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LLOYD'S RESOLVING NAGGING PROBLEMS

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Two years after implementing its ambitious reconstruction and renewal plan, Lloyd's of London is still tying up loose ends to restore its prominence as a major reinsurance center.

Lloyd's continues to chase hundreds of former members for L130 million ($213.1 million) in underwriting losses they refuse to pay. And this month, the U.K. High Court made a high-profile name, refusenik member Anthony Gooda, bankrupt.

Mr. Gooda had worked alongside underwriter Derek Walker, putting names onto the Gooda Walker syndicates, which crashed with estimated liabilities of more than L500 million ($819.8 million) following the infamous excess-of-loss reinsurance spiral that contributed to Lloyd's huge losses and consequent overhaul.

As a name himself, Mr. Gooda was required to join the global settlement of Lloyd's pre-1993 losses but balked at paying the L490,000 ($803,355) premium to close his 1992 and prior-year liabilities into runoff reinsurer Equitas Ltd. Lloyd's legal proceedings against more than 550 steadfast holdouts brought about the bankruptcy order against Mr. Gooda. Mr. Gooda also owes Lloyd's a further L1.2 million ($2 million) for money it paid from its central fund for losses he refused to pay.

But Lloyd's still is only chasing L130 million out of the L600 million ($983.7 million) outstanding debt from names worldwide. For all intents and purposes, the market has written off much of the money due from overseas members, though it maintains that it will collect as much as possible as part of its business debt collection.

Mr. Gooda's bankruptcy appears to be the beginning of the end for recalcitrant names. This month, the High Court rejected non-paying names' attempt to appeal its decision, allowing Lloyd's to use bankruptcy orders on names who do not have enough assets to cover their debts.

As Lloyd's seems to be resolving problems in one segment of its membership, others start to rear their heads. A constant theme of the past year has been whether Lloyd's will end the annual joint venture mechanism that allows unlimited liability members to trade in the marketplace.

Comments made earlier this year by Chief Executive Ron Sandler to the Assn. of Lloyd's Members that the annual joint venture's days are numbered met with protest from some names. Despite subsequent statements by both Mr. Sandler and Chairman Max Taylor that unlimited liability status would be available as long as a sufficient number of names wanted it, the ALM took the unusual step of threatening to call an extraordinary general meeting to overturn any such proposals.

Unlimited liability names also say Lloyd's billing changes are edging them out of the market. The Corporation of Lloyd's has started to bill members -- corporate and individual -- for services as they use them rather than on a flat-fee basis. Unlimited liability names, who now in addition must put up more in assets to back their underwriting capacity, are viewing the higher cost of membership as an attack on traditional forms of capital.

Corporate limited liability capacity now represents 60% of Lloyd's capital base, and Mr. Sandler has no doubt that it will increase next year.

"At the core is the belief that Lloyd's offers long-term secure profit," said Mr. Sandler. At the same time, corporate investors have been attracted by the "Lloyd's intellectual capital, market share, brand name, licenses and ability to compete."

The process that started four years ago, when Lloyd's changed its rules to allow corporate investment in the market, has taken on a life of its own. From the early days of investment funds spreading their capacity over a number of syndicates, the market has evolved toward an exchange comprised of what are, essentially, Lloyd's insurance companies.

The combination of capital dedicated to specific syndicates -- some set up for that purpose, while others are a result of corporate investors buying the shares of other investors in the syndicates -- with the managing agencies of the syndicates has resulted in the Lloyd's integrated vehicle. Such vehicles operate like insurance holding companies, in which agency owners are corporate investors supplying capital to syndicates.

And their numbers are growing. Recent activity in the Lloyd's auctions, a process that allows members to trade their participation in syndicates to the highest bidder, has seen some corporate owners of managing agencies buying as much capacity on their syndicates as possible. At the same time, some corporate investors have been taking the deals out of the auction process and offering capacity holders cash or shares for their syndicate places.

Before the auction process started in July, market executives predicted corporate capital would take a dominant role in the market, and the future of the few members agencies left remains in question.

Sax Riley, chairman of Sedgwick Group P.L.C., which owns members agency Sedgwick Oakwood Members Agents Ltd., sees the agent's role changing as the number of unlimited liability names decreases.

It may be that the corporate vehicles set up by the agency for its names to convert into limited liability members of Lloyd's either buy or set up their own managing agency. Although this has been a practice for corporate capital providers, it is one of the first forays into underwriting by a conversion vehicle.

Mergers and acquisitions among capital providers and agencies have been a strong theme of Lloyd's over the past year. The deals give investors more control over their syndicate participations, particularly if they can buy out all the other syndicate members, and can give the so-called Lloyd's integrated vehicle critical mass within the market.

Other recent deals by corporate capital investors have included:

* LIMIT P.L.C. bought out the remaining shares of Bankside Insurance Holdings Ltd. and Janson Green Ltd. it didn't already own. LIMIT aims to merge the agencies next year. It has also sold LIMIT (No. 9) Ltd. to ACE UK Ltd.

* Syndicate Capital Trust P.L.C. bought SVB Associates Ltd.

* Aberdeen Lloyd's Insurance Trust P.L.C. bought Hayward Brick Stuchbery Holdings Ltd., the holding company for Chaucer Syndicates Ltd.

* NAC Re Ltd. is in talks to buy Denham Syndicate Management Ltd.

* ACE Ltd. bought Tarquin Ltd., the holding company for Charman Underwriting Agencies Ltd.

* Angerstein Underwriting Trust P.L.C. is merging with ML (Bermuda) Ltd., the holding company of the Murray Lawrence Group. Angerstein also has merged its two agency businesses, JE Mumford (Underwriting Agencies) Ltd. and PB Coffey (Underwriting Agency) Ltd.

* Lomond Underwriting P.L.C. merged with Atrium Cockell Group Ltd.

* Underwriters Reinsurance Co., a unit of Alleghany Corp., bought Venton Holdings Ltd.

* SAFECO Insurance Co. of America is in talks with RF Bailey Holdings Ltd., which owns RF Bailey (Underwriting Agencies) Ltd.

Despite warnings of meager profits for 1997 and 1998, investors' enthusiasm for Lloyd's does not seem to have dampened. In fact, potential investors are waiting in line to find a home for excess capital in the market.

"There are signs that world capital is dying to find an inadequate return," said Grahame McKean, director of Lloyd's broker Ballantyne, McKean & Sullivan Ltd. And if the going gets tough, or returns appear more attractive in other markets, Mr. McKean foresees capital being moved elsewhere.

If one of the advantages of mergers is economy of scale, then ACE has seized the opportunity with both hands. John Charman, newly appointed chief executive of ACE U.K. Ltd. since it bought out Tarquin, has already put his mark on the company, reorganizing and streamlining the business in just a month.

Particularly in today's "extreme trading conditions," Mr. Charman recognized the organization needed to become a lot more efficient and had to cut costs dramatically. He has consolidated the ACE and Tarquin syndicates into three business units for the 1999 year onwards, at the same time laying off 60 people.

What ACE has started, other large businesses at Lloyd's will be forced to follow as the squeeze on profit margins continues, predicted Mr. Charman. And Lloyd's centrally will find itself forced to follow suit, he said.

Mr. Sandler agrees with this approach, emphasizing the Corporation must provide value for money, outsourcing operations where it makes sense and competing with other service providers. Recently, it has improved certain processing services, providing daily rather than weekly settlement of claims and premiums.

Lloyd's is in a more stable position having tied off the final loose ends after reinsuring past liabilities into Equitas two years ago. Outside the original deal were the liabilities of Lioncover Insurance Co. Ltd., an insurance vehicle set up by Lloyd's in 1987 to deal with losses arising from the infamous PCW syndicates.

Lloyd's and Equitas agreed at the end of last year to transfer these last pre-1993 liabilities to the reinsurer for a L601 million ($985.3 million) premium. More recently, Lloyd's paid L66 million ($108.2 million) to Equitas for a contingent liability from the reconstruction and renewal plan. This effectively seals off Lloyd's remaining liability to Equitas.

As for the future of Lloyd's, "we need a strong, healthy, vibrant market that is professional and profitable," said Mr. Charman.

BMS' Mr. McKean can see the advantages of insurers buying into the Lloyd's underwriting culture but warns that the pressures on Lloyd's businesses to perform could take the market closer to other insurers. "If they bought into Lloyd's for the difference, what's the point of changing it?" he asked.

"The key issue is not whether the capital is corporate or unlimited, it's the ability to develop permanent structures. . . .The trend will favor continuous capital," Mr. Sandler predicted. To help the process along, Lloyd's is exploring a system of annual accounting alongside its traditional three-year system and is discussing ways of allowing captive syndicates to trade in the market.