TIME EUROPE
WEB FILE - LLOYD'S OF LONDON
SPECIAL REPORT
The Decline and Fall of Lloyd's of London
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"Johns Manville is a goner," Don Tayler confided to Ronald Verrall at a Lloyd's of London social gathering in February, 1981. Tayler and Verrall were underwriters for David Rowland, a leading Cambridge-educated Lloyd's insider who would become its chairman in the 1990s and be knighted by the Queen. Tayler, chairman of a small group of insurance professionals that monitored the asbestos threat, was warning Verrall of the looming bankruptcy of the Johns Manville Corporation, the world's leading asbestos products manufacturer. It was still a year and a half before Johns Manville would file for protection and reorganization under Chapter 11 of the U.S. bankruptcy law--one of the largest industrial corporations ever to do so--but Tayler had learned from private sources that bankruptcy was inevitable. He also knew that claims for damages against the company were so massive that they threatened to overwhelm not only Johns Manville but its last-resort insurers, the syndicates of the Lloyd's market.
Armed with that information, Ronald Verrall took steps to reinsure massive asbestos liability away from David Rowland's syndicate onto an unrelated Lloyd's syndicate. Verrall concealed the asbestos problem from the managers of the other syndicate and their unsuspecting Names, disguising it on the books as innocuous ship cargo he was insuring, according to records of an arbitration proceeding in London in 1990. In typical British understatement, an arbitration panel found Verrall's syndicate liable for "non-disclosure of a material fact."
Manipulations such as Verrall's are even now being combed by investigators, for it appears that the early '80s were the years when the frantic activity to spread or offload the asbestos risk got into high gear. But the Parnells and Verralls were not the only ones seeking to offload looming asbestos liabilities or who knew that insolvency beckoned. There is evidence that as early as 1979, one of the largest banks in the world, Citibank of New York, was aware through a senior bank official of the incipient crisis. Lloyd's North American reserves, then worth about $4 billion, were on deposit at Citibank, and Thomas Hitchcock, who was in charge of the bank's international insurance business and was the bank's point man for the Lloyd's American Trust Fund, had concluded that the fund was not enough to cover Lloyd's asbestos exposure. That is claimed by Roger Bradley who says in a sworn affidavit that Hitchcock confided his findings to him over dinner in New York. The banker's recommendation? Lloyd's should recruit still more Names. On the back of a napkin, says Bradley, the two men figured that the capital of 25,000, 50,000, or perhaps even 100,000 Names would be required to meet the coming asbestos claims. Thus Citibank may have become caught up in the effort to bring unsuspecting Names into the market--a claim made in a State of California lawsuit that was settled on non-evidentiary grounds in 1996. Another suit, now pending in federal court in New York City and certified as a class action, alleges that Citibank breached its fiduciary duty to Names who had trust accounts at the bank. Citibank, according to the suit, looted the trust accounts of Names who owed nothing to Lloyd's to pay the obligations of those who purportedly did. A spokesman for Citibank told Time that neither the bank nor Hitchcock would have any comment because of the pending litigation.
By 1982, a flustered Lloyd's was not only worried about its financial exposure but its exposure to future litigation arising from the recruitment drive for Names. The answer was to persuade Parliament to grant Lloyd's immunity from lawsuits by the Names. Because of its exalted status, Lloyd's for centuries had enjoyed a unique freedom from regulation in Britain. Down the years Parliament had explicitly exempted Lloyd's (in so-called private acts) from the laws that applied to the insurance industry at large. But now Lloyd's needed to protect itself from legal action by disaffected Names. Immunity, however, was unlikely to be granted if Parliament got wind of Lloyd's looming financial problems. In the upcoming London trial, the dissident Names will charge that in order to make itself look healthy Lloyd's and Lloyd's syndicates manipulated their finances to show false profits, thereby deceiving not only Parliament but also existing and prospective Names.
To understand these allegations one must first fathom the peculiar financial system--fundamental to the operation of Lloyd's--that the Names say was manipulated. Like so much else at Lloyd's, the system, having originated in the 17th century, was complex and unusual--"odd" and "quirky," as a committee of Parliament would later observe, "arachnoid," as a U.S. judge asserted.
Instead of figuring profits and losses and closing its books at the end of each year like most businesses, a Lloyd's syndicate waits two additional years to better account for unresolved or disputed claims. At the end of the third year, the underwriter in charge balances the accounts as best he can, estimating the size of any unresolved claims and setting aside reserves to cover them. Unresolved claims can also be reinsured assuming another syndicate willing to take them on can be found. However, if unresolved claims are still too numerous or large at the end of the third year to allow a closing of the books, the underwriter is supposed to leave his syndicate's books open until all claims are covered, even if that takes many years.
When asbestos claims began to arrive at Lloyd's, the insiders knew they would take longer than three years to be resolved. Asbestos claims were more than doubling each year from the late '70s onward. Estimates of eventual claims ranged well over $100 billion, exceeding Lloyd's total reserves and Names' combined assets.
"Lloyd's was bust and had to disguise its problems by false accounting," concluded Anthony John South, a British insurance expert and member of Lloyd's from 1968 to 1994, in a sworn affidavit prepared for the West case in Los Angeles. (South died in December, but lawyers can still use his evidence in both the West and Jaffray trials.) Under normal procedures, Lloyd's underwriters would have been barred from closing the books on the affected syndicates--even after three years--and would have had to set aside large reserves in anticipation of the claims. But Lloyd's insiders knew such moves would alert Parliament to the looming trouble and scuttle the new bill that would insulate Lloyd's against lawsuits. "Three-quarters of the market was technically bust in 1982," Jaffray claims. "But Peter Green was determined to close the books, otherwise Parliament would not have passed the Lloyd's bill." Adds Christopher Stockwell, a leader of the dissident Names in a witness statement prepared for the Jaffray trial: "[Green] ... would not have hesitated to seek to hide the problem if he believed that the interests of the market were threatened."
The insiders are alleged to have devised a two-part cover-up. First, in order to post current "profits," they used funds that instead should have been set aside as reserves against future asbestos claims. That is "fraud anywhere in the world," said South in his affidavit. Second, they formed new Lloyd's syndicates with newly recruited Names, who were oblivious to the asbestos problem, and had them reinsure the old syndicates. In effect, the old Names, typically Lloyd's insiders, passed liability for enormous potential claims to new Names, none of whom had been warned about what they were being asked to reinsure. They were like "lambs being led to slaughter," alleges a legal memorandum filed by lawyers for the family of Oliver Grace in a New York court in December, 1998. "Lloyd's ... permitted the liabilities to be rolled forward onto an expanding pool of investors ... without disclosure," concludes William H. Mohr, an assistant attorney general in New York, who conducted an intensive two-year investigation of Lloyd's. "It has been a classic Ponzi scheme, in my opinion," British investor John Finlay testified to a committee of the House of Commons in February 1995.
To succeed at these deceptions, it is alleged that Lloyd's misled its auditors as well as its Names and Parliament. At a time in the early '80s when asbestosis claims were more than doubling every year, the chairman of Lloyd's audit committee, R.J. Kiln, gave instructions that the specifics of asbestos claims were not to be mentioned to outside auditors for Lloyd's. Some auditors, however, sensed trouble. At a meeting at Lloyd's on Jan. 15, 1982, they told senior officials informally that if Lloyd's were to set aside sufficient reserves to properly anticipate asbestos claims, the marketplace would be "effectively bankrupt." A formal written warning--less blunt--followed a few weeks later, on Feb. 24, 1982.
In that warning, the chartered accounting firm Neville Russell informed Lloyd's that losses from asbestosis and related diseases such as cancer appeared to be "considerably in excess" of what Lloyd's had acknowledged and raised doubts about the adequacy of reserves. The Neville Russell letter, although judicious and understated, implied that asbestos threatened the viability of Lloyd's itself. Neville Russell spoke for auditors for more than 80% of Lloyd's syndicates. It was an apocalyptic warning.
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