Investor Ire Endangers Lloyd's
LLOYD'S of London, the 305-year-old society of insurance underwriters, is facing a crisis that could trigger its eventual collapse, financial experts say.
Following an admission by Lloyd's that losses for 1989 were more than British pounds2 billion, a group of "Names" - private individuals who pledge their fortunes to provide Lloyd's with capital - confronted David Coleridge, the society's chairman, at a meeting June 24 in London's financial district.
The meeting was attended by 5,000 Names who demanded to know what had gone wrong.
Mr. Coleridge was on his feet for six hours as he fielded questions and complaints of mismanagement and, in some cases, fraud. He said the society had no plans to bail out Names whose personal fortunes had been wiped out or severely dented. Lloyd's announces its performance figures three years late.
Christopher Stockwell, chairman of an umbrella group of aggrieved Names who have suffered average individual losses of British pounds100,000, said that unless Lloyd's came up with a satisfactory rescue package, "litigation on a massive scale is certain."
"The publicity around the litigation will be immensely destructive," Mr. Stockwell said. "The effect will be to undermine confidence in Lloyd's as a financial institution."
In recent days the aggrieved Names have gathered enough signatures to force Coleridge to call an emergency general meeting at which a motion of no confidence in Lloyd's management will be debated, probably in July.
Coleridge denounced the call for a special meeting, saying it "runs the risk of severely damaging Lloyd's worldwide business, and will work against the interests of the membership generally."
The number of Names, currently 22,000, is down from a high mark of 36,000 in 1988 and is still falling.
In the early 1980s the Lloyd's system yielded big profits for most Names, but in the last five years a series of huge insurance claims worldwide has helped to turn the system sour. The loss of British pounds500 million in 1988 ended a 21-year unbroken profit record.
Lloyd's warns investors about the risks, but many Names insist they are victims of a poorly regulated and in some cases rigged system. The Lloyd's insurance market is split up into several syndicates which are managed by agents. A few of the agents stand accused of mismanagement.
Names claim Lloyd's insiders directed outside investors' pledges into extremely high-risk projects but put their own funds in safer investments.
Another practice said by City of London sources to have been extensively used at Lloyd's was "churning," in which a string of underwriters spreads risk through multiple reinsurance, reaping commissions on each transaction.
In the short term, Lloyd's will try to fend off lawsuits. Most Names have said they will drop plans to litigate if Lloyd's limits their losses to 10 percent of capital invested, but Coleridge said such a limit was impossible. He said Names who had not suffered heavy losses were unwilling to cough up enough money to rescue those who had.
In the longer term, the Lloyd's council seems likely to have to look for new sources of capital if it is to survive. Attracting corporate money may prove difficult, partly because Lloyd's is so heavily geared to private investment, and also because few corporations would be willing to invest on the traditional high-risk basis.
Coleridge has said the best Lloyd's could do in future was to limit investor's potential losses to 80 percent, but few corporate investors are likely to regard such terms as attractive.