THE RHA REVIEW
Volume 2, No. 4, Third Quarter 1996

There is good news and bad news from London. The bad news is that the Lloyds’ Names can reject the current offer being made to them. The good news for Lloyd’s is that it is very likely that the Names will accept this latest offer for reconstruction and renewal.

More good news is that one of the underwriters who fled from England after a multi-million-pound Lloyd’s’ fraud in the early eighties has had an arrest warrant issued against him in the United States. This follows Peter Cameron-Webb’s failure to observe a court order against him for recovery of Names’ funds under his control in Switzerland. This does bring about the thought of a Pandora’s box of legal possibilities being opened up against other "fraudsters" in the London insurance market. It has always been the view of outsiders that the bigger the fraud, the more likely you are to get away with it.

Other city figures involved in alleged fraudulent activities that are or have been investigated by the Department of Trade and Industry (DTI) and Serious Fraud Office (SFO) may now be having sleepless nights similar to those that they caused others.

The 34,000 Names around the world have until August 28, 1996, to accept or reject the "offer" of reconstruction and renewal terms designed to draw a line under and put closure on the huge losses "incurred" in recent years through a series of man-made and natural disasters and the large number of long-term environmental pollution claims.

It should be remembered that this is the second such rescue mission that has been launched. The first was attempted in 1994, when approximately £900 million (41.3 billion) was thrown into the pot. This second offer is worth £3.2 billion ($4.6 billion), making this pot a little more attractive. How will this rescue package be divided? The deal is roughly this: about £2.1 billion ($3 billion) of debt owed on all Names’ involvement will be written off. The remaining £1.1 billion ($1.6 billion) will go toward mitigating the losses of the 13,600 Names who have sued Lloyd’s.

All Names who have funds at Lloyd’s will allow those funds to be surrendered. The system will then "transfer" £14 billion ($20 billion) of Names’ assets into the newly formed Equitas, which has been formed to take over all Names’ liabilities. This will supposedly allow them to sleep at night. On top of these figures, a further £900 million ($1.3 billion) will be required from Lloyd’s to ensure that Equitas is properly funded.

Accountants participating in the funding of this rescue bid are to be indemnified on a limited basis. Ernst & Young, Arthur Andersen, Coopers & Lybrand, Littlejohn Fraser, and Neville Russell are expected to contribute £116 million ($167 million). The reason for these contributions is that some accounting firms are being held somewhat responsible for failure to properly audit Lloyd’s’ books in the past.

Names who accept the offer waive their legal right to sue the companies and related firms involved. Despite all of the efforts to end all litigation in this £3.2 billion ($4.6 billion) rescue bid, there is still a rebel action group, representing Names, that has established that accountants and auditors who have not contributed to the "offer" will not be protected by the waiver. Names therefore can accept the "offer" and still litigate against non-contributing auditors. This then places some high-ranking auditors like Pannel Kerr Forster at risk of litigation.

The majority of Names have approved the acceptance of a £440 million ($634 million) payment from current and future profit toward the rescue plan. Despite this, fears still exist that a minority will not accept the terms.

All in all, a package has been placed before the Names to vote upon. If they vote for it, Lloyd’s will survive and continue into the future. A return to profit has already begun, and there is expected profit in the future underwriting years. A rejection of the "offer" has been declared by senior officials at Lloyd’s to be "too dire to contemplate." In September the DTI, which regulates the insurance industry in the United Kingdom, will make its annual assessment of the financial capabilities of Lloyd’s. So if the vote is for a rejection of the "offer," the DTI could be in a position to consider that Lloyd’s is not in a financial condition to continue.

I am convinced that Lloyd’s will survive, but there are a number of land mines left on this battlefield that need to be defused before the people in the City of London can tread safely around this battlefield again. Also, there are some who say that a number of people need to be tried for war crimes before everyone is finally satisfied.