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LONDON -- The 1996 and 1997 underwriting accounts will be profitable ones for Lloyd's of London, predicts syndicate analyst Chatset Ltd.

In its annual Lloyd's League Tables publication, this year supplemented with a review of the auction process that allows members to trade their capacity participation, Chatset forecasts that Lloyd's will produce a profit of 574 million pounds ($954.6 million) for the 1996 year of account and 366 million pounds ($608.7 million) for 1997.

The 1996 and 1997 years will close at year-end 1998 and 1999, respectively, under Lloyd's three-year accounting system.

For 1997, Chatset says its projected result is "significantly more optimistic than Lloyd's." This is because "underwriters are very cautious about making predictions after only 12 months trading and are not required to do so by Lloyd's until the sixth quarter," explains the analyst's commentary.

Despite this forecast of good news for Lloyd's, Chatset warns that the market currently is suffering because business is leaving the market while rates continue to decline, shown by the fall in both gross and net premiums received by Lloyd's underwriters.

In 1993, gross premium income was 10.5 billion pounds ($17.46 billion), with net income after brokerage and outward reinsurance of 6.3 billion pounds ($10.48 billion). This has fallen in succeeding years, resulting in gross premium income in 1997 of 7.8 billion pounds ($12.97 billion) and net premiums of 4.6 billion pounds ($7.65 billion).

The steady decline in premium income could force additional charges on Lloyd's capital providers, warns Chatset. As part of the financing of its reconstruction and renewal plan, Lloyd's took out a 300 million pounds ($498.9 million) syndicated loan with a consortium of banks, to be paid back over five years using a 1.1% levy on premium income. Last year, this raised just 42.5 million pounds ($70.7 million), and according to Chatset, "it would look as though the rate of 1.1% will have to be increased," effectively increasing the costs of trading in the market. Chatset speculates that corporate capital providers may find the London company market a more attractive option than Lloyd's when faced with additional levies and could exit Lloyd's.

Chatset said Lloyd's already suffers from high acquisition costs for its business, which must enter the market via Lloyd's brokers. Direct marketing initiatives set up by some syndicates "have as yet made no impact" on reducing the cost of getting business into the market, contends the analyst.

It further warns that while the current buyers' market continues, Lloyd's underwriters -- who traditionally rely on brokers to bring business into the market -- will not be able to force cuts in brokerage payments.

Orphan syndicates, so called because they had no successor syndicates to close their business into, also have suffered from high costs, states the report. Several of the 1993 and 1994 orphan syndicates have been closed into three current syndicates, 282, 2021 and 1227, in what Chatset calls the "orphan scam." Deals for running off these syndicates cost 32 million pounds ($53.2 million), according to Chatset, adding "it does seem strange that the orphan syndicates, which only had the 1993 year left open and in some cases 1994, have suffered a poor runoff whilst the market as a whole has thrown up good surpluses."

These surpluses have released 176 million pounds ($292.7 million) from reserves for those two years, though the Inland Revenue is viewing this as an underestimate of the surplus on reserves, and names are being taxed accordingly. Chatset blames the reinsuring syndicates, saying it suspects they have charged "exorbitant premiums" for closing the orphan accounts.

Moves continue toward Lloyd's becoming a marketplace of insurance companies, with traditional unlimited liability names being squeezed out by various pressures, Chatset stated. In addition to referring to Lloyd's Chief Executive Ron Sandler's comments earlier this year that the days of the annual venture, whereby Lloyd's regenerates its capital every year, are numbered, Chatset also identified other factors diminishing Lloyd's attraction to individual names. These include increased charges, "with managing agents nudging their profit commissions up towards 20% and annual fees from the norm of 0.5% to 0.6% and higher."

In addition, underwriting agencies are moving toward corporate capital for their syndicates, citing concern about the security of capital from unlimited liability names. They are merging separate syndicates into one composite syndicate, so that names have a smaller choice of syndicates to underwrite on in the short term, and in the longer term, the agencies can become an insurance company "with no need for the (unlimited liability) name or perhaps even Lloyd's," according to the analyst.

Lloyd's is moving away from its traditional structure as a subscription market, asserts Chatset, with the larger syndicates able to write 100% of a risk, and electronic trading systems being introduced.

"These might be moves towards great efficiency, but there was always much to be said for the traditional subscription market with the face-to-face contact with the broker, with the opportunity for juniors to learn the trade and the comfort that, if the lead underwriter made a mistake, somewhere down the slip a following underwriter would pick it up," the report says.

Copies of Lloyd's League Tables and 1998 Auction Review are available for 75 pounds plus postage for overseas orders from Chatset Ltd., Peninsular House, 36 Monument St., London EC3R 8LJ.