Lloyd's Reports '02 Profit, Positive Outlook

The 2002 results, Lloyd's said, mark a strong return to profitability for the market, after incurring a huge loss in the previous year from the 9/11 terror attacks. "We have announced our annual results in London today, and we are pleased to be able to report, as you no doubt have seen, that the numbers are very positive," said Lord Peter Levene, chairman at Lloyd's of London, during a conference call.

Andrew Moss, director of finance for Lloyd's, added that 2002, for Lloyd's, was a year of profit and a strong performance, in both accounting methods.

"We have two measures of profit: One is on an annually accounted basis in line with the rest of the insurance industry; the other is our more traditional three-year accounting basis," Mr. Moss explained.

"On the pro forma annually accounted basis, we are reporting a profit of $1.34 billion, and that goes against the loss last year of 3.1 billion pounds ($4.99 billion)."

Although the initial profit projection of $2.4 billion for the traditional three-year accounting is only an estimate and some of the policies are still in risk, Mr. Moss added, "we believe there is a cause to be optimistic that the projection will eventuate. And if and when it does, it will be the highest-ever profit on a particular year at Lloyd's."

The insurance market also saw a marked improvement in its combined ratio last year. "In 2001, primarily due to the detrimental effects of claims arising from Sept. 11, we were at the 140-percent mark on the combined ratio," Mr. Moss recalled.

And while that figure was still comparable to many others in the global insurance industry, Lloyd's saw the ratio drop below the 100-percent mark to 98.4 percent last year. "The pattern looks strong against nearly all of industry groups or individual companies," he said.

Mr. Moss also noted that Lloyd's net written premiums have risen by eight percent last year while its net incurred claims fell 36 percent. "That is largely a result of more disciplined underwriting and improvements in terms and conditions in 2002, and the absence of, obviously, the very large claim arising from Sept. 11 in 2001," he said.

Lloyd's, unlike many other insurers who have seen a drop in their equity investments, reported a boost in investment return among its collection of 71 syndicates to over $1 billion.

Mr. Moss noted the figure reflects Lloyd's conservative investment policy. "In syndicates, only one percent of assets are held in equities. So although U.S. and U.K. equity markets have fallen back sharply in the course of 2002, our assets have been invested in cash and in fixed-interest securities, and we reaped the benefits of that conservative policy," he said.

Julian James, director of worldwide markets at Lloyd's, added that in 2002, there also has been a significant strengthening of the market resources and central assets, with the net resources up 85 percent to $12.1 billion and its central assets up 55 percent to $906 million by the end of last year.

Amid its strong financial results, however, there was one potential concern?Lloyd's confirmed today that it has commenced arbitration with six of its insurers participating in its central fund insurance policy. In this policy, the central fund pays claims if underwriters making up Lloyd's market run out of their own funds, but these insurers involved have been withholding payment for some claims.

Lloyd's said it is confident of its position for two reasons. "Firstly, we believe we have a very strong case, the policy is very clear," Mr. Moss said. "Secondly, the central asset growth puts us in a very strong position to withstand any adverse outcome on the arbitration process.

"We could stand to lose up to $467 million. Even if we did that, our central assets would still be close to $800 million at the end of 2003. So this is a manageable issue for Lloyd's."

The major ratings agencies seem to agree with that assessment at the moment.

Oldwick, N.J.-based insurance rating firm A.M. Best Co., for instance, affirmed its "A-minus" financial strength rating with a "stable" outlook after assessing Lloyd's central fund insurance contract and its improving financial performance.

Standard & Poor's Ratings Services also said Lloyd's arbitration action against the insurers to the central fund will have no immediate impact on its "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," said Stephen Searby, a credit analyst for S&P in New York.