst Stephen Searby. “The worst-case scenario for Lloyd’s would be for the arbitration to result in a full contract rescission. In this scenario, the impact on the rating would need to be determined as and when rescission became the most likely outcome, and by analysis of the various actions that might need to be taken by Lloyd’s management at that time to meet any resulting financial requirements.”

S&P said the projections for the open years of account, 2001 and 2002 were “are in line with Standard & Poor’s original estimates.” Searby added that “Consistent with past loss-making years, Standard & Poor’s would expect 2001 to deteriorate slightly, and would expect the 2002 result to improve.”