£5.4bn attacks claims for Lloyd's

LLOYD'S of London is facing insurance claims totalling £5.4bn arising from the terrorist attacks on America, according to credit rating agency Standard & Poor's. The sheer size of the claims, the largest in Lloyd's 300-year history, will put a significant strain on its ability to pay and some claims could be irrecoverable, says S&P.

Lloyd's, which has not made a gross estimate for its exposure, puts its loss after reinsurance claim-backs at £1.3bn, but admits that claims for individual loss events have tended to rise over time.

S&P says the reinsurance in place at individual syndicates is largely of relatively high quality but calls are still likely to be made on the market's central reserve fund to meet some claims.

'Credit quality is satisfactory, although admittedly there may be coverage issues that emerge over time that could render certain gross claims irrecoverable,' said S&P director Stephen Searby. 'The losses will inevitably result in cash draw downs from the central fund assets over the medium-term, though these should be more than replenished by the additional levies already announced.'

S&P said a decision by American regulators to relax funding requirements to 60% of liabilities from 100% had helped to ease the immediate liquidity strain on the market. American auditors are due to assess the market's creditworthiness shortly.

'Although the reduced funding requirement will alleviate Lloyd's liquidity burden to a degree, it nevertheless remains significant,' S&P says.

Lloyd's last week wrote to 108 syndicates asking for £780m to cover losses from the attacks, with the 2,800 individual members or 'Names' asked to pay £246m. It has also increased its levy on its syndicates to bolster its £323m central fund. The fund also has £350m of reinsurance cover to help meet any claims over £100m, and theoretical capacity through further levies of more than £1bn.

S&P, which has already lowered its rating on the market to A from A-plus in the wake of the attacks, is to keep Lloyd's on negative credit watch. It says the rating uncertainty on the market is unlikely to change before there is 'greater clarity relating to its claim estimates and reinsurance recoveries' and 'when liquidity issues are resolved and when cash calls are met by capital providers'.

S&P's £5.4bn estimate was reached after discussions with Lloyd's management and is broadly in line with S&P's estimate of the global industry loss.

'Considerable uncertainty over the ultimate size of the market's losses remain,' the agency says. 'Nevertheless, any further deterioration is expected to be in line with with the industry loss.'