WHAT'S IN A NAME?

The demise of the Lloyd's "Name" has been reported many times, but the subject of this off-repeated obituary has stubbornly refused to die.

Rear Adm. Nicholas Goodhart has seen the best and worst that Lloyd's can offer to a well-heeled and unflappable investor. He has earned and lost enormous sums over more than 20 years, fought the market in court and lately stepped back from the financially perilous position of investing with unlimited liability. But he is still a "Name," and he vows to remain one, following the fortunes of the market from his home near the English seaside resort town of Teignmouth.

Lloyd's Names, the wealthy individuals who financed the legendary insurance market for more than 300 years, present Lloyd's with a classic conundrum: It can't live with them, but it can't live without them--at least not yet. Their rebellion over losses in the disastrous late 1980s and early 1990s brought the market to the brink of collapse. A handful of defiant members still fight the war of the last decade in courtrooms on both sides of the Atlantic. Those who continue to invest at Lloyd's add to the cost of maintaining a capital base for the market's underwriting syndicates.

But the remaining traditional members, who take unlimited liability for the risks they write, still provide about 22% of Lloyd's capital, despite the growth of more efficient corporate backers. Limited-liability members, such as Goodhart and the broad category of individual investors now called "private capital," provide an even more significant share of Lloyd's financial underpinnings.

With another series of losing years stretching behind and before it, the market might find that the oldline Names provide a hedge against possible cutbacks in limited-liability corporate capital, which has blossomed to account for 70% of the market's capacity since corporate members were first admitted in 1994. New entities--such as Integrated Lloyd's Vehicles, or ILVs--have sprung up to provide and accept corporate capital in the evolving market, but they arrived just in time for an intractable bout of soft-market conditions.

"I suspect that through the bad period, a lot of ILVs will find out that their capital walks away when they find out what their losses are," Goodhart said. Private capital, which is not subject to pressure from corporate investors and equity markets, is "much more durable," he asserted. Capital that is narrowly focused on one or a few syndicates takes on much greater risk, Good-hart noted, while private capital members are able to spread their risk, protecting both themselves and the policyholders who depend on Names' financial strength.

But that theory runs headlong into hard numbers, said Julian Avery, group managing director of Wellington Underwriting plc, one of Lloyd's largest managing agencies. Preliminary figures in February showed that the number of individual Names fell to 3,411 for 2000 from 4,655 in 1999 and 6,828 in 1998. Total unlimited liability capacity is [pounds]2.2 billion (about $1.26 billion) this year, down from [pounds]2.7 billion (about $1.69 billion) last year.

"I wouldn't see that trend reversing," Avery said. "Demography tells me that these people are getting older...I don't believe that in the medium term we will see private capital in the market."

Lloyd's has two challenges before it with regard to individual Names. One is to exorcise the demons of the past, embodied in lingering litigation over decades-old asbestos and pollution losses. The other is to find efficient ways of retaining those solo investors as part of a diverse capital base that Lloyd's touts as one of its strengths--or to ease them out if their presence ceases to make economic sense.

Court Actions

The most important remaining legal case is Society of Lloyd's vs. Jaffray, which went to trial in the United Kingdom's Commercial Court on Feb. 28. The case, which bears the name of Sir William Jaffray, one of the Lloyd's members, began as a debt-recovery exercise, with Lloyd's pursuing about 150 members it says owe some [pounds]50 million toward their liabilities to the market. These Names refused to join Lloyd's "Reconstruction and Renewal" program, in which liabilities from 1992 and prior years were reinsured into Equitas, a runoff company established for that purpose. The money the holdout members owe actually is to Equitas.

The Names have countersued and finally are getting a hearing on a longstanding allegation: that they were enticed fraudulently into the market by insiders who knew as early as the 1970s that Lloyd's faced an unbearable load of claims tied to asbestos-related illnesses and deaths, particularly in the United States. The charge is that the market undertook an aggressive recruitment drive to spread the losses among a larger pool of investors--and then placed unwitting new recruits on syndicates that reinsured much of that risk. The judge in the case has said he intends the outcome to be the final word on the fraud issue.

The claims in question stem from a period during which Lloyd's was reinsuring companies that manufactured or otherwise used asbestos in ways that exposed employees to its ill effects. These commercial policies were written long before the health risks of asbestos were known, and the policies were written so broadly that the Lloyd's syndicates were not protected from health-related claims.

The intransigent members, with their litigation spearheaded by the dissident United Names Organization, hint darkly at sensational revelations to come in the trial. Catherine Mackenzie Smith, a lawyer and co-chair of UNO, said the case is "a very serious matter" for Lloyd's, which has struggled to restore its image after the financial troubles of the 1990s.

"Information will come out which will be of considerable interest to the reinsurers," Mackenzie Smith said. Whether the members win or lose the disclosures will damage Lloyd's image and may cause some reinsurers to repudiate their contracts with Lloyd's syndicates and with Equitas, she predicted.

The vast majority of members who accepted the Equitas settlement signed waivers of their right to pursue claims of fraud against the market, Mackenzie Smith said. But if the Jaffray case produces a finding of fraud, the next litigation may be to test the legality of that waiver, she said.

Mackenzie Smith joined Lloyd's in 1975 and stopped underwriting in 1993--after she learned of what she considered to be fraud on the part of the market. She added that unlike many members who simply refused to pay their debts, she paid "substantial sums" to cover the losses of syndicates she had joined. "I am alleged to owe further," she said.

Michael Deeny, chairman of the Association of Lloyd's Members, said the United Names suit is merely a final desperate attempt by debt-ridden Names to avoid any responsibility for genuine losses. Deeny was no apologist for Lloyd's as chairman of the Gooda-Walker Action Group, which won negligence awards for Names against one of the most loss-ridden managing agencies in the 1990s. But he said the premise of the Jaffray suit was "a very far-fetched conspiracy theory," in part because the makeup of the Lloyd's Council at the time included too many members who stood to be hurt by the alleged fraud.

As to the potential embarrassment from the trial, Deeny said it would be "damaging to the people in the old Lloyd's who failed to address the asbestosis issue," but of little relevance to today's market.

Meanwhile, in the United States, Names have been rebuffed repeatedly by federal courts, which have upheld the agreement U.S. members signed to make any disputes with the market subject to English courts. Still fighting, the U.S. Names have turned to state courts in hopes of finding a more sympathetic ear. They will bring similar allegations before a judge in Los Angeles Superior Court in the case of West vs. Lloyd's, scheduled for trial in January 2001. Information uncovered in discovery for the Jaffray case will be available to the plaintiffs in the West case and another suit against Lloyd's U.S. law firm, LeBoeuf, Lamb, Greene & MacRae, said Jeffrey Peterson, executive director of the American Names Association.

Goodhart, who has traded through it all and was part of an action group that won a judgment against underwriters, acknowledges that the market made major blunders during the its worst days. For him, as for many Names, those were the years from 1988 to 1991, when a string of catastrophe losses compounded the damage from asbestos and pollution claims.

"We had underwriters who literally didn't have the first idea what they were doing," he said. But Goodhart recouped his losses in the profitable years of 1993-96, and he said, "I'm optimistic that Lloyd's has been cleaned up a lot." Still, the 80-year-old Goodhart, who retired in 1973 after 40 years in England's Royal Navy, switched to limited-liability trading last year.

Annual Rites

The Names who continue to fight represent a distinct minority. Also in a minority are the 3,411 Names still trading on the traditional basis of unlimited liability in 2000, down from a peak of more than 34,000 in the 1980s. But the stalwarts have an unsettled relationship with Lloyd's, which has sent mixed signals about its appetite for keeping individual members as part of the capital mix. The relationship was especially strained in 1998 when Ron Sandler, then the market's chief executive, hinted strongly that Lloyd's wanted to phase out individual membership. While not mentioning Names directly, he spoke of archaic trappings of the past. Since then, Lloyd's tone has been more conciliatory, although the official line is that the fate of Names is subject to commercial forces beyond the market's central control.

"Nobody has a problem with private capital at Lloyd's," said Caroline Wagstaff, head of marketing communications at Lloyd's. "The core issue is the strategy of how that capital is provided." She noted that individual Names are free to switch syndicates from year to year, making it difficult for syndicates that rely on such capital to do long-term planning. It also is more expensive from a standpoint of accounting and reporting.

An official at one London brokerage said that neither brokers nor their customers care much about the source of syndicates' capital, as long as it is solid and Lloyd's keeps its central security provisions in place. But he said the market's quirky three-year accounting system and the "horrors" of dealing with a swarm of individual investors must make it "quite debilitating for them to manage the enterprise."

It's easy to understand why some Names, especially those who have avoided the worst of Lloyd's losses, would want to stay in the market. They enjoy tax advantages with their investment and can put the same money to work twice. This is because their deposits at Lloyd's can be in the form of a letter of credit, allowing them to earn a return from their underwriting while simultaneously investing the same funds elsewhere.

Goodhart's approach offers a window into the mind of a dedicated Lloyd's investor.

"I suppose I'm a bit of an optimist," he said. "I'm quite clear that Lloyd's is much more volatile than ordinary insurance companies.

"One has to keep one's head during the low points in the cycle," he continued, and "look out for the dogs in the syndicates you have, and get rid of them quickly enough." It's a credo of self-reliance, but at the same time he complains about the market's attitude toward individual investors.

"We're not being well treated by Lloyd's at present...we're getting the rough end of the stick," Goodhart said. What rankles him is that he isn't allowed to back more business, a result of the risk-based capital requirements now imposed on all capital providers. If those were eased, he said, more private capital would pour into the market.

The troubles of the past decade squeezed out many Names who, some would argue, never belonged at Lloyd's in the first place. The average individual Name now has capacity of more than [pounds]500,000, or about $800,000, said

Anthony Young, chief executive of the Association of Lloyd's Members. The most recent Lloyd's Council elections gave a boost to private capital, Young said, bringing on members who are known to be strong advocates for the rights of individual Names to continue trading.

Currently, individuals can participate on the traditional basis of unlimited liability, taking on risk through members' agents who manage their affairs; through Members' Agents Pooling Arrangements, which spread Names' investments across several syndicates; or through various "conversion vehicles," which allow them to trade with limited liability. Only under limited circumstances can a member be forced off a syndicate--for example, when corporate backing for the syndicate reaches a specified threshold. In that case, there is a mechanism to ensure that Names get fair market value for the capacity they control.

Building Capacity

One view is that the true bonanza for Names lies in the value of their underwriting capacity to the corporate capital providers who covet that capacity. Lloyd's has been running capacity auctions for several years, a process that has allowed many Names to cash Out their positions in the market.

At the same time, the vertically integrated corporate players, which often supply capital to the syndicates they operate, face pressure to streamline their operations and cut costs, one of which is the expense associated with a mixed capital base that includes many individual investors. A report last fall by Greenwich Lloyd's Underwriting Ltd., a leading members' agency, predicted that corporate members would pressure the market for a mechanism to ease the transition.

"We can only speculate on how this may be achieved, but it seems safe to predict that the basis of any offer must contain a substantial financial incentive in order to facilitate the transfer of Syndicate capacity from existing spread, individual and corporate members," the report said. "Herein lies the potential value for those who participate in the Lloyd's capital base of the new millennium."