Lloyd's - Lloyd's insurance market makes strong return to profit

• Lloyd's outperforms international peer group
• Market conditions set to remain favourable in the medium term
• Modernisation of market set to improve profit sustainability

The Lloyd's of London insurance market today reported its financial results for 2002.

• Profit of £834 million on a pro forma annually accounted basis
• Initial projection of profit of £1,484 million on a three-year accounted basis for the 2002 underwriting year

The result is in line with expectations and marks a strong return to profitability for the market.

Lloyd's Chief Executive Nick Prettejohn said:

"These results demonstrate a very strong performance. It was the market's resilience and disciplined approach, at a time when the industry as a whole has faced many difficulties, that generated 2002's healthy result.

"These figures compare very favourably when measured against the market's peer group. Lloyd's combined ratio for 2002 was 98.6%. This compares with an average of 105.1% i for European reinsurers, 121.3% ii for US reinsurers and 108.3% iii for US property and casualty insurers."

During 2002, the net resources of the Society and its members increased by 85% to £7,509 million (from £4,052 million in 2001).

Lloyd's central assets increased by 55% to £563 million (from £363 million in 2001). Based on current expectations, the central assets are forecast to grow to approximately £800 million by the end of 2003.

Lloyd's advised that it has commenced arbitration proceedings with the group of insurers involved in its Central Fund insurance policy in order to secure payment in full under the terms of the policy. The six insurers on the policy are currently withholding payment of a proportion of the claims. Lloyd's is confident of success in the arbitration proceedings. Irrespective of the outcome, there will be continued growth in Lloyd's central assets when measured against the year-end 2001 position.

Commenting on the prospects for the market in the immediate future, Mr Prettejohn said:

"The state of the capital markets and the continuing actions by many insurers to increase their reserves for past underwriting means that the Lloyd's market should enjoy positive trading conditions in the medium term.

"We are determined that the implementation of our new Franchise arrangements will reinforce these external factors by raising underwriting standards and improving efficiency. These should enable Lloyd's to sustain today's positive performance into the future."

For further information, please contact Lloyd's:

Lloyd's is the world's leading insurance market with a capacity to accept insurance premiums of up to £14.4 billion. It is the world's second largest commercial insurer and third largest reinsurer. In 2003, 71 syndicates are underwriting insurance at Lloyd's, covering all classes of business from more than 120 countries worldwide. Approximately five per cent of world reinsurance is placed at Lloyd's which also accounts for half of the London market's international insurance premiums.

A high-resolution photograph of Lord Levene, Nick Prettejohn and Andrew Moss is available for download from www.newscast.co.uk (Please note: Lloyd's accepts no responsibility for the content of external sites ).

A presentation on Lloyd's 2002 financial results can be viewed at www.lloyds.com/2002results .

Notes accompanying Lloyd's 2002 financial results

1. Result for 2000, projections for 2001 and 2002 - three-year accounts

While 2002 is being reported on an annually accounted basis, the result for 2000 and the latest projections for 2001 and 2002 are calculated using the Lloyd's traditional three-year accounting method.

Lloyd's announced today that the 2000 result is a loss of £2,397 million - a deterioration of £200 million on the last projection. The latest projection from the businesses in the market for 2001 is a loss of £1,653 million, which is in line with previous projections.

Normally the first projection for 2002 would not be released until August 2003. However, in order to help transparency a very early indication for 2002 of a profit of £1,484 million is included here, with the caveat that many 2002 policies remain active.

Difference between annual and three-year accounting

Lloyd's traditional method of accounting has been on a three-year basis. Under this system, the year's accounts remain open for 36 months. Premium income and claims are usually accounted for in the year the policy is issued.

Under annual accounting, the result for the year accounts for the movement of premiums, claims, expenses and reserves during that calendar year period.

There can be considerable differences between the three-year figure and annual figure for the same year. For example, under annual accounting, the entire September 11 loss was accounted for in 2001 when the claims occurred. But under three-year accounting, the September 11 losses were split between 1999, 2000 and 2001 because these were the years in which the relevant insurance polices were issued.

2. Cautionary note on forward-looking statements

This document includes forward-looking statements. These statements are based on currently available information and consistent accounting policies as applied at 31 December 2002. They reflect Lloyd's current expectations, projections and forecasts about future events and financial performance. All forward-looking statements address matters that involve risks, uncertainties and assumptions. Based on a number of factors, actual results could vary materially from those anticipated by the forward-looking statements. These factors include, but are not limited to, the following:

• Rates and terms and conditions of policies may vary from those anticipated.
• Actual claims paid and the timing of such payments may vary from estimated claims and estimated timings of payments, taking into account the preliminary nature of such estimates.
• Claims and loss activity may be greater or more severe than anticipated, including as a result of natural or man-made catastrophic events.
• Competition on the basis of pricing, capacity, coverage terms or other factors may be greater than anticipated.
• Reinsurance placed with third parties may not be fully recoverable, or may not be paid on a timely basis, or such reinsurance from creditworthy reinsures may not be available or may not be available on commercially attractive terms.
• Developments in the financial and capital markets may adversely affect investments of capital and premiums, or the availability of equity capital or debt.
• Changes in legal, regulatory, tax or accounting environments in relevant countries may adversely affect (i) Lloyd's ability to offer its products or attract capital, (ii) claims experience, (iii) financial return, or (iv) competitiveness.
• Economic contraction or other changes in general economic conditions could adversely affect (i) the market for insurance generally or for certain products offered by Lloyd's, or (ii) other factors relevant to Lloyd's performance.
• The foregoing list of factors is not comprehensive, and should be read in conjunction with other cautionary statements that are included herein or elsewhere. Lloyd's undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

3. Combined Ratios

A combined ratio is a measure of an insurer's underwriting profitability based on the ratio of net incurred claims and expenses to net earned premiums. A combined ratio of 100% is break even. A ratio of over 100% is a loss; less than 100% is a profit.

4. Lloyd's Net Resources £m's

Lloyd's also announces today the most recent figures for its global assets available to meet policyholders' claims. As at 31 December 2002 these were:

5. Implementation of the Lloyd's franchise

During August and September 2002, members of Lloyd's voted in favour of a package of reforms designed to increase the transparency, efficiency and profitability of the market. The cornerstone of these proposals was the introduction of a new franchise structure to the market with Lloyd's centrally acting as the franchisor and the individual market businesses becoming franchisees.

Considerable progress has been made on the implementation of the proposals. Lloyd's has appointed Rolf Tolle as its Franchise Performance Director and created a new unitary board, the Franchise Board, to replace two old-style committees, Market Board and Regulatory Board. The Franchise Performance Directorate, alongside Lloyd's Risk Management team, is working closely with market businesses to introduce a new business planning cycle and a series of franchise guidelines.

Lloyd's has been involved in constructive discussions with HM Treasury on proposals to remove tax obstacles which may have discouraged some individual members underwriting insurance with unlimited personal liability from converting to limited liability status.

On the move to full introduction of annual accounting, the necessary amendments to European regulations are currently being considered by the European Parliament.

The project to close run off years continues. The closure of four open years of account through reinsurance to close has opened the way for more than 3,400 Names to cease.

6. Central Assets £ms

7. Central Fund

In normal circumstances, the Central Fund is available, at the discretion of the Council of Lloyd's, to meet a liability if a member has insufficient resources in its Premium Trust Fund (PTF) and is unable to provide other additional funds.

The Central Fund continues to be held and administered by the Council of Lloyd's primarily as a fund available for the protection of policyholders.

At 31 December 2002, the combined assets of the Central Fund amounted to £476 million, an increase of £196 million since reported last year.

The Central Fund is supported by a five-year insurance contract, which commenced in 1999, with six leading insurers whereby the insurers will meet unrecovered losses to the Central Fund where it has been applied to meet members' cash calls, up to a ceiling of £350 million per annum wherE such calls exceed £100 million in any one year. The aggregate maximum payment over the lifetime of the policy is £500 million.

The six insurers of the Central Fund are:

• SR International Business Insurance Company Ltd (a subsidiary of Swiss Re) - 32.5%;
• Employers Reinsurance Corporation - 20%;
• St Paul International Insurance Company Ltd - 20%;
• International Insurance Company of Hannover Ltd (a subsidiary of Hannover Re) - 15%;
• XL Mid Ocean Reinsurance Ltd - 10%; and
• Federal Insurance Company (a subsidiary of Chubb) - 2.5%.

In addition to the Central Fund and the insurance policy, there is a 'callable layer' - up to 3% of a member's premium limit from the premium trust funds. This can be transferred from members' premium trust funds into Lloyd's central assets. For 2003 this equates to a further £432 million.

ii Source - RAA

iii Source - Business Insurance