ANA Responds to CNBC Interview of Lloyd's Chairman
Date: April 23, 2006
To: Larry Kudlow
From: John F. Shettle, Sr.
Re: April 18 Show / Comments by Chairman of Lloyd’s
I watched your April 18 broadcast, and was disappointed that Lloyd’s of London used your usually great show as a platform for PR spin, instead of an opportunity to inform and educate American investors and insurance buyers.
If Lloyd’s were a US public company, its Chairman would be held to a high standard to avoid making misleading statements to your viewers and the financial community at large.
Following are some examples of statements about Lloyd’s financial structure and performance that were broadcast on your show that need correction or clarification.
My observations are first-hand, and are based on over 40-years of insurance and reinsurance experience.
I have moreover attached documentation supporting my comments, and would be pleased to field any questions you may have after reading these materials.
1. KUDLOW: "Joining us now is a legend in the insurance biz who believes free markets, free capital markets, are best equipped to handle the next big one."
Peter Levene had never worked in the insurance business before he was appointed to the position of Chairman for Lloyd’s of London in June 2002. He was England’s Chief of Defense Procurement in the late 1980’s and the Lord Mayor of London, among other things. But I can assure you he has never been a legend, or even a blip on the screen of anyone in the insurance world.
2. Peter LEVENE: "We did handle 9/11. . . 9/11 cost us some $3 billion."
According to the attached Exhibit "A", which includes news stories about and excerpts from a September 2005 report by KPMG entitled "The UK Run-Off Survey - Non-Life Insurance," Lloyd’s syndicates in run-off from 1993 to 2002 still have $13.82 billion in unpaid claims. On September 19, 2005, Business Insurance reported that "Steve Goodlud, a director in KPMG's corporate recovery insurance solutions unit, said most of the runoff liabilities of Lloyd's syndicates stem from the 2001 year of account, which includes losses from the September 11, 2001, terrorist attacks in the United States."
In other words, Lloyd’s has many billions of dollars in unmet obligations still remaining from the events of September 11. To speak of a fixed net loss figure, and refer to these claims as "handled" is deceptive, and notably side-steps saying that claims against Lloyd’s syndicates from 9/11 have not been paid in full.
3. Peter LEVENE: "But as to whether we can get it right or not, from Katrina, Rita and Wilma, it cost us $5 billion. And we ended up, virtually breaking even, losing only $150 million."
It is neither possible, nor remotely credible to proclaim financial results for 2005 at this time.
The three hurricanes referred to occurred in the US between August and October 2005. As the attached Exhibit "B" illustrates, Lloyd’s syndicates continue to collect premium for at least 12 months following the close of a calendar year. Also, claims on their insurance policies and reinsurance contracts continue to be filed for a year or more after the end of the underwriting year of account (i.e. at least through the end of 2006 for the 2005 Y.O.A.).
4. Peter LEVENE: "And we’ve learned how to do this. Of course, in between, we have years where we make good money. If we didn’t, we wouldn’t have the money to pay them."
Implying that profits from one year of account can be accumulated for the benefit of, or carried forward as reserves for subsequent years of account is totally misleading.
As can be readily ascertained by viewing their own web site www.Lloyds.com, the enterprise known as "Lloyd’s of London" is a marketplace where 62 relatively small, stand-alone ventures known as "syndicates" underwrite risks on an annual basis. Lloyd’s takes pains to make it clear that it is not a monolithic, continuously operating insurance company like its competitors. The same structural anomalies that make the Lloyd’s market unique, however, also make it impossible for the capital or profits of syndicates operating in one year of account to be used to cover losses from a previous or subsequent year.
Only a small part (less than 2% of capacity) of a syndicate’s capital can be called upon to help defray unfunded losses of other syndicates. Beyond that, there is no mutualization of contractual obligations among Lloyd’s underwriters. The deposited and pledged funds of Lloyd’s underwriting Members (now mostly limited liability corporate investors) backing a given syndicate in a given year, plus a nominal amount of funds available in Lloyd’s Central (guarantee) Fund, are the limit of the monies available to pay claims resulting in that specific syndicate year of account.
5. Peter LEVENE: "Well, we got the sums right. We know what we’re doing. We’ve been doing it 300 years."
Lloyd’s had little experience outside the marine insurance business until approximately 1900. Their first 200 years were spent primarily covering marine hulls and cargoes.
Quoting Lloyd’s former CEO Ian Hay Davison:
"Although Lloyd’s holds a pre-eminent position in the world’s marine
and aviation insurance markets (In 1987 when his book was published, yes,
but not today), this is not the case with non-marine business, where Lloyd’s
share of the world’s market is under 1%."
Real property coverage is classified as a non-marine risk.
6. Peter LEVENE: "Well, we don’t get dictated to by the regulators."
Is it not outrageous that Chairman Levene has publicly announced on your show that Lloyd’s does not take directions from regulators?
Lloyd’s has a history of promoting itself to regulators and analysts as being sui generis. Lloyd’s cloaks itself in ambiguous explanations of its uniqueness in order to persuade regulators it is either outside their purview, or too difficult for an outsider to understand, neither of which are true.
Lloyd’s simply wants to be left alone so its executives and syndicates can operate without anything more than token regulatory oversight, unlike its US-based competitors. This creates an unlevel playing field skewed to the disadvantage of independently audited, law-abiding US insurers and reinsurers. It also jeopardizes the security of Lloyd’s US policyholders, and US insurance companies that buy reinsurance from Lloyd’s syndicates and carry that reinsurance as an asset on their balance sheets.
1. KPMG report:
2. Lloyd's List article:
3. Business Insurance article:
The UK Run-Off Survey - Non-Life Insurance
Current size of the UK Non-Life Run-Off Market
As shown in Table 1, the liabilities of the UK non-life run-off market represent approximately 23 percent of the non-life market as a whole.
Source: A.M. Best’s Statement File - Non-Life – UK, S
& P Thesys – SynThesys Non-Life,
Table 2. Main components of the UK Non-Life Run-Off Market
Source: A.M. Best’s Statement File - Non-Life – UK, S
& P Thesys – SynThesys Non-Life,
At the end of 2004, the total liabilities of Lloyd's syndicates in run-off in respect of 1993 and subsequent years of account were £7.2 billion across 104 open syndicate years. This is a reduction of £0.5 billion on 2003, and exceeds Equitas’ total (discounted) liabilities of £4.6 billion (undiscounted £6.4 billion).
As in 2003, the largest proportion of run-off liabilities at Lloyd's relates to the 2001 year of account, in which there remains a significant level of US casualty and World Trade Centre related losses.
Run-offs outstrip Equitas liabilities, says
LLOYD'S ventures have built up more run-off liabilities in the last dozen years, than the volume of run-off remaining in Equitas, writes James Brewer.
Equitas is the vehicle created to save the market from collapse from disastrous 1992 and prior underwriting, and has been settling some of its biggest obligations recently.
At the end of 2004, total liabilities of syndicates in run-off for 1993 and subsequent years of account were GBP7.2bn ($13bn), according to a survey by KPMG, the accountancy group which advises on corporate recovery.
At Lloyd's this is a reduction of GBP500m on the previous year, but the figure being dealt with by Lime Street practitioners is now much higher than the discounted liabilities of GBP4.6bn (undiscounted GBP6.4bn) at Equitas.
Run-off involves books of business either naturally discontinued, or where businesses collapse.
KPMG, which was commissioned to conduct the survey by the Association of Run-Off Companies, said that as in 2003, the largest proportion of run-off liabilities at Lloyd's related to the 2001 year of account, in which there was a significant level of US casualty and World Trade Center loss.
Overall, the UK run-off market reduced in size by 6% measured by total liabilities of GBP38.4bn, mainly as a result of continued efforts by Equitas to eliminate its US asbestos and environmental exposures.
Many of the Lloyd's cases are being handled by outsourced providers, and there is provision for transferring run-off outside the market, although that has yet to occur.
Steve McCann, head of open years management at Lloyd's, has been strengthening procedures and improving ways of monitoring performance of providers.
<Lloyds List -- 09/08/05>< Copyright ©2005 Informa Martime Trade and Transport >
Lloyd's post-1993 runoff liabilities climb
The total amount of liabilities of Lloyd's of London syndicates in runoff but not reinsured into Equitas Ltd. now exceeds the liabilities of Equitas, according to a study of the runoff market conducted by KPMG L.L.P. in conjunction with the Assn. of Runoff Companies.
According to the study, the total liabilities of Lloyd's runoff syndicates at the end of 2004 were £7.2 billion ($13.82 billion), compared with the total liabilities of Equitas-the runoff reinsurer for the pre-1993 longtail liabilities of Lloyd's of London syndicates-which stood at £4.6 billion ($8.83 billion).
Steve Goodlud, a director in KPMG's corporate recovery insurance solutions unit, said most of the runoff liabilities of Lloyd's syndicates stem from the 2001 year of account, which includes losses from the Sept. 11, 2001, terrorist attacks in the United States.
The total liabilities of the nonlife runoff market in the United Kingdom in 2004 are estimated at about £38.4 billion ($73.72 billion), according to the study, down £2.7 billion ($5.18 billion) from 2003.