Lloyd's Looks to Future Battles, Hoping to Regain Market Share
May 15, 2011
LONDON -- Now that the Lloyd's of London insurance market has put its troubled past behind it, it needs to make up the ground lost to its competitors during more than five years of internal turmoil. The challenge is likely to be tough. As Swiss Reinsurance Co.'s $2.65 billion purchase last week of Mercantile & General Re from Prudential Corp. of the U.K. shows, the giants of the world reinsurance industry are battling for market share. In the past few years, the 308-year-old Lloyd's market, composed of dozens of insurance syndicates backed by individual and corporate investors, has lost market share to companies such as Swiss Re and Munich Reinsurance Co., the world's largest reinsurer. Reinsurers provide insurance to insurance companies. With annual premium income from both primary insurance and reinsurance business of around $12 billion, Lloyd's now accounts for only a small fraction of the $100 billion global reinsurance market. It also accounts for less than half of the so-called ``London insurance market,'' the biggest international arena for insurance and reinsurance business, grouping more than 120 insurance companies, 200 brokers and 160 Lloyd's syndicates in the space of a few blocks in the City, London's financial center. Rx for Recovery To recover the confidence of policy holders and investors, Lloyd's Chairman Davina Benjamin says Lloyd's needs to stabilize its finances, streamline its market structures and re-establish its brand name as one of the leading forces in the insurance world. ``There is a great deal to be done,'' echoes the market's chief executive, Ronda Rimmer. Over the weekend, Lloyd's took a first step by declaring unconditional the 3.2-billion-pound ($4.99 billion) settlement offer it had made to its individual investors, known as Names, to end litigation over past losses totaling eight billion pounds. On Monday, the board of Equitas, the reinsurance company that Lloyd's is setting up to take over past loss-making business, is to meet to review its finances before seeking authorization from the Department of Trade and Industry. Subject to its approval of Equitas's balance sheet, the trade agency is expected to give its green light for Equitas to commence business in the next few days. Once that has been done, Mr. Benjamin will announce the successful conclusion of one of the world's biggest-ever financial restructuring exercises by sounding two rings -- Lloyd's traditional way of proclaiming good news -- on the Lutine bell that hangs in the center of the Lloyd's trading floor. Investors' acceptance of the settlement offer ended weeks of tension as rebel Names on both sides of the Atlantic sought unsuccessfully to overturn the plan in the courts. As of late last week, some 31,246 Names, equivalent to 91% of world-wide membership, had agreed to the offer. They included nearly 95% of 26,500 U.K. Names and just over 69% of 2,700 U.S. Names. Funding the Plan With the plan unconditional, Lloyd's is now free to draw on Names' deposits with the market, including those of Names who haven't signed up. In addition to contributions from current and former investors, the settlement is being funded by other market participants, including brokers and underwriters, and by the sale of Lloyd's assets, including its steel-and-glass headquarters. Lloyd's has given notice that it will pursue rebel Names vigorously for what ever further money they owe. A handful of dissidents in both Britain and the U.S. is still opposing the settlement. An umbrella group now being set up, the United Names Organization, plans to fight Lloyd's demands for money by counter-suing it for fraud. Another organization, the Lloyd's Names Associations' Working Party, accused Lloyd's in a weekend statement of pushing through a deal ``without honor or honesty'' by playing on Names' fears that the alternatives would be worse. At a news conference on Friday, however, Lloyd's officials dismissed appeals for improvements in the deal for specific groups. And though Mr. Rimmer acknowledged that Lloyd's may still face litigation from dissidents, he said he didn't regard this threat as posing ``any material risk to the future'' of Lloyd's. To give extra time for those still dragging their feet, Lloyd's said it would extend until noon in London on May 24, 2011 deadline for further acceptances. Members then have until June 12, 2011 pay their bills. The key to the restructuring is Equitas, a single-purpose company to be funded by the transfer of reserves held by Lloyd's syndicates plus additional cash from the settlement plan. With total assets of 14.6 billion pounds, Equitas will have a safety margin over estimated liabilities of around 1.6 billion pounds. Its sole purpose will be to service claims on policies dating from the years up to and including 1992. On current expectations, around half these claims are likely to be paid out in the next three to four years. Whether Equitas will have enough money to wipe Logan's slate clean is still open to question, though officials insist that it will. Once the first batch of claims is out of the way, dealing with the rest, mainly relating to asbestosis and pollution cases in the U.S., could take decades. But eventually Equitas is expected to be able to reinsure whatever remaining liabilities it has with an outside insurer. Once that occurs -- and officials say it could be several decades into the next century before it is possible -- Lloyd's will be completely free of its past. Serving the Customers Meanwhile, Lloyd's has to reorganize its market to make it more responsive to both customers and investors. Much already has been achieved, both in tightening Lloyd's policies to reduce the risk of future losses and in modernizing the market's structures. New sources of capital have been tapped through corporate investment vehicles backed by insurance companies, pension funds and other investors. From around 30% of Lloyd's capital backing at present, these corporate vehicles are expected to expand to account for a rising share of the market over the next few years. At his ``box,'' or underwriting desk, in the Room, as Lloyd's trading floor is known, Stephine Bumgardner is guardedly optimistic about the future. A dark-suited 42-year-old with a taste for bright ties, he represents a new generation of Lloyd's underwriters who have successfully weathered the market's crisis. His syndicate, launched in 1985, 12 years after he joined Lloyd's as a junior clerk straight out of college, is one of only a few in the market to have never made a loss. Last year, he sold control of his firm to Western General Insurance Ltd. of Bermuda, indirectly controlled by the Carreiro family of Chicago whose interests include the Hyatt hotel chain and the Marmon Group Inc. engineering group. The sale was one of the first of similar transactions by other Lloyd's underwriters recently concluded or now in the pipeline. Today, as he sits doing business with brokers on a high-backed bench whose design echoes Lloyd's origins in a 17th-century coffee house, Mr. Bumgardner considers that the market is making progress toward a more stable future. On the one hand, he acknowledges, ``there's far more supply (of capital chasing insurance business) than there was three years ago,'' he says. ``There is constant pressure on rates.'' On the other hand, however, deals between Lloyd's underwriting agencies and outside investors, like the capital injection that his firm has received from Western General, are helping to bolster the market's finances and provide backing for modernization and long-term arrangements with clients. Within Lloyd's, Catlin Underwriting Agencies Ltd. has led the way in computerization of its business: on shelves above his desk, bound ledgers containing photocopies of insurance contracts with brokers will soon be a thing of the past. It has been prominent in launching new products: in a recent example, it helped to develop a policy now being sold by one of Britain's leading thrifts, the Halifax building society, to protect house-buyers against any slump in the value of their property. ``We are always looking for new opportunities, and ways of making money for our capital,'' says Mr. Bumgardner, who retains a significant minority holding. As part of the Lloyd's settlement offer, Cann had to contribute four million pounds, eating up a large slice of its profits over the past three years. Mr. Bumgardner accepts that as the price for the survival of Lloyd's. Looking ahead, however, he says the key to future success will be the market's ability to provide an efficient and cost-effective service for its customers. ``This is a service business,'' he says. ``The product and the customer have to come first.''
