Lloyd's of London yesterday unveiled a daring pounds 6bn plan to break out of the cycle of losses, litigation and bad debts which threaten to engulf the world's most prestigious insurance market.
The plan includes a pounds 2.8bn debt-forgiveness and compensatio n package to put an end to litigation by aggrieved names, the investors who back the market with unlimited liability. It seeks to draw a line under the appalling losses of recent years, providing a sound basis for a "new Lloyd's" to trade profitably into the future.
David Rowland, Lloyd's chairman, said in an introduction to the plan: "Unless we take radical action now to produce a solution which is acceptable to our policyholders, our regulators, and to you, the membership, I do not believe that [Lloyd's] will be able to survive in anything like its present form."
Lloyd's names claimed the offer represented a victory for them, but warned that a great deal of detailed negotiation will be needed before they could commit themselves.
The plan involves clearing away almost pounds 6bn of liabilities that Lloyd's will have accumulated by the end of this year, enabling the "new Lloyd's" to begin with a clean balance sheet. The key to success in this hugely complex fund-raising exercise is the ability to get names to agree to end all litigation in return for a guarantee that they will not have to suffer any further losses. "We want to say to names, you are free to resign, and we undertake never to pursue you again for debts," said Mr Rowland.
To achieve this, all pre-1992 claims will be transferred to a special reinsurance vehicle, called Equitas, leaving the "new Lloyd's" unencumbered. Freeing Lloyd's from the this uncertainty is crucial if the market is to attact new capital, notably corporate investors.
"Once we have cleared the balance sheet, I believe Lloyd's will be able be very attractive to new investors - it is a damn good business," said Mr Rowland.
Lloyd's hopes the negotiations over the complex restructuring can be concluded within nine months, enabling the "new Lloyd's" and Equitas to begin operating in the spring of next year. But part of the immediate fund raising will give Lloyd's a years breathing space from its cash-flow problems, enabling it to pay claims over the short term.
Lloyd's said yesterday that by the end of last year, unpaid and deferred names' debts amounted to pounds 2.2bn. The loss for 1992, its latest accounting year, was confirmed at pounds 1.2bn bringing the accumulated losses since 1988 to over pounds 9bn.
Michael Deeny, chairman of the Gooda Walker action group, which has 3,000 members, said "We welcome these proposals. We regard them as a victory for names and an essential development for securing a solvent future for Lloyd's. It was vital that they came up with a plan to address losses caused by appalling negligence. What was announced today is a plan, not a legally binding offer. Until we get an offer, action group by action group, we will continue with the litigation."
Detailed negotiations between names and Lloyd's start today, but the settlement may not end all the litigation. Some action groups are determined to pursue syndicate auditors to make good losses not recovered from Lloyd's agents or through the settlement.
Christopher Messer, chairman of the Janson Green Action Group, said: "The major action groups had specifically said that they wish to be free to pursue the auditors unless they come up with a really substantial sum of money."
Auditors have a substantial amount of professional indemnity insurance with which to pay any claims should the names succeed in court actions.
To wipe the slate clean of the pounds 6bn in liabilities, the Lloyd's plan must solve several problems simultaneously. The central fund will provide pounds 1.1bn and a further pounds 900m will be drawn from the market, including a pounds 450m levy on members, pounds 200m from the underwriting agents, and pounds 250m from mortgaging buildings and other assets.
This will make up the pounds 2bn debt forgiveness for names. A further pounds 800m will go towards settling litigation, drawn from the insurers of Lloyd's agents facing litigation. Altogther this forms the pounds 2.8bn litigation settlement package, which is the first part of the pounds 6bn plan.
The balance will come from the early release of pounds 800m of profits from 1993, 1994 and 1995; an expected pounds 600m in revenues from names still paying off debts, and pounds 1.5bn from names' deposits at Lloyd's. Mr Rowland said Lloyd's will transfer $500m (pounds 312.5m) to New York to satisfy demands from US regulators for more underwriting support.
How Lloyd's hopes to wipe the slate clean
To put the past behind it, Lloyd's needs to clear nearly pounds 6bn of liabilities. Here's how the package should add up.
r pounds 1.1bn from Lloyd's central fund
r pounds 900m raised from the insurance market
r pounds 800m from insurers of the agents facing litigation by names
r pounds 800m from early release of profits from 1993/94/95
r pounds 600m from normal payments of liabilities by names
r pounds 1.5bn from names' deposit fund at Lloyd's
This leaves residual liabilities of pounds 300m to be found.