November 26, 2002

Honorable Terri Vaughan
Division of Insurance, State of Iowa
330 E. Maple Street
Des Moines, IA 50319

RE: Lloyd’s American Trust Funds
Equitas American Trust Fund

Dear Commissioner Terri Vaughan:

This is the second in a series of letters regarding the lack of substantive regulation of Lloyd’s. This dearth of regulation is primarily due to the failure of the New York Insurance Department ("NYID") to fulfill its duties and obligations to fellow regulators and policyholders across the United States.

Over the decades, reliance on the NYID has conditioned state insurance departments throughout the U.S. to unquestioningly depend on the NYID to properly monitor Lloyd’s.

The purpose of this letter is to illustrate why continued trust in the NYID is misplaced, and to address the lack of audits of the Lloyd’s and Equitas American Trust Funds.

Many U.S. regulators have two fundamental misconceptions about Lloyd’s:

1. That the U.K. government, through the Financial Services Authority ("FSA"), audits Lloyd’s financial solvency. (They don’t; they "rely on insurer reports")

2. That the NYID routinely audits Lloyd’s and Equitas’ U.S. trust funds. (The only audit was published in 1995)

Presently, the European Commission is investigating the British Government for failure since the mid-1970’s to properly apply an EC directive to audit arrangements at Lloyd’s.[^1] The EC is clearly concerned about the reliability of the financial reports published by Lloyd’s and solvency of the Lloyd’s market. We believe you should share the EC’s concern.

Since 1977, Lloyd’s has been transacting the business of insurance in the U.S. as an accredited reinsurer and approved non-admitted insurer based upon its agreement to maintain on deposit in the State of New York specific amounts mandated by New York Insurance Department ("NYID") regulations. However, during an audit of Lloyd's trust funds by the NYID published in May 1995, state examiners discovered that the deposits in Lloyd's American Trust Funds ("LATF") were deficient by over $18.47 billion on a gross basis! As a result, in May 1995, NYID’s then Superintendent Ed Muhl, required Lloyd’s to retain 100% of liabilities in separate, newly established trust funds for Lloyd’s U.S. surplus lines and reinsurance business.[^2]

American Names Association / U.S. Insurance Commissioners
Page two / 11-26-02

Despite the fact that Lloyd’s has incurred more than $11.5 billion in losses since 1997 [^3], and indications that Equitas may be insolvent, the NYID has not conducted another audit of any of these Funds to determine whether Lloyd’s and Equitas are in compliance. If the amounts on deposit in the Lloyd’s American Trust Funds and the Equitas American Trust Fund are deficient, the protection afforded to Lloyd’s policyholders and reinsureds in your state is illusory!

Why hasn’t the NYID audited the Lloyd’s and Equitas trust funds? We believe the NYID has failed to fulfill its duty to you and other state regulators because its senior executives are being unduly influenced by Lloyd’s and its advocates. We believe Lloyd’s leadership fears that revelation of its actual liabilities relative to its trust balances will expose its true financial condition and impair its approval status in the U.S. The negative impact Lloyd’s restructuring plans could have on 1993 to 2002 U.S. policyholders, however, makes an audit imperative.

In October 2001, at a special summit meeting of the NAIC in Washington, D.C., the NAIC assumed direct accountability for verifying the financial strength (or weakness) of Lloyd’s. The NAIC commissioned Arthur Andersen to conduct a "thorough examination" of Lloyd’s.[^4] The NAIC’s statements and releases to the press led the public, ceding reinsurers and industry observers, including many state regulators, to believe that the examination would include a thorough examination of Lloyd’s post 9-11 financial condition.[^5]

We have been informed, however, that instead of verifying any of Lloyd’s financial data, Andersen only focused on Lloyd’s procedures and safeguards. The NAIC has not published even a summary of Andersen’s report, and discussions of Andersen’s findings by an NAIC oversight committee have been confined to closed executive sessions, but reliable sources have described the report as being essentially "useless". If the NAIC feels that the Andersen report is useless, a new examination including an audit of Lloyd’s American Trust Funds should be ordered without further delay.

We believe that you and other state regulators cannot rely on the NYID to fulfill its oversight obligations to you and Lloyd’s U.S. policyholders. The only way you can prudently decide whether to allow Lloyd’s underwriters to continue to transact insurance in your state as approved non-admitted carriers is to know their true financial condition, and require compliance with your own state’s laws. Until the trust funds have been thoroughly audited and you are personally satisfied that the mandated balances are on deposit, there is no way you can assure your constituents that their claims will be paid in full.

It is essential that state insurance departments mandate and regularly confirm that adequate balances are in Lloyd’s and Equitas’ U.S. Trust Funds, and that the trusts are maintained in compliance with their respective Trust Deeds.

American Names Association / U.S. Insurance Commissioners
Page three / 11-26-02

Lloyd’s is writing and renewing policies every day, while implementing its plan to convert from a "market" to a "brand name" franchiser. If you and other state insurance regulators do not require Lloyd’s to prove that the American trusts are properly funded, who will? Without an audit, on what basis can U.S. insureds make informed decisions about placing risks with Lloyd’s?

We call upon all Commissioners to compel an audit of all the Equitas and Lloyd’s American Trust Funds, such audit to be

1. conducted by a firm other than Arthur Andersen;
2. supervised by Examiners from at least three (3) states, excluding Georgia, Texas and New York; and
3. memorialized in a report of the examination available to the public, as is the case with domestic insurers.

Please take a moment to read the enclosures. If you would like a complete copy of the 2001 Lloyd’s Global Results or have any questions, please feel free to contact our office.

Sincerely,

American Names Association

 J. F. "Jack" Shettle, Sr.
Chairman

cc: Fifty-four (54) Insurance Commissioners in the United States and territories

^Endnotes:
1. Source: European Panel Warns British Government Again Over Lloyd’s Insurance Market,Knight Ridder Tribune Business News, 10-17-02
^2. Source: Stipulation Agreement Between Lloyd’s and the NYID, 5-24-95.
^3. Source: Lloyd’s Global Reports, Compilation of aggregate market losses for 1997 to 2001 years of account
^4. Source: NAIC Members Clarify Requirements for Lloyd’s Trust Funds, NAIC News Release, 10-23-01
⁵. Source: Lloyd’s in Solvency Probe, BBC News, 11-05-01