For centuries, Lloyd's of London, which began doing business insuring ship cargo in a dockside coffee house in 1688, has been the very symbol of insurance. It has expanded exponentially to insure the most dangerous and most precious of things, from North Sea oil rigs to Betty Grable's legs to Mick Jagger's voice. It has always paid its claims.
But Lloyd's has been staggered by heavy losses in the Sept. 11 terrorist attacks. Now, insurance analysts, rating agencies and regulators are raising questions about Lloyd's ability to pay its share of coverage for the attacks, the worst single disaster ever for the insurance industry.
PHOTO: NY TIMES
Lloyd's is no stranger to brushes with possible insolvency. In the late 1980s and early 1990s it was socked with a string of multibillion-dollar claims from natural calamities and asbestos liability that brought it to the brink of collapse.
Lloyd's says no one should doubt its ability to pay now. But in the next week or so, US insurance regulators will begin the most thorough examination they have ever conducted of Lloyd's finances, an indication that they do not take Lloyd's promises at face value.
"We want to verify what Lloyd's says," said JohnOxendine, the insurance commissioner of Georgia, who is coordinating the work of the American regulators. "We trust them, but like Ronald Reagan said, `Trust, but verify.' We just want to be good, prudent regulators and double-check."
The regulators want to do everything possible to help Lloyd's through this crisis. A failure to pay claims would not only hurt customers and badly damage Lloyd's credibility but would also probably create a temporary shortage of commercial insurance, driving up prices as customers sought coverage elsewhere.
Million dollar examination
On Wednesday, the regulators hired Arthur Andersen, the big accounting firm, to help with their investigation, and Nov. 5 Oxendine and regulators from seven other states will meet in Dallas to discuss their next steps. Industry experts say the examination is likely to last two to three months and cost more than US$1 million. Under insurance industry practice, Lloyd's must pay the cost of the examination.
"This examination is a big deal," said a former regulator who has been closely following Lloyd's.
The problem for Lloyd's is that it is responsible for US$8 billion in claims, or 20 percent of the estimated US$40 billion in losses in the September attacks -- the largest single share of any insurer. It says it expects to be reimbursed by other insurers for all but US$1.9 billion of the losses. But the regulators are concerned about whether it can raise cash within its organization and whether the insurers that have promised to reimburse it will have problems. All of this raises the possibility that the cash might not be there when customers of Lloyd's submit claims for losses in the attacks.
Lloyd's contends that it is dealing with a cash-flow problem -- in other words, the money is coming, though not necessarily fast enough -- and that it is in no danger of sinking.
"This has always been a question of short-term liquidity, not solvency," Sax Riley, the chairman of Lloyd's, said in a statement last month.
But analysts suggest that Riley is drawing a distinction without a difference. "In our view, liquidity and solvency are inextricably linked," Alice Schroeder, an analyst at Morgan Stanley, said in a report. "Either way, if you don't have the money, you can't pay your claims."
Moreover, the amount that Lloyd's must pay will be substantially higher than it is currently estimating if the first big lawsuit arising from the attacks succeeds, industry experts said. Larry Silverstein, the New York property developer who is the leaseholder on the World Trade Center, has argued that because two planes crashed into the twin towers, two events took place. If the courts agree, he would get two payments of US$3.6 billion, the amount of his coverage. Insurers say the attacks were one event.
The shortage of cash at Lloyd's has already forced it to ask regulators to bend the rules.
In exchange for an exemption from the regulatory scrutiny that American insurers receive, Lloyd's is permitted to put into a trust fund an amount of money equal to its expected claims. If it failed to pay claims, they would be paid from the trust fund. Under that arrangement, Lloyd's was required to have an amount equal to 100 percent of its September losses in the trust fund by Nov. 15. Regulators agreed late last month to let Lloyd's put up 60 percent of the money and gave it four and a half months to come up with the rest.
Lower ratings
But credit ratings agencies, which evaluate the ability of insurers to pay claims, are not as willing to give Lloyd's a break. AM Best, a ratings agency that specializes in insurance, and the Standard & Poor's rating agency have reduced Lloyd's ratings by a notch.
Other rating agencies have lowered ratings on some of the 108 Lloyd's business units, known as syndicates.
Matthew Mosher, who is in charge of property casualty ratings at AM Best, said that although Lloyd's moved from an A to an A-minus rating, it remains in the agency's secure rating category. The downgrades are significant, however, because Lloyd's could lose business. Some corporations will buy coverage only from insurers with the highest secure ratings.
The financial shock to Lloyd's from the September attacks came at a time of particular vulnerability. Lloyd's had already been weakened by four consecutive years of heavy losses, an estimated US$4.9 billion since 1997. Competition had driven down prices for the entire industry, especially for the aviation and marine coverage that Lloyd's pioneered.
In the previous crisis, Lloyd's lost nearly US$12 billion over five years beginning in 1988. At one point, analysts say, Lloyd's was about US$1.4 billion short of what it owed in claims. To raise money, Lloyd's sold its London headquarters and leased it back.
Its financing then came mainly from more than 30,000 individual investors who shared in insurance profits and had promised to pay whatever Lloyd's needed to meet its obligations. Many of the investors, known as "names," were driven into bankruptcy, and some committed suicide.
Now Lloyd's has 2,850 individual investors and gets 80 percent of its capital from corporations, mostly other insurers. The corporate investors have only limited liability to Lloyd's. Unlike the names, when Lloyd's needs more money, the corporate investors can either pay up or leave.
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