LONDON-Lloyd's of London earned record profits for 1994, unburdened by the need to make significant additions to reserves.

Risk managers generally welcomed Lloyd's profitability, saying it will enhance stability in a much-needed market.

Lloyd's on Friday reported record profits of (British pounds) 1.1 billion ($1.88 billion) for the 1994 underwriting year, which closed Dec. 31, 1996, under the market's three-year accounting system. That's a nearly fivefold gain over 1993 profits of (British pounds) 225 million ($349.4 million) (BI, July 15, 1996). The 1993 profit was the market's first black ink after a five-year string of losses that totaled nearly (British pounds) 8 billion ($12.56 billion).

Lloyd's Chief Executive Ron Sandler described the result as "extremely satisfying."

Before adjustments to reserves, Lloyd's underwriting profit for 1994 was (British pounds) 1.01 billion ($1.73 billion), down 6.5% from (British pounds) 1.08 billion ($1.68 billion) for 1993. Those figures reflect members' expenses.

Members' expenses, which include the 1.5% special contribution to the market's reconstruction and renewal plan as well as agents' profit commissions, totaled (British pounds) 654 million ($1.12 billion) in 1994, up 2.8% over 1993.

Adjusting for overreserving actually released (British pounds) 82 million ($140.2 million) to profits for 1994, compared with (British pounds) 859 million ($1.33 billion) in additions to reserves in 1993 (see chart).

"The result is a consequence of generally good market conditions, the exercise of much-sharpened skills in pricing and the setting of terms by our underwriters, and a year that contained only a limited incidence of major catastrophes," said a statement from Lloyd's Chairman Sir David Rowland accompanying the 1994 global results.

All of Lloyd's major market sectors-marine, non-marine, aviation and motor-showed an overall profit in 1994.

Results for 1994 by market segment, before expenses, included:

Marine business generated a profit of (British pounds) 565 million ($966.2 million), or a profit equal to 44% of (British pounds) 1.29 billion ($2.21 billion) in net premiums. In 1993, marine business generated profits of (British pounds) 526 million ($816.9 million).

Non-marine business recorded profits of (British pounds) 837 million ($1.43 billion), or 28.6% of (British pounds) 2.93 billion ($5.01 billion) in net premiums. Non-marine profits were (British pounds) 881 million ($1.37 billion) in 1993.

Although 1994 was the year of the Northridge earthquake in California, which produced $12.5 billion in insured damage, a stronger underwriting environment and high deductibles limited its impact on Lloyd's.

Aviation business showed a profit of (British pounds) 148 million (253.1 million), or 30% of (British pounds) 498 million ($851.6 million) in premiums. Aviation profits were (British pounds) 138 million ($214.3 million) the year before.

Motor business was the least profitable, especially as a percentage of premiums written, due primarily to heavy competition in the U.K. market. Motor profits were (British pounds) 117 million ($200.1 million), or 12% of net premiums of (British pounds) 973 million ($1.66 billion). In 1993, profits on motor business were (British pounds) 175 million ($271.8 million).

Where Lloyd's showed marked improvement over its previous year's performance was in reserving costs.

There were "startling differences" between the prior-year liabilities for 1994 and 1993, said Mr. Sandler.

For the 1993 account, Lloyd's boosted reserves for open accounts in runoff by (British pounds) 1.34 billion ($2.08 billion), though this was partly countered by releases from reserves for closed accounts totaling (British pounds) 485 million ($753 million), for a net addition to reserves of (British pounds) 859 million ($1.33 billion).

By contrast, in 1994 syndicates in runoff-primarily so-called "orphan" syndicates that had no successor to reinsure into-needed just (British pounds) 31 million ($53 million) of reserves. Combined with (British pounds) 113 million ($193.2 million) in releases from syndicates that had been overreserved in previous years, this resulted in an overall release to members of (British pounds) 82 million ($140.2 million).

"1994 is a very different picture because we haven't got Equitas reserving," explained Mr. Sandler. Equitas Ltd. was set up last September to take over all Lloyd's pre-1993 liabilities, with the exception of life business. After an extensive procedure for reserving for those syndicate liabilities, Lloyd's has now effectively isolated itself from the problems of past-year liabilities, while a number of its competitors still face potential losses, he said.

Nevertheless, market executives are wary of becoming complacent.

"We need to concern ourselves with how able Equitas is to cope with its liabilities," said James Illingworth, director of Angerstein Underwriting Holdings P.L.C., which manages corporate capital and several Lloyd's agencies. Faith in Lloyd's will once again be shaken if Equitas proves to have insufficient resources, at least in the near future, he said. But on the upside, "anyone looking at Lloyd's now has to regard it as pretty good security."

Predictions for both the 1995 and 1996 underwriting years are still healthy returns. Lloyd's has upped its prediction of an (British pounds) 800 million profit for 1995 to (British pounds) 900 million, while the 1996 account is estimated to show a (British pounds) 600 million profit.

Philip Maidens, director of syndicate analysis with Sedgwick Oakwood Underwriting Agents Ltd., said that the estimate of 1995 returns "could be on the pessimistic side" and the final profit could be in line with 1994's earnings.

This mainly is due to the implementation of inception date allocation, which meant that from the beginning of 1995, fpremiums for risks were allocated to the year in which the risk was written, rather than when the policy is issued by Lloyd's Policy Signing Office. Many Lloyd's policies are renewed at Dec. 31, though the actual policies are not issued until early in the following year.

However, a spokesman for the Assn. of Lloyd's Members warned that "anyone should not expect these good results to continue into 1997 and 1998. The current trading conditions are diabolical and Lloyd's will be lucky to escape a marketwide loss in the current down cycle."

In general, U.K. risk managers welcomed Lloyd's 1994 profitability.

"Healthy profits are good because we want Lloyd's to be successful," said Derek Brighton, chairman of the Assn. of Insurance & Risk Managers, adding that insurance buyers need Lloyd's flexibility.

John Harris, risk and insurance manager with British Energy P.L.C., was "very pleased" with the result. "I still look on Lloyd's as a very serious market, particularly on the nuclear side," he said. While Mr. Harris said he never doubted Lloyd's security, he noted that "Equitas is still unproven as yet."

Liz Taylor, group risk management director with Equifax Retail Services Ltd., welcomed the Lloyd's results as an indication of the general strength of the insurance market, but expressed concern about whether the underwriting cycle will turn in the next couple of years.

"The frightening thing about it is that business will be written in the next year or two at less than value," which will lead to losses and a hardening of rates, she said. "Risk managers don't like fierce market cycles. I would like to see something more sensible," particularly because the boom-bust cycle does not promote good risk management, Ms. Taylor said.

Richard Reddaway, group insurance manager with pharmaceuticals giant Glaxo Wellcome P.L.C., welcomed the Lloyd's results as "clearly good news for everybody."

Corporate capital's entrance into the market has most likely brought new disciplines into the market, he added. "Clearly some of Lloyd's business practices had been wanting," though Lloyd's maintained its strengths of innovation and flexibility, he said.