Moody's warns of liquidity crisis at Lloyd's

Some parts of Lloyd's of London may not have enough cash to survive the massive financial hit relating to the attacks on America, a leading ratings agency has warned.

Moody's said yesterday that Lloyd's faces a liquidity crisis as it scrambles to muster more than £1bn of funds as a down payment for its largest ever single hit. But some of its members also face the possibility that they do not have enough money to continue to do business, and may have to bow out of the market to avoid bankruptcy.

Moody's predicts that the cost of the attacks is likely to rise from £1.3bn of net liabilities Lloyd's has estimated. This would clean out the historic insurance market's central fund of reserves, traditionally used to help members pay particularly heavy liabilities, and would mean that some Lloyd's members would have to find more cash to top up the fund.

Moody's downgraded its ratings of the financial strength of the five underwriting syndicates it monitors as a result of its fears.

Moody's said in a statement: "Previously, we said that even the weakest syndicates provided policyholders with at least adequate security. Given recent events, Moody's believes this may no longer be true, with the weakest syndicates now with the potential to fall into the 'questionable' range."

The firm emphasised that the syndicates it rates, ACE, Wellington, Amlin and SVB, retain ratings above A even after the downgrades and so are unlikely to be among the syndicates facing a solvency crisis.

But it predicts that smaller syndicates may not have the financial strength to meet the many more calls from Lloyd's for cash to replenish the central fund. In time this could transform Lloyd's into a handful of large underwriters, from its current state of 108 syndicates including a number of very small businesses.

Moody's believes that Lloyd's only has £1.02bn of funds available through its central reserves once its own reinsurance is taken into account. Yet, even if its estimate of losses arising after the 11 September attacks does not rise, it will still have to make more cash calls to raise £1.3bn. Lloyd's maintains that it does not face any solvency issues.

Moody's believes that smaller syndicates would be unable to carry on if there was another significant disaster with the next year, such as a hurricane or earthquake. Lloyd's is frequently hit by these types of losses as it specialises in underwriting natural and man-made disasters.