RE: Lloyd's Global Results and 1997 Annual Report

Dear

Both our in-house accountant and I have reviewed the report. His charge was to identify any areas of inconsistency which are difficult to explain, justify or balance between and among the statements. I took a "big picture" approach in examining solvency and general financial condition.

The biggest issue is the ability of Lloyd's to pay back the "syndicated bank loan". This report shows the net assets of the Corporation of Lloyd's to be c.£75m. The principal balance of the loan due at 12/31/97 is c.£276m. This results in a negative net worth of c.£201m.

The notes to the financial statements indicate that Lloyd's intents to retire this debt through a premium levy over the next four years. The levy in 1997 accounts for c.£43.5m, which includes a receivable; the actual amount collected was c.£38.6m. Obviously, if the next four years provide the same numbers, Lloyd's will be short by c.£100m to £120m in principal payments only; this does not include interest. According to the notes, c.£56m is payment due in 1998. The notes also state that Lloyd's believes debt recovery can assist in retiring this amount. I think it is fair to assume that most debt recovery has already occurred and I don't know how much Lloyd's realistically will recover in the next four years to use toward retiring the syndicated bank loan.

According to the notes, if there is a default in the syndicated bank loan, the banks are able to demand repayment of the outstanding balance from the Corporation's net assets and also from the Central Fund. As we have seen above, the net assets are not substantial. Apparently, there is a "New Central Fund Byelaw" which empowers the council to make a call on behalf of the Central Fund from members premium trust funds up to £200m. This may be Lloyd's safety valve if the bank loan is in default. However, I question the legality of invading premium trust funds, especially given Lloyd's past proclivity for changing operating rules in mid-stream.

While the syndicated bank loan represents the largest area of question as to Lloyd's status as an on-going concern, there are other interesting assumptions made throughout this document. As to the consolidated revenue account, it appears that Lloyd's reports income on an accrual basis to include amounts invoiced; yet, expenses appear to be actual outlays, on the cash basis, with the exception of pension costs. This creates a situation in which income may be overstated on a profit/loss basis.

An interesting side note is that there appears to be a surplus in the pension fund. The notes indicate that the liability was funded at a level of 131% of the actual accrued pension benefits, so there will be a "contribution holiday" in 1998. I find it ironic that a company in the midst of such fiscal turmoil manages; to overfund its employees pensions.

Also of interest is the condition of the Central Fund. The "net funds", or what we would refer to as the cash position of the Central Fund has decreased from c.£685m on January 1, 1996 to c.£144m on December 31, 1997. Without the above mentioned Byelaw, the Central Fund may be of little help toward solvency.

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