Webnote 33: Range of Options under consideration *
A wide range of options were contained in a paper dated 15 March 1995:
1. Continued business plan (basically, muddle through with some enhancements such as a ‘triple close’ – closing the profitable years 1994 and 1995 ahead of the normal three-year delay – to provide extra funds to Names to pay Equitas premiums.)
2. Slowed down Equitas (as above but on a longer timetable to avoid crystallising the Equitas losses and to give the team more time to correctly estimate the reserves.)
3. Settlement without reconstruction, whereby Names would be offered an exit route underwritten by an interim vehicle in 1995 which would then reinsure into Equitas the following year.
4. Reconstruction including settlement which combined finality for Names with a massive expansion and acceleration of Equitas to include all of the 1992 and prior liabilities. The option also proposed a transition to 100% corporate capital by the beginning of 1997.
5. Reconstruction without a settlement – like option 4, but leaving the litigating Names to fight it out in the courts with their agents.
6. Wind-up, in which Lloyds would go into run-off. The lights would go out, though something might be salvaged.
The core group wrestled with these options. The eventual package included several of these elements. Increasingly, core group members realised the inter-connectivity of both the problems and the solutions. A paper dated 22 March set out options 1 and 4 as the two front runners and included the first draft of a possible May announcement around a seven point plan. Middleton pressed hard for a very quick timetable. ‘Q&E’ – meaning ‘quick and equitable’ – was polite shorthand for a ‘quick and dirty’ way through certain problems. Middleton was looking for a deal with the spiral syndicate action group leaders, led by Deeny. He was convinced the DTI would have no alternative but to accept a Q&E estimate if the only alternative was to close Lloyd’s down.
Webnote 34: Foreword to Reconstruction and Renewal Plan *
‘Our Society is at a crossroads.
We have made good progress since the publication of our 1993 Business Plan. Our marketplace is now producing very significant profits for Members. But we have not yet resolved the problems of the past. Unless we take radical action now to produce a solution which is acceptable to our policyholders, our regulators, and to you, the membership, I do not believe that the Society will be able to survive in anything like its present form.
To maintain the confidence that is vital for our business, we must reconstruct our finances, maintain our solvency and deal with the problems of the past. This will involve compromise by all sections of our Society. The market and our on-going Members will be asked to contribute towards a fair settlement of the liabilities of the Names who are unable to pay all their past losses. This document outlines the scale of the contributions, but all its figures are illustrative at this stage.
We cannot hide from these issues. Inevitably, the problems they have created for some of our Members have attracted much publicity. This in turn has raised anxieties among our clients, whose interests we must always keep at the forefront of our minds. I am convinced that if we can achieve the reconstruction set out in this document we shall strengthen the security available to all our policyholders and meet all the requirements of our regulators worldwide.
I believe that this plan for reconstruction and renewal is vital and in the best interests of all Members, including those who have resigned or who are seeking to resign. We have considered the alternatives and they are stark. The Department of Trade and Industry has confirmed that policyholder obligations would be the first priority if the exercise of their powers were invoked.
Your Council is convinced that these reconstruction proposals have a good prospect of success and are in the best interests of our policyholders and the Society. As we enter a debate about the details of the plan, I urge members to recognise the need for compromise if we are to achieve a fair settlement of our past and realise a profitable future.’
David Rowland
Chairman
May 1995
Webnote 35: Benefits of the Plan to each major constituency *
The reconstruction plan included the following passage to explain how the plan would benefit each of several major constituencies.
Benefits of the Plan
1. The reconstruction offers substantial benefits to policyholders, Members, and the working community of agents, underwriters and brokers. “Business as usual” is not an alternative, given the challenges facing the Society. The Council is convinced that this plan is the best option for balancing and protecting the interest of all.
2. The plan has been created to ensure the continued solvency of Lloyd’s, in respect of both the “old” and the “new” Lloyd’s. In the absence of the measures contained within this plan, the ability to maintain solvency cannot be taken for granted. This is the fundamental benefit for all constituencies. In addition, specific benefits for the various parties are summarised below.
3. The Council’s objective has been, and will continue to be, to further the interests of the Society as a whole, to protect the position of policyholders and to treat fairly all those within the Lloyd’s community whose interests are affected.
Benefits for policyholders
4. For policyholders, the reconstruction offers enhanced security behind existing and future policies underwritten at Lloyd’s.
* The security of existing policies will be strengthened by the formation of Equitas, with reserves set in accordance with prudent professional standards, and subjected to external verification. The pooling of the assets backing the 1992 and prior liabilities will eliminate concerns over the ability of individual Names to meet these liabilities. The settlement and reconstruction package improves the prospects for collecting debts from Names.
* The security of future policies will be enhanced by: the creation of a strong “firebreak”; the establishment of a new Central Fund to support policies from the beginning of 1993; the resolution of litigation; and the admission of new capital to support future underwriting.
Benefits for Members
5. The reconstruction offers major benefits to all categories of Member. Below, we identify the benefits for all Members and then set out some additional benefits relevant to different groups.
* For all Members:
– a final reckoning of liabilities on all 1992 and prior open years
– an estimated £2 billion of assistance with the cost of ‘finality’
– early release of profits on 1994 and 1995 to help meet the costs of ‘finality’, and a move to annual accounting for future years
– the equitable settlement of litigation
– an acknowledgement by Lloyd’s that the settlement discharges all their obligations to the Society.
* For all Members (individual and corporate) wishing to continue underwriting:
– the prospect of a profitable on-going market, having resolved the uncertainties of 1992 and prior liabilities
– the ability to offset the special contribution from Members on the 1993, 1994 and 1995 years against future Central Fund contributions
– a commitment from the Society not to levy further in respect of 1992 and prior liabilities.
* For all continuing individual Names:
– the chance to participate on an equitable basis alongside corporate capital, including benefiting from the planned capacity auctioning system to be introduced for 1996.
– the prospect of being able to convert to limited liability status on favourable terms.
* For Members wishing to resign:
– the prospect of being able to resign within twelve months.
* For litigating Names:
– the prospect of a negotiated settlement, which offers a more efficient and equitable outcome than is likely through the courts
– and, as for all Names, the prospect of ‘finality’ which cannot be secured through litigation.
Benefits for agents, underwriters and Lloyd’s brokers
6. For the working community of Lloyd’s, the reconstruction offers the prospect of a strong continuing market, having resolved the uncertainties associated with 1992 and prior liabilities. Some specific benefits for agents and underwriters include:
* more flexible access to corporate capital through new limited liability vehicles
* the prospect of an end to litigation against agents and the Society
* accelerated release of profit commission on 1993, 1995 and 1995.
* * *
7. Against these benefits, there are clearly some considerable costs for Members and agents. These are unavoidable if solvency is to be assured. In designing the reconstruction, we have sought to spread these costs fairly and to ensure that there are sufficient benefits to all parties to secure their support.
8. The Council, with its advisers, has tested this plan against alternatives and, in particular, that of the Society ceasing to trade. The Council is convinced that this alternative would inflict severe damage and uncertainty on all categories of Members and would not result in Members being able to avoid their liabilities.