Equitas day: final act in the Lloyd's nightmare

The bills arrive tomorrow. John Eisenhammer reports

THE FINAL chapter of the Nightmare on Lime Street has just opened. It is one of the most chilling tales of high finance this country has ever witnessed - a disastrous combination of misfortune, greed, incompetence and fraud. There were 34,000 names underwriting at Lloyd's of London in 1988; today the number still active is just over 12,000, an unparalleled statement of flight and dispossession.

Since 1988 Lloyd's has racked up losses of more than pounds 9bn. This has brought a devastating turnaround in the fortunes of many names - by definition people of above-average means who pledged all their wealth to cover eventual liabilities.

Many are household names, such as Virginia Wade, Tony Jacklin, Henry Cooper, Susan Hampshire, Edward Heath and Ian Lang, President of the Board of Trade. The effect of the crisis on members of parliament could be crucial for the future of the Government as bankrupts forfeit the right to remain MPs. There has been widespread speculation that other MPs are being bankrolled by wealthy figures and banks to avert bankruptcy.

Traditionally, Lloyd's had been regarded as a safe investment and unlimited liability was a theoretical risk. But it was to provide a stark lesson in the risks of getting involved in financial markets. Under the burden of its losses, litigation and refusals to pay by angry names, Lloyd's is going bust. To avoid this fate, the insurance society has devised an unprecedented rescue plan.

It is hiving off all its pre-1993 policies, notably the ruinous asbestos and pollution liabilities in the US, into a separate reinsurance company called Equitas. Names are being asked to pay a final premium into Equitas, to cover with one sum all the potential liabilities from their old policies. It means that for a price, they can do what has not been possible before: sign a cheque and walk away.

For many names, this means finding more money. To help the settlement, Lloyd's is offering at least pounds 2.8bn in credits and debt forgiveness to names, reducing Equitas bills and buying off litigants. After years of uncertainty, tomorrow names will finally receive the first estimates of how much it will cost each of them to "achieve finality".

Who is affected?

Every one of the 34,000 names. Even if they stopped underwriting some time ago, names remain liable for claims on policies written during the years they were active. The settlement therefore affects everyone involved in Lloyd's before 1993, but each name's case will be different, depending on how long, how risky and how much insurance an individual paid.

Which is the key figure?

The figure in the Summary Data of the Indicative Finality Statement. This shows an estimate of what, if anything, you will have to pay Equitas to reinsure all your old policy liabilities. Remember, any premium is over and above your funds pledged at Lloyd's. For some names, these funds will be more than enough to cover the cost of Equitas, and they get some money back. The less fortunate will still need to find more cash.

What do I do?

Don't panic, even if the bill looks unpayable. Lloyd's has said no one will be left out of the settlement for a genuine lack of funds. Special extra funds are there for the hardest hit. Moreover, these are estimate bills and the final premiums are likely to be lower for most people.

What do I do next?

Consult your financial adviser and banker. These are highly important decisions with considerable tax implications for some, and time is short. Planning is essential, and Lloyd's requires early notice if you want help. The deadlines for payment of the finality bills is late July.

What if I think it will be hard/impossible to pay my bill?

Inform Lloyd's promptly on the appropriate form in your Indicative Finality Statement pack. Anyone with an estimated finality bill in excess of their funds at Lloyd's should consider applying for additional debt credits. These will be allocated on the basis of need. To assess this, names must submit to rigorous means testing by Lloyd's financial recovery department to ensure they have not dissipated assets.

What are the special schemes?

Lloyd's is planning a special mortgage or loan facility, to help hard- hit names get around the difficulties of age, the complexity of their affairs and the need to raise up to 100 per cent loans against their homes. This could also help names whose funds at Lloyd's are secured by their homes. Repayment could be over 25 years, with no new insurance required. There will also be a structured payment facility, spreading the cost of finality over five years.

Do I have a say in all this?

Yes. The Lloyd's settlement plan depends on the outcome of a vote by all names in July, after having received the final Equitas bills. It will be a choice between finality, at a price, and uncertainty, which could prove more or less expensive in the coming years as Lloyd's as we know it is wound up, and the debt collectors take over.