A repeat performance

The story of another year of losses at Lloyd's is fast becoming a familiar tale. When the 314-year-old market announced last week it had made a £3.11bn loss in 2001, it felt like history was repeating itself.

If Lloyd's had been able to post a profit, that would have really been news. The last time it nudged into the black was in 1996 when it made £359m, after expenses. Instead, it has suffered five years of consecutive losses and is relying heavily on a good underwriting year for 2002 to break the pattern.

Amid the fuss over yet more losses at the market everyone loves to hate, came an announcement that could be an important signal of better things to come. The announcement was about new accounting rules - so no wonder it received little press. How this system works, especially with regardto World Trade Centre losses, is the key to Lloyd's survival.

In January, the chairman's strategy group (CSG) and management consultants Bain & Co suggested Lloyd's should make changes to modernise the market, such as ending unlimited liability Names. It was also proposed that Lloyd's uses the General Accepted Accounting Principles (GAAP).

Traditionally, Lloyd's reports results three years in arrears, so both claims and premiums go into the year in which the policy was written.

Now Lloyd's has taken up the recommendation to calculate its results on an annual basis. This means claims are accounted for in the year that they occur and premiums are spread over the life of the policy.

Fundamental step
Lloyd's chief executive Nick Prettejohn says: "The move to annual accounting is a fundamental step in our strategy of reform. It makes us more accessible and transparent, and enables us to report results that can be compared easily to those of other insurers."

Under the new annual structure, Lloyd's saw a loss of £3.11bn in 2001 and £1.2bn for 2000. It has not calculated the 1999 year of account on this basis.

Using the old three-year system, an early indication for 2001 would have been a £1.56bn loss, with a projection of a £1.72bn loss for 2000. The 1999 year made a £1.95bn loss, up £280m from its November forecast.

But, however the figures are presented, the occurrence of many disasters in one particular year is the cause of most of the losses.

Prettejohn described 2001 as "an exceptional year by any measure". Besides WTC, it faced 13 catastrophes, including the loss of the Petrobras oil rig off the coast of Brazil, the Tamil Tiger attacks on Sri Lanka's national airline, a chemical factory explosion in Toulouse and tropical storm Allison which struck the Mid West and East coast of the US.

Prettejohn says WTC was the industry's "largest ever loss" and Lloyd's "single largest loss". It is estimated 11 September will cost the market £1.98bn.

The numbers make interesting reading as the new accounting rules reflect the performance of the market better. But there is more to it than just the figures.

Mounting losses
Standard & Poor's director of financial services ratings Stephen Searby said: "The headline figures are not what is important, but the distribution of the losses in the market and the impact on the Central Fund are."

Among the gloom of mounting losses there is hope, though. Lloyd's finance director Andrew Moss says uncertainty about World Trade Centre losses have reduced, particularly over the past three months. He adds there has been no significant change since November, when Lloyd's predicted 11 September would see a £1.9bn loss.

The impact of WTC is spread across the whole market, with the ten largest syndicates operating in 2001 carrying 54% of the total net loss. The next ten syndicates account for another 18% and 82 others bear the balance. By the end of March 2002, Lloyd's had paid $900m (£625.5m) of the reported claims.

Moss is confident the market can now produce positive results. Premiums for aviation have increased by an average of between 60% to 90%, with marine war rates shooting up 250% in the fourth quarter of 2001, compared to the previous year.

"Lloyd's has traded through 11 September, uncertainties have diminished, central assets are growing and the trend towards profitability is very clear," Moss says.

"Premium income increases in the last six months can only have one effect."

At the same time, Lloyd's has accepted it must now produce a clean balance sheet.

"Our loss record since the Reconstruction & Renewal plan is unacceptable," says Prettejohn. "We have to make fundamental change."

Lloyd's believes the implementation of the strategy group's recommendations will drive that change.

Chairman Sax Riley says: "We are on schedule and the reforms are evolving." He adds that an extraordinary general meeting (EGM) to vote on the proposals is being timetabled for September.

But not everyone agrees that changing the market will solve Lloyd's' problems.

Australian Association of Lloyd's Members (AALM) deputy chairman Patrick Moore says: "The 1999 to 2001 results represent the total failure of Lloyd's to regulate its business.

"It should cease the toying with many aspects of the strategy group and get on with the business of listening to market practitioners and then implementing what they need to grow their businesses."

Providing Lloyd's is not struck by too many casualties, it seems 2002 will be profitable. But it will take more than a change of accounting system to bring about a happy ending.