Lloyd's faces cash crisis as US regulators demand WTC top-up

Click to follow

Lloyd's of London yesterday faced a cash crisis after US regulators insisted the City insurance organisation stump up an extra £1.5bn to cover its liabilities following the 11 September attacks on America.

The move was an about turn by US regulators, which had led Lloyd's to believe that it would only have to put up 60 per cent of gross reinsurance liabilities to reassure them that it would be able to meet the eventual bill following the devastation.

But America's National Association of Insurance Commissioners (NAIC) now insists that Lloyd's comply with normal US rules that foreign insurers produce funds to cover 100 per cent of gross reinsurance liabilities up front.

Lloyd's faces a total bill for primary insurance and reinsurance of £5.4bn. The NAIC is requiring it to create a fund for the reinsurance part, which is understood to total £3.75bn.

Lloyd's has already paid £2.25bn into a US trust fund. It now has to try to find an extra £1.5bn before the NAIC's deadline of 15 November.

Lloyd's said it was still trying to clarify the situation. But it is likely that it will have to make new demands for cash from its members, including individual Names. They have already had to pay out £44,000 each following cash calls last week.

Chris Waterman, a director of the ratings agency Fitch, said: "It is likely that Lloyd's will not be in a position to fund 100 per cent of its reinsurance as some Names and other members will have liquidity problems. Some will have to liquidate long-term assets such as bonds or property, which could be difficult, and it is not really a good time to be doing that."

The extra cash calls are unlikely to force Names into bankruptcy. But those facing liquidity problems will have to negotiate loans from banks or secure credit notes, but they will only be able to do this if they have enough cash to underwrite the note.

The NAIC said that if Lloyd's is unable to provide 100 per cent funding by mid-November, it would give it a grace period of 60 days. But Lloyd's will have to guarantee the payment and have a plan in place to recover it from members.

Analysts agree that Lloyd's can meet its liabilities but suspect that even before the NAIC changed its position Lloyd's faced liquidity problems.