Lehman/A.M. Best Co. 2nd Annual Conference

Roger Sellek Commercial Director Lloyd's

Developing story

Lloyd's to Exit Captive Insurance Market

Lloyd's is phasing out of the captive-insurance sector and won't pursue new business in that arena, said Roger Sellek, commercial director for the Lloyd's market.

In an interview following his May 21 presentation at the second annual Insurance Conference in New York, cosponsored by Lehman Bros. and A.M. Best Co., Sellek said that Lloyd's only captive--originally sponsored by SmithKline Beecham--recently converted to a runoff company and that Lloyd's is not pursuing further captive insurance business.

What's triggering the decision not to pursue captive business is an ongoing "root-and-branch" review that Lloyd's is conducting in conjunction with consultants from Bain & Co., Sellek said.

Captives, which often have tax considerations as a primary purpose, may not be as tightly focused on profitable underwriting as the for-profit syndicates and agencies that comprise the bulk of the Lloyd's market, Sellek said. As a result, Lloyd's officials became uncomfortable about possibly exposing Lloyd's Central Fund to additional liabilities by growing the market's captive business. The Central Fund provides ultimate backing for the entire market. Lloyd's sought and gained permission to host captive insurers in order to attract captives of large corporations. Those companies in turn were expected to utilize other services available through the market. That plan has not worked as originally hoped, Sellek said.

Based on the ongoing Bain & Co. review--which should be complete in the third quarter of 2000--Lloyd's is likely to announce sweeping changes that will take effect in time for the 2003 underwriting year, Sellek said. That review began with an assignment to look at how to improve relationships among capital providers--specifically how to deal with individual investors in a system that is becoming increasingly dominated by corporate capital--but has expanded to include a broader review, including assessing how Lloyd's is perceived in the market, he said.

"We really do need greater clarity about what the market wants from us," Sellek said.

Captive insurance companies are special-purpose organizations generally set up to self-insure a company or association. They are usually located in nations or states that provide favorable tax rates and regulations. Active captive domiciles include Bermuda, Guernsey, Ireland, Vermont and Hawaii.

In late December 1998, Lloyd's launched its captive business by announcing the formation of a captive insurance company sponsored by SmithKline Beecham plc. In January, Glaxo Wellcome plc and SmithKline Beecham plc reached a merger agreement, which curtailed SmithKline's needs for its own captive, Sellek said.

Lloyd's continues to receive several inquiries each week regarding captives, but has chosen not to pursue those leads, Sellek said.

(By Lee McDonald, vice president, A.M. Best Co.: Lee.McDonald@ambest.com)

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Lloyd's Modernizes Distribution to Restore Underwriting Profitability

London-based Lloyd's is working hard to regain its underwriting profitability after suffering some significant losses in recent years, according to Commercial Director Roger Sellek. He spoke before a lunchtime crowd at the second annual Insurance Conference held in New York May 21 and 22, cosponsored by Lehman Bros. and A.M. Best Co.

The Lloyd's market embarked on a review of its capital position in 1992 and was subsequently taken to court by many of its private investors who are exposed to unlimited liability and who are referred to as "Names." Lloyd's believes it has unambiguously won the Names court case and is now devoting more attention to continuing its evolution and becoming profitable again.

According to Sellek, Lloyd's last turned in positive pure results in 1996. Excluding returns on funds at Lloyd's, the market lost more than $500 million in 1997 and almost $2 billion in 1998. Results for all of 1999 are not yet in, but Sellek said he expects they will be worse.

Among key initiatives, Lloyd's has raised its standards for accepting members, is expanding its distribution reach, and is creating a lloyds.com Web site to conduct business on the Internet. It is trying to modernize the London market, which Sellek said is unacceptably slow in collecting premiums and paying claims. It is opening a new office in Singapore, is becoming licensed in the Czech Republic and Hungary, and is working to establish a presence in China.

Internally, the Lloyd's market is working to drive down its overhead costs from 3.1% of its $16.7 billion capacity of last year to 0.5% by the year 2003. It is moving toward annual accounting from its traditional three-year reporting period. And it has established a strategy subgroup to conduct a fundamental review of "what we want to be," Sellek said.

Lloyd's structure is already far different than it was in the early 1990s. Its members include 895 corporations and 2,852 individuals, down from more than 32,000 members at its high point. Lloyd's also pared the number of members' agents to five from 40.

The market is growing rapidly in the United States, its largest overseas territory with 35% of Lloyd's business, and Sellek said he expects the United States to supplant the United Kingdom as its largest business territory.

Lloyd's currently has 12 investment vehicles that trade on the London stock market, each with a market capitalization of about $400 million. Sellek said members might like its "uniquely strong brand," access to global licenses, flexibility of capital provision, speed in establishing a new business and its strong internal regulation. Lloyd's conducts a stringent peer review before accepting a new member.

The Lloyd's market began accepting corporate members in 1994 to satisfy a need for a more flexible capital structure following losses in the late 1980s and early 1990s. Corporate members trade on the stock exchange as integrated Lloyd's vehicles.

Investors can buy into the Lloyd's market through these vehicles or by purchasing stock of other companies with a Lloyd's business, he said.

Lloyd's is a 300-year-old market consisting of 108 competing, mainly specialist, insurance and reinsurance businesses. Sellek said Lloyd's hopes it can provide more clarity over the course of this year on its franchise-management initiatives.

(By Ron Panko, senior associate editor, Best's Review: pankor@ambest.com)