In 1993, when David Rowland became chairman of Lloyd's and I became his deputy, he asked me to go and find some new capital for Lloyd's.
The only supply of capital at the time, the individual Name with unlimited liability, was dwindling rapidly. lloyd's faced a crisis of capital. The best estimate the Council of Lloyd's was given in July 1993 was for £5bn of capacity for 1994, down from £9bn. This would mean the end of Lloyd's.
It had become clear that corporate membership was possible. I had always hated the unlimited aspect of membership of Lloyd's – here was my opportunity to get rid of it.
I did not have an ounce of investment banking knowledge, so we got Richard Johnson and his team from JP Morgan to give us the banking advice, and Barry O'Brien of Freshfields to create the rules – and they did amazing work. It's unthinkable that it would have been passed through the council if we hadn't been on the edge of implosion. It was wonderful to see the bitter opponents of change forced to give way, as there was no alternative.
We enabled corporate membership and £1bn of corporate capital was raised in 1993 for the 1994 account, which not only stemmed the flow of individual Names out of the door, but reversed it. The Names thought: “If these clever corporates want it, I don't want to give it up.” We ended 1993 with capacity for 1994 of £11bn, of which £2bn was supported by corporate capital.
I had thought capital would be easier to raise for specific syndicates or groups of syndicates managed by one agent, as the more focused the underwriting, the more understandable and attractive it was to investors.
The stumbling block was that it was not possible to get a stock exchange quote for such vehicles and there was very little venture capital available in those days.
So allowing corporate players to spread their investment over a number of Lloyd's syndicates was permitted, with the council bending the rules to allow it. Only one type of investment vehicle raised capital dedicated to one agency, the Hiscox Dedicated Insurance Fund (now Hiscox) – the rest were spread vehicles.
There was considerable resistance from Names to the new corporate members, with much sympathy from the council, as the reconstruction and renewal plan depended on agreement and votes from Names.
Those who exaggerate the virtues of individual unlimited liability Names must remember the facts – they were deserting just when the market was returning to magnificent profits and did not pay their losses, but held the market to ransom and had to be let off payment of £3bn to allow the reconstruction of the market with the birth of Equitas.
Development
The other important decision made by the council was to allow insurance companies to become members. Lloyd's was suddenly open, not only to anyone with capital, but to the whole insurance industry. A small insurer with no overseas licences and with a lowly rating could join Lloyd's and issue a Lloyd's policy.
So we had our “big bang”, remarkably similar to the stock market “big bang”. A fever built up to buy into Lloyd's agencies, just as the big investment banks bought the stockbrokers in the 1980s, and some very odd bedfellows soon discovered they did not suit each other.
The culture of an independently minded, small Lloyd's underwriting business unused to corporate discipline was alien to the disciplines of big business. Some poor small agencies were bought, probably to the benefit of Lloyd's, but some good big ones were too, and Lloyd's lost some of its brightest stars as their leaders rebelled against the constraints of corporate discipline.
The threat was always there that the weakest insurers would buy into Lloyd's to gain the credibility. Actually, some very strong companies (even Berkshire Hathaway) have entered the market.
On balance, I think the corporate influence is good. The days of running a financial services provider with amateur one-man-band enthusiasm are over and, if Lloyd's wants to be a serious player in the international market, it must be a market of serious players.
The present day
Today, in 2001, we have a neat reversal of the first year of corporate capital, with individual unlimited Names supplying just under £2bn of capacity, and just over £9bn of capacity supplied by corporate capital.
The future is undoubtedly corporate, but there are still 2,381 individual Names with unlimited liability left, stubbornly hanging on despite logic and losses, down from a peak of 32,433. Over the eight years, corporate capital has become nearly all dedicated to integrated Lloyd's vehicles (ILVs). This is a ponderous title for a vehicle that incorporates the capital behind a syndicate or group of syndicates with the management company – like any other insurance company. The spread concept rapidly became unpopular with investors for its lack of focus and control over the underwriting.
As the market polarises into ILVs, there is potentially only one bidder for the capacity of each syndicate. Auction prices have dropped as a result.
The future
As the manager of a syndicate, I am content that the remaining Names want to stay and pay us to underwrite on the back of their capital. Underwriting is a very capital intensive business.
We have to have about 40% of our turnover in readily realisable securities (regulatory capital) separate from the money we need to invest in the business. In Lloyd's, however, we can supply the regulatory capital through capital pledged by third parties and we are happy to use that of individual Names.
However, as someone dedicated to the healthy future of the Lloyd's Market and devoted to lower costs in my business, I wish there were one type of supply of capital, not a myriad of different schemes. I wish it was all corporate and all dedicated to ILVs with no spread capacity, with effectively one corporate Name on each syndicate, in which anyone, individual or corporate, who wishes to support the ILV can invest.
We could cut costs dramatically by getting rid of three-year accounting and all the expenses and poor information flow associated with that. Regulation could be reduced to policyholder protection only without investor protection (the stock exchange rules do that). We could then be understood by the investment community as we would look like, and be like, the rest of the insurance market. Best of all, I could rest at night knowing Lloyd's would never again inflict on an individual the horrors of unlimited liability and unquantifiable losses.
