Lloyd's Posts First Profit in Five Years, But U.K. Investors May Stage a Revolt
by Nicholas Bray
The Wall Street Journal, July 15, 1996

LONDON -- Lloyd's of London faces a stormy annual meeting of its investors today, despite swinging to a larger-than-expected yearly profit and winning the agreement of securities regulators in the U.S. on its proposed rescue plan.

Yesterday, Lloyd's said it had won support from state securities regulators for a proposal to reduce by as much as 20% the payments it is seeking from its U.S. investors as part of its #3.1 billion ($4.82 billion) reconstruction plan.

The announcement appeared to remove one of the principal obstacles to the plan: the threat of continued litigation in the U.S., where investor lawsuits accuse Lloyd's and its agents of fraud.

Earlier, Lloyd's announced global profit of #1.1 billion for its 1993 underwriting year, ending five years of losses totaling #8 billion. Lloyd's, a London-based insurance market, previously recorded a profit in 1987.

Accounts for 1994 and 1995 are still to be completed, under lloyd's system of closing its books three years after the fact in order to give time for claims to come in. Lloyd's estimates profit of #1 billion for 1994 and #822 million for 1995. Lloyd's posted a loss of #358 billion for 1992.

Despite the 1993 earnings, which exceeded forecasts of #1 billion profit, Lloyd's may have difficulty maintaining a profit with insurance rates beginning to soften.

The main threat to Lloyd's future remains clear: If it fails to win support for the reconstruction plan from an overwhelming majority of its 34,000 investors, known as "Names", by Aug. 31, the 300-year-old market will be unable to meet U.K. solvency requirements and may have to cease trading.

In a bid to head off such a prospect, Lloyd's last week announced a #40 million package offering U.S. Names a 20% reduction in their debts to Lloyd's. Success of that package hinged on its acceptance by securities regulators from individual states, with whom dissident U.S. Names have lodged claims that Lloyd's contravened U.S. securities laws by enlisting them as investors.

Yesterday, lloyd's said it had won support for its offer from regulators in states representation 84% of its 2,700 U.S. Names. States accepting the plan are said to include New York, California, Louisiana, Florida and Texas.

Missouri, where 63 Names live, rejected the plan. Individual Names still have an option of rejecting the recovery plan in order to press ahead with litigation.

That switches the spotlight back to dissident Names in Britain, where about 3,000 contend they have been discriminated against. Though Lloyd's officials have said no more money is available, the fact that Lloyd's could make an offer to U.S. Names has encouraged dissidents in Britain to believe they can get similar treatment.

Some U.S. Names are liable for huge losses in their Lloyd's syndicates. These losses have already wiped out much of their net worth and many stand to lose their houses. A 20% reduction in the amount they owe Lloyd's is not likely to do them much good.

If Lloyd's survives, it will be in a new form. After the massive losses, especially to "outside Names", few investors are likely to blindly sign up for Lloyd's syndicates as they did in the past. Most of funds for Lloyd's restructuring is comming from corporate sources and these investors will insist on full disclosure, something that Lloyd's has not been used to in the past. Like much of British society, Lloyd's is an anachronism. If they survive they will have to change into something that more closely resembles the multinational insurance companies they compete against.

Ian Kaplan

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