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LONDON-Lloyd's of London would be delighted if it manages to collect even half of the (British pounds) 600 million ($1.01 billion) still owed by members who rejected the market's reconstruction and renewal plan.
Unveiling the Corporation of Lloyd's annual report and accounts, Lloyd's Finance Director Bob Hewes said the collection process has resumed after two recent U.K. court decisions allowing Lloyd's to recover the debts (BI, April 28).
Lloyd's has issued writs against 1,300 members who have not paid their so-called "finality bills" reinsuring their pre-1993 liabilities into Equitas Ltd. But it is taking a pragmatic view toward the collection process.
"We know that some members are not in a position to meet their gross debt," said Mr. Hewes.
In those cases, Lloyd's is still prepared to enter into payment arrangements, though many members in this position are finding their bills much higher than they would have been if they had accepted the R&R settlement.
This is because under the settlement, Lloyd's provided "debt credits" to cushion bills, giving more debt credits to members on successful action groups or on particularly badly performing syndicates. The offer of debt credits was withdrawn from members who either rejected the R&R proposals or failed to pay their final bills on time.
The costs of setting up Equitas and resolving Lloyd's old-year problems have pushed the Corporation's accounts deeper into the red for 1996. It reported an overall loss of (British pounds) 484.1 million ($829 million) for the year-compared with a (British pounds) 13.8 million loss ($23.6 million) for 1995-primarily due to its (British pounds) 486.4 million ($833 million) contribution to the R&R settlement. In 1995, the Corporation put (British pounds) 66 million ($102.5 million) toward the settlement process.
During 1996, Lloyd's disposed of a number of assets, including its flagship headquarters on Lime Street, which it now leases. In 1995, Lloyd's sold its publishing subsidiary, Lloyd's of London Press Ltd.
Meanwhile, Lloyd's created a new company last year, Omniline Ltd., to assume ownership of its second building on Lime Street. That building, commonly known as the 58 Building, was subsequently mortgaged for (British pounds) 24 million ($41.1 million), and the proceeds were put toward the settlement funding.
To tide the Corporation over during the R&R period, it also raised a (British pounds) 300 million ($513.8 million) syndicated loan, backed by seven banks led by Citibank International P.L.C.
Mr. Hewes said Lloyd's had drawn upon (British pounds) 285 million ($488.1 million) of the loan facility, and (British pounds) 7.5 million ($12.8 million) interest had accrued on it by the end of the year, meaning Lloyd's has used (British pounds) 292.5 million ($500.9 million). At last year's annual general meeting, Lloyd's Chief Executive Ron Sandler predicted only two-thirds of the loan would be used.
Lloyd's is paying the banks back over a five-year period by a 1.1% levy raised on all Lloyd's policies issued from the beginning of this year. So far, about (British pounds) 10 million ($17.1 million) has been paid back, said Mr. Hewes, explaining it is collected and handed over to the bankers monthly.
An increase in subscription rates to Lloyd's is covering the rest of the deficit. Last year, the Corporation raised (British pounds) 53 million ($90.8 million) by charging an entrance fee of 0.5% of premium limit. That proportion has been raised to 0.7% for 1997, which Mr. Hewes expects will raise more than (British pounds) 70 million ($113.4 million), but he hopes the fee can be reduced for next year.
Subtracting the R&R costs from the bottom-line figure in the Corporation accounts leads to a loss of about (British pounds) 10 million. Part of that is still due to R&R expenses, said Mr. Hewes. For example, the Corporation is still footing the cost of managing members in the process of resigning, though this expense is rapidly diminishing as the members pay their finality bills and leave the market for good. In addition, the Corporation is bearing the legal costs of recovering unpaid debts from non-accepting members.
Mr. Hewes said he is confident the Corporation's 1997 accounts will show a "modest surplus" that will be sustained into the future.
On a more pessimistic note, Lloyd's warns that members may have to wait to receive their share of the record 1993 profits, estimated at more than (British pounds) 1 billion ($1.61 billion).
"We shall do our very best to release available surpluses as early as possible, but the complexities are considerable, and the timing of the releases is subject to ensuring that each member's Canadian and American Trust Fund is sufficiently funded to meet regulatory requirements," the report states.
Complications include the first-ever distribution from Members Agents Pooling Arrangements, devices similar to mutual funds that were created by Lloyd's to give members' investment a wider spread of syndicates.
Mr. Hewes predicted most members should get their profits by the end of June but said that after last year's problems, when Lloyd's "didn't manage the distribution. . .as we wanted to," Lloyd's will not tie itself to a timetable this year.
Also, Lloyd's is in the final stages of negotiating the reinsurance of Lioncover Insurance Co. Ltd., the company set up in 1997 to reinsure the liabilities of
the notorious PCW syndicates. Lloyd's negotiated a settlement with members on syndicates managed by the PCW Underwriting Agencies Ltd., WMD Underwriting Agencies Ltd. and Richard Beckett Underwriting Agencies Ltd., as well as syndicates 2 and 49, after they collapsed with huge exposures to pollution and asbestos claims in 1982.
Lioncover's liabilities currently are guaranteed by Lloyd's Central Fund, a fund of last resort designed to cover members' shortfalls for the annual solvency test administered by the U.K. Department of Trade and Industry and to protect policyholders from syndicate failures.
By the end of last year, the Central Fund stood at (British pounds) 236.3 million ($404.7 million), a 56.3% drop from 1995, but nevertheless a lot stronger than Lloyd's had predicted. At the beginning of 1996, Lloyd's was warning that the fund could be exhausted by the R&R process.
In the end, the Central Fund contributed (British pounds) 382.2 million ($654.5 million) to the settlement. Provisions for Lioncover liabilities took (British pounds) 149.3 million ($255.7 million) out of the fund, compared with (British pounds) 73 million ($113.4 million) in 1995. In total, Lioncover has cost the Central Fund (British pounds) 487 million ($785.8 million).
Equitas provided Lloyd's with an indicative premium for reinsuring Lioncover's liabilities of (British pounds) 300 million ($465.9 million) at the end of 1995. This is made up of the (British pounds) 222.3 million ($380.7 million) supplied by the Central Fund in 1995 and 1996, plus (British pounds) 78 million ($133.6 million) to cover the "risk premium" and arrangement costs.
In the meantime, two analysts have criticized Lloyd's for allegedly trying to push out traditional unlimited liability members. In its latest newsletter, CBS Analysis, part of members agent Christie Brockbank Shipton Ltd., accuses Lloyd's of trying to push unlimited liability members out of the market by moving from its current annual venture status to a longer-term capital base. Instead, it thinks Lloyd's should aim for "a method combining the best from the past with an update to the current structure," perhaps involving three-year commitments with penalties if the investor decides to withdraw within that time. Some members agents already have made longer-term commitments to syndicates, says the newsletter, and it suggests this system should be formalized.
Also mourning the possible demise of the traditional member is analyst Chatset Ltd. In its recently published evaluation of the Lloyd's market, Chatset said that by increasing the minimum total means for unlimited liability members, or the personal wealth that they must show to join Lloyd's, Lloyd's is squeezing them out of the market.
"The number of failures of DTI-authorized companies over the past three decades provides little comfort to the assured," says the report. "Is a limited-liability, DTI-regulated Lloyd's likely to be a stronger entity than the traditional Lloyd's based on unlimited liability?"