Lloyd's WTC Exposure Soars 45 Percent

London Editor

London

Lloyds of London has revised upwards its exposure to the World Trade Center disaster by about 45 percent to a total net loss of 1.9 billion ($2.7 billion at current exchange rates), compared to projections of 1.3 billion ($1.9 billion) released on Sept. 23.

The Oldwick, N.J.-based A.M. Best Company is maintaining the A-minus (Excellent) financial strength rating of Lloyds despite the markets updated loss estimates, although the rating remains under review, pending a number of developments.

Lloyds said the primary source of the loss deterioration is in new property claims and increasing reinsurance exposures as Lloyds primary insurers revise their loss estimates upwards.

“The gross loss has risen by only 6 percent to 5.7 billion ($8.1 billion) and is unlikely to affect the gross funding requirements for Lloyds U.S. reinsurance business,” Lloyds said. Earlier projections had listed the Lloyds gross loss at 5.4 billion ($7.7 billion).

Lloyds and other alien reinsurers are required to keep 100 percent of their reinsurance gross funding requirements in a Credit for Reinsurance Trust Fund. Lloyds received a relaxation of this rule from U.S. regulators and was permitted to send 60 percent of the funding requirement, or over $2 billion, on Nov. 15, with the remaining 40 percent due at the end of March.

As a result of general deterioration of losses unconnected to the World Trade Center and the increased potential for reinsurance bad debt as a result of the WTC claims, the market now projects a 1.67 billion ($2.4 billion) loss in the market's 1999 year of account, up from the previous estimate of 1.39 billion ($2.0 billion) made at the end of August.

For the 2000 year of account, loss estimates have risen to 1.49 billion ($2.1 billion) from the previous projection of 700 million ($994 million), also made at the end of August.

Lloyds said that 650 million ($923 million) of the WTC loss is included in the deterioration of the 2000 figure because the losses are accounted for in the year in which the policies were issued. The balance of the WTC loss falls into 2001.

“Anyone searching these figures for signs of Lloyds demise will be disappointed. Weve stated very clearly that Lloyds can manage its losses from Sept. 11. These new projections dont change that position,” said Lloyds Chairman Sax Riley in a statement. He said that the 40 percent increase in premium income written during 2001 and the steep rate increases seen since September mean that Lloyds financial performance is rapidly turning the corner.

A.M. Best said the Lloyds rating, placed under review in September, will remain under review until a greater measure of certainty can be achieved as to:

The market's ultimate overall WTC exposure. Although the latest estimates are within Bests expectations, the rating agency said that further deterioration is possible.

The market's exposure to unrecoverable reinsurance. Best said the markets anticipated reinsurance recoveries, with respect to the WTC, are nearly 4 billion ($5.7 billion), and the reinsurance is spread among highly-rated reinsurers.

The impact the losses will have on the Central Fund. Best said Lloyds projections indicate a containable impact on the Central Fund, although the agency believes drawdowns are likely to be higher than current projections.

Best noted that Lloyds has taken steps to address this issue by increasing the premium levy between 2002 and 2003 to 2 percent, which will help bolster the Central Fund. “This funding will be in addition to the Central Fund annual contribution, which remains at 1 percent of capacity,” Best said.

The extent to which the markets resources will be stretched by liquidity problems. The concession from the National Association of Insurance Commissioners to reduce the funding requirement for the Credit for Reinsurance Trust Fund provides Lloyds with some relief, Best said.

The willingness of members of Lloyds–both corporate and individual–to recapitalize the market. “Initial indications are positive,” Best said. “Business plans submitted to Lloyd's indicate a total market capacity for 2002 to be significantly in excess of this years capacity of 11 billion ($15.6 billion).”

XL Capital Ltd. last week reaffirmed its commitment to the Lloyds marketplace with its decision to realign XL Brockbank Ltd., its Lloyds operation, by supplying 100 percent of the capacity supporting two of XL Brockbanks syndicates at Lloyds beginning next year: Syndicate 1209, with capacity of 360 million ($511.2 million) and Syndicate 990, with capacity of 80 million ($113.6 million).

Syndicates 588 and 861, backed entirely by third-party capital providers for the 2001 year of account, will cease to trade.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Lloyd's WTC Exposure Soars 45 Percent

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