REPORT ON EXAMINATION OF LLOYD'S LONDON
AS OF DECEMBER 31, 1993

DATE OF REPORT: MAY 11, 1995

EXAMINERS: PAUL COHEN, CFE, CIE
BERNARD GANLEY, AFE
JOYCE N. BUSHELL, CIE

TABLE OF CONTENTS

ITEM NO. - PAGE NO.

3. Trust funds maintained in the United States 9

4. Financial statements 18

5. Losses and unearned premiums 20

6. Summary of comments and recommendations 25

Honorable Edward J. Muhl
Superintendent of Insurance

Sir:

Pursuant to the New York Insurance Law, Department Regulation Nos. 20 and 41, and your instructions, an examination as of December 31, 1993, has been made into the affairs of Lloyd's, London. The following report thereon is submitted.

The examination was conducted at the Corporation of Lloyd's building locatedat One Lime Street, London EC3M7HA.Whenever the term "Lloyd's" appears herein without qualification, it should beunderstood to indicate the members of Lloyd's underwriting community.

As a result of this examination, it was determined that, as of December 31, 1993 Lloyd's failed to maintain the minimum surplus amounts required to be held in trust funds in the United States pursuant to the Regulation No. 20 (11 NYCRR 125). It was also determined that although Lloyd's maintained the minimum deposit amount required to be held in trust funds in the United States as of December 31, 1993 pursuant to Regulation No. 41 (11NYCRR 27), as of January 1, 1994, the effective date of new Regulation 41 (NYCRR 27), Lloyd's failed to maintain the minimum surplus amount required to be held in trust funds in theUnited States.

1. SCOPE OF EXAMINATION

This is the first examination of Lloyd's by the New York State Insurance Department. The examination was conducted as of December 31, 1993. Subsequent transactions were reviewed where deemed appropriate by the examiners.

The examination was limited in its scope to a determination as to whether or not Lloyd's was in compliance with the requirements of New York State Insurance Department Regulation Nos. 20, 41 (in effect as of December 31, 1993), and new 41 (in effect as of January 1, 1994) which govern credit for reinsurance from unlicensed insurers and excess line placements respectively.

The Report expresses no views on the global solvency of Lloyd's. The examination consisted of a general review of the manner in which Lloyd's conducts business in the United States, how such business is reported, the operation of Lloyd's American Trust Funds, Lloyd's American Credit for Reinsurance Joint Asset Trust Fund, Lloyd's American Surplus or Excess Lines Insurance Joint Asset Trust Fund, and Lloyd's Central Fund United States TrustFund. A summary schedule of assets held in these trust funds appears on page 10 of this report. The examination was not intended to encompass a verification of the value of the assets or reserves for liabilities reported by Lloyd's.

2. DESCRIPTION OF LLOYD'S, LONDON Lloyd's is an insurance market which began over three hundred years ago in a London coffee house owned by Edward Lloyd. It comprises a society of underwriters incorporated in 1871 by an Act of Parliament. It is not an insurance company nor does it accept insurance risks or issue policies. It is the individual underwriting members termed "Names" who accept insurance risks by means of participation in Lloyd's underwriting syndicates. From its inception through December 31, 1993, Lloyd's limited underwriting membership to individuals; effective January 1, 1994 Lloyd's expanded its underwriting membership to include corporations. Participation in underwriting syndicates by a Name is on a several but not joint basis. An individual Name's liability is unlimited whereas a Corporate Name's liability is limited to its capital base.

Business at Lloyd's is conducted in the underwriting Room where underwriters for each syndicate are brought business by Lloyd's Brokers who range in size from small companies to multi-national organizations with offices throughout the world. The Lloyd's Broker submits the risk to the underwriter in the form of a piece of paper called a slip. If the Lloyd's Broker and underwriter agree on terms and rates, the underwriter signs the slip and writes the share of the risk that he is willing to accept for his syndicate on the slip. The underwriter thus accepts liability on behalf of his syndicate which is composed of various Names. The Lloyd's Broker then negotiates with other syndicate underwriters or insurance companies for the balance of the risk. Lloyd's Brokers are not restricted to deal only with Lloyd's underwriters but are free to place business wherever they please. Only accredited Lloyd's Brokers are permitted to bring business to the underwriter.

As of December 31, 1993, business underwritten at Lloyd's was divided into four areas: Non-marine (50%), Marine (26%), Motor (26%), and Aviation (10%). Further, Lloyd's worldwide premium income was derived as follows: United Kingdom 37%, United States of America 32%, Europe 12%, and rest of world 19%.

On March 25, 1977, Lloyd's petitioned the Superintendent of Insurance to exercise his discretion under Section 70 (7) of the New York Insurance Law and Regulation 20 promulgated pursuant thereto to grant accredited status to Lloyd's. Lloyd's was granted a certificate of recognition as an accredited reinsurer on April 22, 1977. On November 25, 1977, Regulation No. 20 was amended to incorporate certain conditions previously agreed to by Lloyd's and the Superintendent as part of Lloyd's recognition as an accredited reinsurer. Lloyd's' also is deemed an acceptable excess line insurer pursuant to the requirements of Regulation No. 41.

A. Management

The Council of Lloyd's is the statutory body established and vested with the management of the affairs of Lloyd's. It has the power to regulate and direct the business of insurance at Lloyd's. It is comprised of 18 members, 6 elected from the working membership, 5 from the external membership and 7 nominated by Lloyd's and approved by the Governor of the Bank of England. Nominated members have no business connections with the Lloyd's market. The Council elects the Chairman and Deputy Chairmen from among their number The responsibilities of the Council are in turn delegated to a Market Board, responsible for the development and growth of Lloyd's worldwide business, and a Regulatory Board, responsible for developing and monitoring regulatory practices and procedures throughout the society. The Market Board is comprised of 19 members: Lloyd's Chief Executive Officer, 6 working members of the Council, 6 working members no members of the Council, 3 external members and 3 corporate executives. The Regulator Board is comprised of 16 members: 6 nominated by the Council, 5 external members, 4 working members, and the Solicitor to the Corporation of Lloyd's.

B. Regulation No. 20 (11NYCRR 125) Credit For Reinsurance from Unlicensed Insurers

Pursuant to Regulation No. 20, in order to maintain its status as an accredited reinsurer in New York, Lloyd's is required to have deposited with one or more New York State banks and/or members of the Federal Reserve System located in New York State a trust fund or trust funds, constituting a surplus, in cash of readily marketable securities, in an amount of not less than $100,000,000 for the protection of United States ceding insurers and United States beneficiaries under reinsurance policies issued in the name of Lloyd's. The minimum surplus amount is required to be maintained on a joint and several basisall other funds are held on a several but not joint basis. Regulation No. 20 defines surplus to mean the balance remaining after subtracting United States liabilities, attributable to reinsurance policies issued in the name of Lloyd's, from the total assets deposited in the trust fund or trust funds. Therefore, pursuant to Regulation No. 20, Lloyd's as an accredited reinsurer in New York is required to have assets in United States trust funds equal to its United States liabilities plus $100,000,000.

C. Regulation No. 41. (11 NYCRR 27) Excess Lines Placements Governing Standards

Pursuant to Section 27.5(b) of Regulation No. 41, in effect as of December 31, 1993, an excess line broker wishing to place business with Lloyd's was required to obtain a duly verified bank statement showing that there was on deposit in one or more New York State banks and/or members of the Federal Reserve System a trust fund or trust funds, in cash, clean irrevocable letters of credit, or readily marketable securities in an amount of not less the $50,000,000 for the protection of the United States policyholders of and United States beneficiaries under policies issued by Lloyd's.

On January 1, 1994, the existing Regulation No. 41 was repealed and a new Regulation No. 41 became effective. Sections 27.13(g) of new Regulation No. 41 requires Lloyd's to maintain a trust fund in the form of a trusteed account representing Lloyd's liabilities attributable to excess line business written in the United States and a surplus in the amount of $100,000,000 which shall be held jointly for the benefit of United States excess line policyholders of any member of Lloyd's.

D. Lloyd's Annual Solvency Test

Pursuant to Section 86(l) of the Insurance Companies Act of 1982 (United Kingdom), Lloyd's is annually required to submit to the Department of Trade and Industry ("DTI") a report which shows that it has passed a prescribed Solvency Test. Lloyd's conducts the Solvency Test on two levels. At the first level, Lloyd's collectively completes the solvency margin statement required for its annual report to DTI. This statement relates to the total business underwritten at Lloyd's and is intended to demonstrate the adequacy of assets available to meet the solvency margin required by DTI. At the second level, Lloyd's determines whether each Name maintains sufficient assets to meet his underwriting commitments.

The purpose of the Solvency Test is to ensure that all policyholders' and ceding insurers' claims can be met. All Names, regardless of their underwriting status (i.e. active, resigned, deceased, etc.) who have any syndicate participation are subject to the annual test.

Individual syndicate results necessary to perform the Solvency Test are reported to Lloyd's by each syndicate's Managing Agent in the form of an annual return. The return submitted is required to have been audited by an independent firm of recognized syndicate auditors. The return details the results of the syndicate's operations for all open years of account. Further, the return reports the syndicate's results on a cash basis and adds any adjustment (i.e. outstanding losses) necessary to present results on an accrual basis. Net outstanding losses reported in the return are required to be valued and reported on two bases termed Test 1, a formula method agreed to by Lloyd's and DTI, and Test 2, the amount which the Managing Agent believes is ultimately expected to be required to pay all liabilities in respect of winding up open years of account. The greater of Test 1 or Test 2 is used by Lloyd's to establish the global statutory solvency reserve and also used in the Names' solvency test. Annual audited returns detailing all assets held on behalf of each Name by Members Agents are also required to be filed with Lloyd's as part of the Solvency Test.

Utilizing the annual reports received from Managing and Members Agents, Lloyd's Solvency Department conducts a matching exercise for each name. Where the exercise determines that there are sufficient assets reported to cover a Name's underwriting liabilities, the Name is considered to be solvent. Where the exercise determines that there are insufficient assets reported to cover a Name's underwriting liabilities, the Name is considered to have a solvency shortfall. In this event, the Central Fund, a Lloyd's fund available to meet a Name's solvency shortfall, is earmarked in order that such Name may be demonstrated as being solvent and the requisite audit confirmation filed with DTI. If assets in Central Fund are not adequate, other Lloyd's funds may be used.

The 1993 Solvency Test, filed with the DTI on September 1, 1994, showed an earmarking amount or an excess of liabilities over assets of 1,378,992,285 pounds. In order to pass the Solvency Test requirement, the following Lloyd's funds were earmarked:

Net Assets of Lloyd's (excluding high level stop loss scheme)

Total

3. TRUST FUNDS MAINTAINED IN THE UNITED STATES

At December 31, 1993, Lloyd's Trusteed Surplus Statement filed with the New York Insurance Department showed trusteed assets of $10,172,901,140 liabilities of $9,148,023,250 and a trusteed surplus of $1,024,877,890. The trusteed assets were on deposit with Citibank, N.A. in New York as follows:

Lloyd's American Credit for Reinsurance Joint Asset[s] Trust Fund

It is noted that liabilities reported in the Trusteed Surplus Statement are net of reinsurance.

A. Lloyd's American Trust Funds

Lloyd's American Trust Funds ("LATF") was set up in 1939 prior to the outbreak of World War II. Its purpose was to give assurance to United States insureds that, notwithstanding the impending war, payment of claims by Lloyd's would be uninterrupted by any difficulties experienced in removing funds from the United Kingdom.

The LATF Deed, in effect December 31, 1993, provides for the following:

(a) a separate trust is established for each Name.

(b) each Name at Lloyd's underwrites in association with other Names but each Name is underwriting for his own sole separate account.

(c) LATF applies only to "American business" carried on by each Name. "American Business" is defined as such part of the Name's underwriting business at Lloyd's as complies with the following two conditions:
(i) the liability of the Name in respect thereof is expressed in United States dollars; and
(ii) the premiums payable to or for the account of the Name has been paid or is payable in United States dollars.

(d) all premiums and other moneys payable to or for the account of the Name in connection with American business shall be paid or accounted for to the Trustee and held in trust for the account of the Name.

It is noted that LATF is not applicable to United States business placed with Lloyd's that is expressed in the two other currencies in which Lloyd's conducts business namely pounds Sterling ("pounds") and Canadian dollars. Regulation No. 20 requires trust fund protections for all business ceded by United States insurers to Lloyd's. However, LATF fails to provide protection for business ceded by United States insurers that is expressed in pounds or Canadian dollars. Lloyd's has advised that, to the best of its knowledge, no United States insurer has ceded business to it in any currency other than United States dollars. Further, there are separate trust accounts in place outside the United States for pounds and Canadian dollars.

The examination review of various records maintained by Citibank and at Lloyd's indicates that there is not any record of the individual Name's total assets held in LATF accounts. As noted previously each Name at Lloyd's underwrites in association with other Names but each Name is underwriting for his own sole separate account. Therefore, each Name's assets in LATF is for the purpose of meeting that Name's liabilities and not the liabilities of other Names. Lloyd's Managing Agents keep track of the amount of funds held in LATF for each syndicate under their control and also maintain records of Names comprising each syndicate.

However, each Name is usually represented on several syndicates which are under the control of various Managing Agents. The amount of each Name's United States dollar liabilities and funds in LATF, by syndicate and Managing Agent, is not accumulated centrally. Further, Managing Agents control a Name's funds in LATF by means of group accounts. Such accounts may consist of several syndicates or Names within several syndicates grouped together for investment purposes. In order to determine each Name's assets in LATF, it would be necessary to compile a listing from each Managing Agent of all syndicates under the Managing Agent's control; such listing would have to show a breakdown by policy year down to the Name's level. All Name information would then have to be accumulated. It appears that an LATF allocation by Name is not maintained by the Trustee or centrally by Lloyd's.

This raises concerns that LATF, as currently constructed, may not provide the security intended by Regulation No. 20 and Regulation No. 41, in effect as of January 1, 1994, to United States policyholders and United States ceding insurers. While total assets in LATF may equal total United States dollar liabilities, an individual Name's assets in LATF may be less than the Name's United States dollar liabilities.

The fact that Lloyd's does not measure the adequacy of each Name's assets in LATF in relation to each Name's United States dollar liabilities exacerbates the problem of determining compliance with Regulation Nos. 20 and 41. Therefore, it appears that in order to assure proper security for all United States policy holders and United States ceding insurers Lloyd's needs to determine and be able to report each Name's assets in LATF and each Name's United States dollar liabilities or amend LATF so that assets are held on a joint and several basis.

The examination also determined that in instances where a claim is required to be paid from LATF and there are insufficient funds in a particular group account, Lloyd's instructs Citibank to draw down on a pool of funds held in certain other group accounts, regardless of whether or not these group accounts are under the control of the same Managing agent and despite the fact that a Name's funds that are drawn on may have no liability for the claim, in order to ensure that the claim is settled. In effect, Lloyd's borrows one Name's assets to pay for another Name's liabilities.

As LATF Deed did not provide for the use of one Name's assets to pay another Name's liabilities, Lloyd's was asked to produce documentation to support this practice. Lloyd's advised that it was its United States counsel's opinion that such practice is permitted so long as it is prudent and that it will amend the LATF Deeds to provide the Trustee with the requisite powers. In view of the fact that certain Names are unable or unwilling to fund their Lloyd's liabilities, it is questionable as to whether or not it is prudent to make such loans.

LATF is available for payment of United States dollar claims. Therefore, policyholders and ceding insurers located outside the United States can make claims against LATF. As a major portion of Lloyd's United States dollar business is written outside of the United States, assets available in LATF to protect United States policyholders and United States ceding insurers are subject to withdrawal by policyholders and ceding insurers located outside the United States. Consequently, if United States dollar liabilities of policyholders and ceding insurers located outside the United States are understated and such claims are paid out of LATF, assets in LATF available to United States policyholders and Untied States ceding insurers would be inadequate. Conversely, if United States dollar liabilities of policyholders and ceding insurers situated outside the United States are overstated, or such claims are paid with funds other than from LATF, assets in LATF available to United States policyholders and United States ceding insurers are enhanced.

As a result of Lloyd's 1992 Annual Solvency Test, Lloyd's was aware or should have been aware of the fact that its 1993 Annual Solvency Test would indicate that assets reported in Lloyd's 1993 Trusteed Surplus Statement to the New York Insurance Department would be inadequate to fund Lloyd's United States dollar net liabilities. As indicated previously, in September, 1994 Lloyd's earmarked 1,378,992,285 pounds to meet its 1993 solvency requirements. The earmarking amount represents the total of each Name's excess of liabilities over assets. While Lloyd's earmarked funds to cover Names' deficiencies, Lloyd's failed to transfer funds from London to correct the deficiencies in LATF and comply with the requirements of Regulation Nos. 20 and 41 (in effect as of January 1, 1994).

B. Lloyd's Central Fund United States Trust Fund

Lloyd's Central Fund is a fund into which all Names make annual contributions. This fund, at the discretion of the Council of Lloyd's, is available to meet policyholders' claims in the event of a name being unable to meet his own underwriting liabilities. Lloyd's Central Fund United States (CFUS) represents that portion of Lloyd's Central Fund that is held in the United States. It was established in the United States during July 1992 for the following purposes:

(a) making good any default by any Names under any contract of insurance underwritten at Lloyd's forming part of the Name's American business.

(b) preventing the occurrence or reducing the extent of such default by any Name at Lloyd's.

(c) compensating in whole or in part any person for making for or on behalf of any Name of Lloyd's payment which has the effect of preventing such default by any such Name.

(d) extinguishing or reducing the liability of any Name in connection with his American business.

"American business" is defined as such part of the name's underwriting business at Lloyd's as complies with the following two conditions:
(i) the liability of the Name in respect thereof is expressed United States dollars; and
(ii) the premiums payable to or for the account of the Name has been paid or is payable in United States dollars.

It is noted that policyholders do not have direct access to CFUS in the event a Name's liability is undischarged. As CFUS represents the United States portion of Lloyd's Central Fund, transfers of funds out of CFUS for the above purposes remains at the discretion of Lloyd's Council.

CFUS was established in July 1992 in the amount of $700,061,719 by means of a special levy by Lloyd's against Names. This amount was transferred from LATF to CFUS and represented a portion of Names' underwriting profits on closed years of account held in LATF. As of December 31, 1993, assets in CFUS totaled $370,162,892. The decrease in CFUS is due to the payment of claims through LATF.

C. Lloyd's American Credit for Reinsurance Joint Asset Trust Fund

Effective September 15, 1993, Lloyd's established the Lloyd's American Credit forReinsurance Joint Asset Trust Fund. This Fund, which is required to be maintained at aminimum amount of $100,000,000 on a joint and several basis, provides protection only toinsurers domiciled in a state, district, territory commonwealth or possession of the UnitedStates which have ceded insurance risks underwritten by such insurers to Lloyd's pursuant to an American Reinsurance Policy. An American Reinsurance Policy means any reinsurance contract, other than life reinsurance, between a United States ceding insurer and Lloyd's with respect to property or risks situated in a state, district, territory or possession of the United States. Claims against this Fund become enforceable only after certain conditions are met. One of the major conditions is that the ceding insurer has pursued all of its rights and remedies against Names under the deeds of trust known as LATF and CFUS.

D. Lloyd's American Surplus or Excess Lines Insurance Joint Asset Trust Fund

Effective September 15, 1993, Lloyd's established the Lloyd's American Surplus or Excess Lines Insurance Asset Trust Fund. This Fund, which is required to be maintained at a minimum amount of $100,000,000 on a joint and several basis, provides protection to American policyholders who have obtained surplus or excess lines policies from Lloyd's pursuant to surplus or excess lines laws of the several states of the United States. The fund also provides protection to a third party claimant. An American Policy means any policy of insurance, other than life insurance, issued by Lloyd's pursuant to surplus lines or excess lines laws of any United States jurisdiction which is issued to a policyholder and which provides insurance with respect to property or risks situated in a state, territory, commonwealth or possession of the United States in which Lloyd's is not licensed to do an insurance business.

A Policyholder means the older of an American Policy resident or doing business in the United States and any other persons or associations who are assignees, pledgees, or mortgagees named in the policy.

A Third Party Claimant is one not a party to the policy but having a final judgment from any court of competent jurisdiction from which no appeal can be filed against Lloyd's for claims arising from an American Policy. Claims against this Fund become enforceable only after certain conditions are met.

One of the major conditions is that the policyholder or third party claimant has pursued all of his rights and remedies against Names under the deeds of trust known as LATF and CFUS.

4. FINANCIAL STATEMENTS

A. Balance Sheet

The following shows the United States dollar assets, liabilities and surplus as regards policyholders as reported by Lloyd's in its filed Annual Statement for the year 1993:

The following shows the United States dollar trusteed surplus reported by Lloyd's in its filed New York Supplement of its Annual Statement for the year ending December 31, 1993:

5. Losses and Unearned Premiums

Net liabilities for losses and unearned premiums reported in Lloyd's December 31, 1993,Trusteed Statement totaled $9,964,706,103. This amount was established using a method based upon the formula method (Test 1) agreed to by Lloyd's and DTI and commented upon in this report under item 2D "Annual Solvency Test." The Test 1 formula applies specific percentages to Lloyd's net premium income by year of account and line of business within each account year. The percentages are minimum percentages and are unlikely to cover all losses arising from latent disease or environmental pollution or from know major catastrophes. However, Lloyd's valuation of liability rules require that allowance be made for losses arising from long tail liabilities and catastrophes.

In order to meet the DTI's global Annual Solvency requirement, Lloyd's is required to establish its net reserves using the greater of the formula method (Test 1) or the amounts which syndicate Managing Agents believe are ultimately expected to be required to pay all net liabilities in respect of winding up open years of account (Test 2). For the 1993 Annual Solvency Test, the net reserve established by using the greater of Test 1 or Test 2 resulted in a reserve of 19,977,209,489 pounds which exceed the amount determined by Test 1 by 2,811,742,037 pounds. However, Lloyd's in establishing its United States dollar reserves in its 1993 Trusteed Statement used the formula method (Test 1). Therefore, the examiners have concluded that the net reserves reported in Lloyd's 1993 Trusteed Surplus Statement were seriously deficient.

In response to a request for the United States dollar component of the reserves used for the solvency test, Lloyd's advised that no such listing currently existed. As no listing of the United States dollar component of the reserves existed, the examiners used the procedure set forth in the next paragraph to estimate the net United States dollar reserves as of December 31, 1993.

At December 31, 1993, Lloyd's Trusteed Surplus Statement reflected net loss and unearned premium reserves of $9,964,706,103 which represented 39.237% of its worldwide Test 1 net reserves. As shown in the following schedule, applying 39.237% to the 2,811,742,037 pound reserve difference between Test 1 and the greater of Test 1 or Test 2 translated into a United States dollar net reserve deficiency of $1,632,292,045 and resulted in a reduction in trusteed surplus to a negative $607,414,155:

Greater of Test 1 or Test 2

*Losses and unearned premiums reserves totaling $ 9,964,706,103 converted to pounds at exchange rate of $1.4795 = 1 pound.

On May 2, 1995, Lloyd's furnished a listing, by syndicate, of the net United States dollar reserve component included in its 1993 global statutory solvency reserve reported to DTI. Further, Lloyd's advised that the United States dollar reserve for several syndicates were still unavailable but would be furnished.

The following is a summary of the results derived from the listing:

It is noted that the listing furnished indicates that approximately 63% of Lloyd's net global reserves represent United States dollar reserves.

For report purposes, reserves reported by Lloyd's in its 1993 Solvency Report have been accepted as reported. It is noted that Lloyd's 1993 Solvency Report to DTI indicates a provision for estimated future worldwide liabilities of 20,973,000,000 pounds. This amount included 19,977,000,000 pounds for net outstanding losses, 630,000,000 pounds representing an offset against credit taken as an asset for cash calls due from Names but not received as of December 31, 1993, 399,000,000 pounds representing a liability for 5% release of funds from Names' premium trust funds in respect of the 1993 year of account, and a negative liability of 33,000,000 pounds for various other items.

The above adjustment to Lloyd's December 31, 1993, trusteed surplus is based upon the use of the greater of Test 1 or Test 2 reserves as reported in the listing furnished. Lloyd's Trusteed Surplus Statement reflects its United States dollar liabilities, net of insurance; however, Regulation No. 20 requires Lloyd's to maintain assets in United States trust funds equal to its gross United States liabilities plus $100,000,000. Thus the actual trusteed surplus deficiency is $7,851,962,957. It is noted that, while Lloyd's maintained the minimum deposit amount required to be held in trust funds in the United States pursuant to Regulation No. 41 in effect as of December 31, 1993, as of January 1, 1994, the effective date of new Regulation No. 41, Lloyd's failed to maintain the minimum surplus amount required to be held in trust funds in the United States.

The 1993 Solvency Report indicates that, as of December 31, 1993, Lloyd's had gross outstanding claim reserves of 32,375,944,000 pounds and reinsurance recoverables due from outside reinsurers of 12,398,734,511 pounds. Assuming that gross United States dollar reserve to gross pound reserve ratio is the same as the net ratio (63%), the United States dollar liabilities ceded by Lloyd's to outside reinsurers would total $11,552,768,855 ( 12,398,734,511 x.63 x 1.4795). When such ceded reinsurance is taken into consideration, Lloyd's reported trusted surplus as of December 31, 1993, is further reduced as follows:

As a result of this examination, it was determined that, as of December 31, 1993, Lloyd's failed to maintain the minimum $100,000,000 surplus required to be held in trust funds in the United States pursuant to Regulation No. 20. Therefore, the deficiency in the Trusteed Surplus amount to $ 18,379,853,922. Further, as of January 1, 1994, the effective date of new Regulation No. 41, the deficiency in the Trusteed Surplus amounts to $18,479,853,922 (adjusted trusteed surplus of $18,279,853,922 plus $200,000,000 required as minimum surplus by Regulation Nos. 20 and 41).

6. SUMMARY OF COMMENTS AND RECOMMENDATIONS

ITEM PAGE NO.

1. LATF is not applicable to United States business placed with Lloyd's that is expressed in the two other currencies in which Lloyd's conducts business (pounds and Canadian dollars). Regulation No. 20 requires trust fund protections for all business ceded by United States insurers to Lloyd's. Lloyd's has advised that, to the best of its knowledge, no United States insurer has ceded business to it in any currency other than United States dollars. Further, there are separate trust accounts in place outside the United States for pounds and Canadian dollars. 11

2. LATF allocation of assets by Name is not maintain by Trustee or centrally by Lloyd's even though assets held in LATF are held sole for the benefit of each Name and not on a joint and several basis. Further, Lloyd's fails to measure the adequacy of each Name's assets in LATF in relation to each Name's United States dollar liabilities. While total assets in LATF may equal total United States dollar liabilities, an individual Name's assets in LATF may be less than the Name's United States dollar liabilities. This raises concerns that LATF, as currently constructed, may not provide the security intended by Regulation Nos. 20 and 41 (in effect as of January 1, 1994) to United States policyholders and United States ceding insurers. 11

3. It appears that in order to assure proper security for all United States policyholders and United States ceding insurers, Lloyd's need to determine and be able to report each Name's assets in LATF and each name's United States Liabilities or amend the LATF so that assets are held on a joint and several basis. 12

4. In instances where a claim is required to be paid from LATF and there are insufficient funds in a particular group account, Lloyd's instructs Citibank to drawn down on a pool of funds held in certain other group accounts regardless of whether or not these group accounts are under the control of the same Managing Agent and despite the fact that a Name's funds that are drawn on may have no liability for the claim, in order to ensure that the claim is settled. In effect, Lloyd's is using one Name's assets to pay for another Name's liabilities, as if all assets were being held on a joint and several basis. As the LATF Deed not did provide for the use of one name's assets to pay another Name's liabilities, Lloyd's was asked to produce documentation to support this practice. Lloyd's advised that it was its United States counsel's opinion that such practice is permitted so long as it is prudent and that it will amend the LATF Deeds to provide the Trustee with the requisite powers. In view of the fact that certain Names are unable or unwilling to fund their Lloyd's liabilities, it is questionable as to whether or not it is prudent to make such loans. 12

5. LATF is available for payment of any United States dollar claim. Therefore, policyholders and ceding insurers located outside the United States can make claims against LATF. As a major portion of Lloyd's United States dollar business is written outside the United States, the amount of assets available in LATF to protect United States policyholders and United States ceding insurers is subject to withdrawal by policy holders and ceding insurers located outside the United States. Consequently, if United States dollar liabilities of policyholders and ceding insurers located outside the United States are understated and such claims are paid out of LATF, assets in LATF available to United States policyholders and United States ceding insurers would be inadequate. Conversely, if United States dollar liabilities of policyholders and ceding insurers situated outside the United States are overstated, or such claims are paid with funds other than from LATF, assets in LATF available to United States policyholders and United Stated ceding insurers are enhanced. 13

6. As a result of Lloyd's 1992 Annual Solvency Test, Lloyd's was aware or should have been aware of the fact that its 1993 Annual Solvency Test would indicate that assets reported in its 1993 Trusteed Surplus Statement to the New York Insurance Department would be inadequate to fund Lloyd's United States dollar net liabilities. While Lloyd's earmarked funds to cover Names' deficiencies, Lloyd's failed to transfer funds from London to correct the deficiencies in LATF and comply with the requirements of Regulation Nos. 20 and 41 (in effect as of January 1, 1994). 14

7. Lloyd's established its 1993 Trusteed Surplus Statement liabilities using a net formula basis which is lower than the net amount required to be established by Lloyd's for solvency reporting to the DTI. Lloyd's should establish its Trusteed Statement liabilities based upon its estimate of the United States dollar component of the amount it is required to report to DTI for solvency purposes. Further, Lloyd's should transfer funds to LATF equivalent to its estimate of the United States dollar component and adjust such estimate when the actual annual solvency report amounts become known. 20

8. The liabilities reported in Lloyd's Trusteed Surplus Statement as of December 31, 1993, are net of reinsurance cessions. Regulation No. 20 requires Lloyd's to maintain assets in United States trust funds equal to its gross United States liabilities plus $100,000,000. Therefore, Lloyd's reported trusteed surplus is overstated due to the fact that Lloyd's fails to establish its United States liabilities on a gross basis. 23

9. As a result of this examination, it was determined that, as of December 31, 1993, Lloyd's failed to maintain the minimum surplus amount required to be held in trust funds in the United States pursuant to Regulation No. 20. The deficiency in the Trusteed Surplus amounts to $18,379,853,922. Further, as of January 1, 1994, the effective date of new Regulation No. 41, the deficiency in Trusteed Surplus amounts to $18,479,853,922 (adjusted trusteed surplus of $18,279,853,922 plus $200,000,000 required as minimum surplus by Regulation Nos. 20.and 41). 24

Respectfully submitted,

____________________
Paul Cohen, CFE, CIE
Supervising Insurance Examiner
State of New York
County of New York

PAUL COHEN, being duly sworn deposes and says that the foregoing report subscribed by him is true to the best of his knowledge and belief.

___________________
Paul Cohen, CFE, CIE

Subscribed and sworn to before me this 16th day of May, 1995

Tak Chan
Notary Public, State of New York No 24-4825108
Qualified in Kings County
Commission Expires on September 30, 1996

Respectfully submitted,

____________________

Bernard Ganley, AFE
Principal Insurance Examiner
State of New York
County of New York

Bernard Ganley, being duly sworn deposes and says that the foregoing report subscribed by him is true to the best of his knowledge and belief.

___________________
Bernard Ganley, AFE

Subscribed and sworn to before me this 16th day of May, 1995

Tak Chan
Notary Public, State of New York No 24-4825108
Qualified in Kings County
Commission Expires in September 30, 1996

Respectfully submitted,

____________________
Joyce N Bushell, CIE
Supervising Insurance Examiner
State of New York
County of New York

JOYCE BUSHELL, being duly sworn deposes and says that the foregoing report subscribed by him is true to the best of his knowledge and belief.

___________________
Joyce N Bushell, CIE

Subscribed and sworn to before me this 16th day of May, 1995

Tak Chan
Notary Public, State of New York No 24-4825108
Qualified in Kings County
Commission Expires in September 30, 1996