Ratings Intact Despite Arbitration: Lloyds

By Lisa S. Howard

International Editor

Chicago

The ongoing arbitration between Lloyds and the six companies insuring the Lloyds Central Fund is not posing a danger to the markets “A-minus” rating, according to a Lloyds official.

Lloyds first revealed that it commenced the arbitration on April 2, when the market announced an annual profit of $1.3 billion (834 million) for 2002.

The 500 million Central Fund policy, led by Swiss Re, was bought at the end of 1998 and assisted the market in obtaining an “A-plus” rating from A.M. Best and Standard & Poors.

These insurers “have chosen to withhold claims payments on that policy,” Julian James, director, worldwide markets, Lloyds of London told National Underwriter. “As a result of that, we took steps to initiate arbitration proceedings to secure full payment of the amount of money we believe we are rightfully due.”

He explained that the policy has paid 134 million ($215.7 million). If the arbitration goes against Lloyds, the maximum impact on the Central Fund will be 290 million ($466.9 million), which includes the effects of tax and premium payments.

Assuming the contract is unwound, Mr. James said, in excess of 500 million ($805 million) would remain in the Central Funda level nearly equal to that attained during 2002 and over three times the 1999 level. The Central Fund acts as a mutualized guarantee fund to protect policyholders in the event that a syndicate can no longer pay claims.

“When we bought the policy, net central assets of the Society [of Lloyds] were 54 million [$86.9 million],” Mr. James said. The rating agencies know whats going on and have chosen to maintain the existing “A-minus” rating. “Clearly, one of the major factors theyve taken into account is the huge growth in the net central assets of the society” since 1998, he said.

Mr. James wouldnt discuss the arbitration, but confirmed that Swiss Re is disputing the intent of the cover.

In a statement, Swiss Re said the six reinsurers on the Central Fund panel “entered into the contract to pay policyholders claims in the event that a Lloyds syndicate became insolvent and the Central Guarantee Fund was unable to do so.” Swiss Re added, “Lloyds has submitted claims for discretionary payments from the Central Guarantee Fund used to protect members solvency and to fund liquidity requirements, particularly in the United States.”

Swiss Re contends that this is not the purpose for which the insurance cover was intended.

Mr. James noted that the contract contains a provision that says interest begins building on the amounts owed, starting when the arbitration is initiated.


Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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