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WEB FILE - LLOYD'S OF LONDON
SPECIAL REPORT
The Decline and Fall of Lloyd's of London
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Even as Lloyd's deflected suits, it hounded investors for cash, ruining many lives. Roy Bromley, a British Name since 1977, balanced a shotgun on the ledge of open French windows at his home in London and shot himself in the chest. Richard Burgoyne, a Name who had lost heavily in two years, also shot himself at home--his wife and two sons, ages 8 and 11, found his body in their living room. Margaret Jones, a British lawyer and magistrate, sedated herself with pills and whiskey and then gassed herself to death with carbon monoxide. The wife of Harold Weston, a prominent lawyer, found his body hanging from the banister of a staircase in their home. Charles Bailey and Fred Yeo, both Canadians, hanged themselves as well. Sir Richard Fitch, a British admiral and defense official, killed himself with carbon monoxide from his car exhaust after learning that much of his estate had been wiped out by the Lloyd's debacle. "He saw everything he had based his life on destroyed," says the admiral's son, also called Richard. "Until the last years of his life my father had absolute faith in Lloyd's. He thought he was dealing with gentlemen."
Estimates of Lloyd's-related suicides range from around a dozen to over 30. The gentlemen at Lloyd's acknowledge only seven.
Many investors such as Shirley Cook in Texas and Elizabeth Bencsics in New Mexico stopped short of suicide but still suffered the decimation of their nest eggs. And a few Names are so rich that even losing millions did not cause them serious pain. Discount stockbroker Charles Schwab, a celebrity in the U.S., published a book of investment advice in 1998 entitled Charles Schwab's Guide to Financial Independence. The book did not mention that Schwab possibly stood to lose $2.3 million with Lloyd's of London.
Under pressure financially and haunted by the specter of their fellow investors' suicides, thousands of Lloyd's Names in 1996 succumbed to a settlement concocted by Lloyd's called Reconstruction and Renewal. The settlement comprised two parts. First, Lloyd's created a reinsurance company known as Equitas to assume responsibility for all the pre-1993 Lloyd's obligations, including the asbestos and pollution claims. Second, the Names' pre-1993 obligations to Lloyd's would be reduced and capped if the Names agreed to pay the reduced obligations and waive all claims against Lloyd's.
The size of the reduction varied among investors and was often set arbitrarily. Invoking its unilateral rule-making authority, Lloyd's "agreed" to the settlement on behalf of Names who had refused to agree to R. and R., and adopted a rule barring any delay in payment while investors' lawsuits against Lloyd's were pending. That rule is infamously known as "Pay now, sue later." Catherine Mackenzie Smith, one of the leading dissidents and a lawyer herself, argues that the "Pay now, sue later" rule was "specifically intended to prevent the allegations of fraud against Lloyd's from being effectively raised." Lloyd's gameplan in her view: force the Names to pay now so as to drain them of the funds to sue later.
The Equitas settlement, which the Treasury Select Committee of the House of Commons called a "scheme" designed to "shore up an institution reeling from past failings," raised more questions than it answered. Today, its structure appears fragile, its future in doubt and its legality under fire.
Possible fraud at Equitas is one of the issues to be aired in the Jaffray suit and is likely to figure in the U.S. criminal investigation. "Allegations by the Names [are] of the utmost seriousness," asserted High Court judge, Sir Anthony Colman, last year. The allegations involve "a pattern of deception by Lloyd's ... not confined to a short period of time ...They allege a continuing culture of misrepresentation over many years." Uncharacteristically blunt in a judicial climate that for years has favored Lloyd's, Colman continued, "These allegations are exceptionally damaging to Lloyd's reputation and to the reputation of the insurance market in general. Further, if they are made good at trial, it may also be proved that this conduct has caused the Names to suffer immense financial losses, so great in many cases that individuals have been driven to bankruptcy, physical illness and death."
Lloyd's of London's potency as meta-phor powers David Hare's play, Amy's View, which has drawn sell-out crowds in London and New York over the last two years. The play's protagonist, an aging actress portrayed by Dame Judi Dench, is a Lloyd's Name who is ruined by underwriting losses. Her financial decline tracks her professional decline--from a star of the classic London stage to a player on a TV soap--and a broader deterioration of standards in culture and society.
Dench's character explains to her daughter her recruitment by Lloyd's:
"We had a very good lunch--a really good lunch in the actual boardroom at Lloyd's. And the Chairman, well, he'd just loved my Ophelia."
"I cannot believe this!"
"And pretty soon he gave me this form."
"You mean you just signed on the spot?"
"This man really did love my Ophelia. In that, he was genuine. Whatever else may have been going on ... It's partly pure snobbery. If a Cockney had said to me, 'You'll make all this money and you don't do a thing,' I would have said, 'Hold on, I wasn't born yesterday.' So in a way, yes, it does boil down to a question of style. You should see it. There are these big silver candlesticks. There is all this china and glass, stretching way down this fabulous oak-paneled room ... it's England as sheer bloody theater."
In that same theatrical room, the ornate Adam Room in the Lloyd's Building in the heart of the City, the same room where the secret Armageddon letter was shown to the Committee of Lloyd's, the room whose carpet is said not to touch the floor because of all the skeletons that have been swept beneath it, Roger Bradley points with pride to a painting in which he's pictured. It is an expansive representation, based on a photograph, of the Lloyd's trading room in 1965, four years before the Cromer Report, with hundreds of underwriters and brokers, including Bradley, caught up in the hurly- burly.
Retired now for a decade, Bradley still lights up faces when he returns to Lloyd's. The red-collared guard at the entrance, the attendant in the members' cloak room, the waiters and waitresses in the members' dining room all greet Bradley with smiles of recognition, as do underwriters in the Room, the vast, four-story-high, block-square trading venue where the ancient Lutine bell still towers over the ancient sea of "boxes"--the rectangular clusters of benches and desks that make up the oldest and most famous insurance market in the world. But Lloyd's enduring legend cannot conceal the foreboding that grips Lloyd's today.
The Room is somber. Some boxes are empty. Morale is low. Lloyd's of London today is a shadow of its former self. Even its name is diminished; it isn't called Lloyd's of London anymore, just Lloyd's. Reeling from scandal and trauma, Lloyd's position in the global insurance market has "progressively eroded in recent years," said Standard & Poor's in a December 1999 report on the Lloyd's market.
Lloyd's share of the world market has fallen from 10% at the beginning of the 20th century--around 50% in some categories of marine insurance--to less than 2% today. Corporations with limited liability, which were first admitted to the Lloyd's market as investors in 1994 to shore it up after mass defections of individual Names, now account for 80% of its capital. The number of Names, the historical foundation of Lloyd's, underwriting with unlimited liability, has fallen from a high of more than 34,000 a decade ago to fewer than 5,000 today. Even with the infusion of corporate capital, Lloyd's capacity to write insurance is lower today--by 8%--than it was in 1990.
Lloyd's lost about $94 million in 1998 and a similar amount in 1999, according to Charles Sturge, a respected insurance industry analyst, whose grandfather founded the company which Coleridge took public in 1984. Another ratings agency, Moody's Investor Services, predicts that Lloyd's will lose $400 million this year. "Underwriting results are deteriorating at an alarming rate," says Sturge. "We find it hard to view the present Lloyd's with any optimism."
As for Equitas, the entity Lloyd's created to assume responsibility for its pre-1993 obligations, Standard & Poor's says there is a strong possibility that it "could become insolvent at some point in the future," though Standard & Poor's believes there is no "immediate threat." The full extent of asbestos and pollution claims, and the extent to which reinsurers would offset those claims, still isn't known. If Equitas went bust, Lloyd's would be under pressure to bail it out. If it did not or could not do so, Standard & Poor's says, Lloyd's licenses to do business would be at risk in various parts of the world, particularly the U.S., a major share of Lloyd's market.
Despite its dark portrayal of Lloyd's, Standard & Poor's still says that Lloyd's has a "very strong business position" and probably the "strongest brand name and license network in worldwide insurance and reinsurance." So Standard & Poor's is hardly predicting the imminent demise of Lloyd's, which is still a household word.
Lloyd's itself publicly exudes confidence. "Our future vision is of a Society containing strong, well-managed, increasingly independent businesses operating to very high standards, sharing in the collective assets we describe as the Lloyd's franchise," says a recent Lloyd's brochure, Priorities for Growth 2000-2003.
Lloyd's future vision may be optimistic and clearly it is trying to put the past behind it and forge ahead with a new business approach. But before that can happen Lloyd's must confront what could turn out to be one of the most serious threats ever to its existence.
Tucking into roast pork and vegetables in the Lloyd's members' dining room, Bradley is deeply ambivalent about the institution that invigorated his life for 40 years.
"What the hell am I doing sitting here talking about Lloyd's in an affectionate manner? It perpetrated the biggest, most sophisticated, deliberate fraud in financial history. I hope it goes to hell. It caused me so much pain and agony, and there are so many people who dipped their fingers in the till and disappeared with money that wasn't theirs. It belonged to the Names. But this was the most marvelous job. I loved this job. I loved the fellowship. I loved the ambience. I loved the dark suits. I loved the politeness. I loved the intelligent thrust of it. I was dealing with people of extremely good intelligence and social standing, and it carried me up and up and up. Quite frankly, Lloyd's gets into you. Once you're a Lloyd's man, you're a Lloyd's man forever."
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