LONDON -- There seems no end to the bad news for the company that once insured Betty Grable's legs and Namu the killer whale, now that credit-rating agency Standard & Poor's has warned potential clients to take care when doing business with Lloyd's of London.
Lloyd's is in trouble. At the moment, the problem is described as a potential "liquidity crisis" -- the company might not have enough cash on hand to pay claims. But it goes deeper.
The cadre that is the backbone of Lloyd's operation -- the people called "Names," whose private wealth is the underpinning of the company's resources -- is increasingly disaffected. About 700 of them are suing to prevent Lloyd's management from using their money to pay claims.
Also, an investigation by the Securities and Investments Board (Britain's version of the Securities and Exchange Commission), is looking into allegations of negligence at Lloyd's and malpractice by Names and other underwriters active in the insurance business.
This does not mean the most famous insurance company in the world is about to go belly up. But a lot of people are nervous about its future. According to the Financial Times, Lloyd's is negotiating with the Bank of England for support to get it through its difficulties.
The company denies this, but there is no doubt Lloyd's troubles are considerable. According to a Standard & Poor's report issued last week, Names involved in litigation -- mainly in the area of catastrophe insurance -- had invested about $6.4 billion in Lloyd's to meet claims for 1990. That is enough to cover the $2 billion in total catastrophe claims for that year. But should the court grant the Names the injunction they are seeking, there would not be enough in Lloyd's general funds to meet future claims in this area.
Lloyd's also had to pay out $2.5 billion in 1989, and will have to meet claims estimated at $3.4 billion over the next year and a half.
Lloyd's was founded more than 300 years ago in the rawest entrepreneurial spirit, by men who frequented Edward Lloyd's coffee house on Tower Street in east London. They would gamble on such things as whether a condemned man would actually go to the gallows, or whether a ship would make it to home port.
The perils of the sea in the 17th century were great, and it was only a small step from betting on a ship and cargo to selling insurance on it. Thus, Lloyd's began as an insurer of shipping, then later moved into non-marine insurance and aviation.
But it has always specialized in the unorthodox.
It once insured a Tennessee radio station that offered $1 million for anyone who found Elvis Presley alive. It insured a comedy club against the risk of someone in its audience dying from laughter. It insures Bruce Springsteen's voice.
Gambling was at the heart of the Lloyd's business from the start, going back to the gallows lottery. It still is. There is no greater evidence of that than the way the recent run of bad luck has frightened off thousands of Names who lost sight of that fact.
The Names system is unique to Lloyd's and early in the 1980s, becoming a Lloyd's Name was like buying a ticket on the gravy train. It required a security investment of $425,000 and exposed the investor to absolute liability -- that is, to the limit of the Name's wealth. After the $425,000 was exhausted, the company could come after the car, the furniture, the house, whatever was needed to meet claims.
Although the risk seemed potentially high, so were the profits. There were about 32,000 names in the early 1980s. And despite the potential for great loss, it was believed a safe investment. According to one member of Parliament, who is also a Name, "the moon will turn to blue cheese before you get a cash call."
In recent years, the moon has taken on a definite Stilton look. A string of disasters, such as the Piper Alpha oil platform fire in 1988, drained $5.7 billion from Lloyd's funds. In 1989 and 1990, claims reached $30 billion.
Today there are only 22,500 Lloyd's Names. The rest have taken their money into less profitable but safer enterprises.
S&P, meanwhile, has been monitoring the liquidity issue since last fall. And it recently prodded Lloyd's to streamline its operations.
In insurance, confidence is the most valuable asset any company can have. So the speed with which Lloyd's moved to rebut S&P's warning to potential clients came as no surprise.
Lloyd's insists it has no liquidity crisis. It claims that, as of Dec. 31, 1990, the company had resources amounting to $34 billion. This, it declared, was "in excess of all estimated future liabilities."