View from City Road: Lloyd's confronts its problems in a daring move

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The Independent Online
The spanking new business plan from the City's most accident-prone institution disclaims: 'This document is not a prospectus or a solicitation of capital.' Yet Lloyd's plan looks just like that. Eye-catching targets are set to encourage the would-be investor and dissatisfied 'names'. Lloyd's, it says, could see a turnaround in its fortunes over the next five trading accounts of pounds 3.5bn and make a profit of pounds 900m. This would be the most dramatic recovery since Lazarus.

An intriguing aspect is Lloyd's proposal to admit 'incorporated' names. Entities will be limited liability companies. Their owners might be based anywhere in the world. A minimum capital of pounds 1.5m would be needed. Incorporated names could range in size from small, privately held companies to quoted vehicles, but they will be expected to enagage solely in Lloyd's underwriting.

Lloyd's does not regard this as an attempt to phase out unlimited liability, although it has said that existing members of the market could take advantage of the 'incorporated' arrangement once they have discharged their present liabilities. But it is a daring move.

The hardest-hit members will still have to meet their past losses. That means the poor names will become poorer, while the newcomers will enjoy the benefits of limited liability and a clean set of books in which to start trading at a time when premium rates are rising. This is bound to create tensions, but the greater difficulty may come in running investors with limited liability alongside new investors with unlimited liability. The plan is sketchy about larger contributions by limited liability investors to a central fund against losses. But it looks as if some investors will have limited downside, but unlimited upside.

Moreover, shareholders of incorporated names will be able to trade their shares. Given Lloyd's vulnerability to hazards, this secondary market is bound to be volatile, possibly undermining Lloyd's future ability to raise capital. After all, why subscribe new capital when you can buy into old claims at a hefty discount? Nevertheless, Lloyd's is right to go down this route. All other means of raising finance have been blocked, and the capital of the market urgently needs replenishing. There will be problems galore ahead, but at least Lloyd's is now confronting them.

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