Opinion of Robert L. Westin

In the Matter of Lloyd's of London

Robert L. Westin was retained as an insurance expert to express an opinion as to whether a freeze of Lloyd's Central Fund United States (CFUS) held in trust by Citibank in New York, and a stay on the draw-down of the letters of credit and other funds held on deposit by Lloyd's for the accounts of investors in Lloyd's residing in Utah, Colorado, Tennessee, California and other states (hereafter "restrictions") would affect Lloyd's ability to pay claims and render numerous insurance companies insolvent.

The restrictions sought arise out of the complaints of approximately 20 Utah members, 30 Colorado members, 30 Tennessee members and 300 California members of Lloyd's of London, most of whom became members after 1979, that they were fraudulently induced by Lloyd's Member Agents and Lloyd's Managing Agents to become Lloyd's members (Names). It is the position of the Securities Regulators of the forenamed states that the funds required to be deposited by each Name as a condition of membership constituted the purchase of a security subject to each state's security laws and regulations. Similar actions have been filed in 10 other states by securities regulators on behalf of approximately 1,620 additional Names. The regulators claim that Lloyd's engaged in a scheme to defraud investors by concealing the extent of asbestoses and pollution claims that were likely to cause the Names to lose money, rather than earn profits, in future years.

Lloyd's asserts that the Names are underwriters of insurance for their sole accounts and not investors. It contends that they are bound by their membership agreements to resolve their disputes in the U.K. Lloyd's argues that it required the Names to deposit funds to secure their ability to pay their policyholders' claims.

Globally, there are approximately 34,100 Names who have open accounts with Lloyd's. Of these, approximately 14,700 are current members. The remaining 19,400 are awaiting settlement of their accounts to finalize their withdrawal as members. Lloyd's business practices have been severely scrutinized by approximately 65 offensive Action Groups organized by Names. As a result of their findings, approximately 40% of all Names have initiated litigation against an assortment of defendants including Managing and Members' Agents. Through November, 1995, some of the litigants have either been awarded damages by triers of fact in the U.K., or received out-of-court settlements exceeding $1.03 billion.

The litigation initiated by American Names was prompted by recent revelations that by becoming members of Lloyd's, they had unknowingly assumed liability for billions of dollars of undisclosed asbestoses and pollution liability claims which had occurred in prior years dating back to 1960. Despite assurances that throughout Lloyd's history, profits had been the norm and losses the exception, during the period 1980 through 1991, the Names lost money in all but two of the 12 years.

The litigation by Names, and recently the state securities regulators, was hastened by Lloyd's imminently pending implementation of a proposed Reconstruction and Renewal Plan (R&R Plan) designed to "finalize" its financial problems by mutualizing the Names assets to capitalize a new underwriting facility known as Equitas. The R&R Plan allows Lloyd's to draw down on Names' letters of credit and other funds on deposit that would not otherwise be drawn at this time, to use Central Funds, and to apply credits for recoveries on errors and omissions and stop loss reinsurance to provide approximately $7.5 billion to capitalize Equitas. Although Lloyd's has reported substantial profits for the years ended 1993, 1994 and 1995, the Plan essentially preserves those profits for current Names by establishing Equitas as a reinsurance facility to finalize open liabilities estimated to total $4.65 billion for only 1992 and prior years. Of the $4.65 billion, it is estimated that $3.7 billion represents reserves for claims incurred but not yet reported to Lloyd's (IBNR).

According to the recent significant reductions in the estimates presented in Lloyd's Reconstruction and Renewal Towards the Settlement Report of May 1996, Lloyd's is currently estimating that it will be able to apply credits of approximately $5.85 billion for recoveries from settlements and sources other than the Names. Based upon $7.5 billion of indicated capital, a balance of $1.95 billion is expected to be funded by draw-downs of Names' funds at Lloyd's and cash contributions (Equitas funding). The amount sought from each of the 34,100 Names is expected to average approximately $57,200. Lloyd's initially indicated that no Name will be expected to make an additional cash contribution in excess of $150,000. Assuming an average draw-down and new money contribution of $57,200 per Name seeking rescission (after Lloyd's recently announced reductions), a total of $1.144 million is expected from 20 Utah Names, $1.716 million from Colorado Names, $1.716 million from Tennessee Names, $17.16 million from 300 California Names seeking rescission plus an additional $92.664 million from the other 1,620 American Names for a combined total of $114.4 million for all American Names seeking rescission.

It is estimated that each American Name has an average of $95,000 remaining on deposit with Lloyd's. Therefore, based upon an average Equitas funding payment of the average American Name of $57,200, no additional cash contributions are indicated for the group as a whole. The actual amounts will be determined on a Name by Name basis and may be greater or less than the average.

Although Lloyd's anticipates that the settlement of current and future liabilities assumed by Equitas will not be fully paid out for at least 20 years, it wants the Names' funds to appear as interest bearing assets on Equitas' balance sheet now. The formation of Equitas will not be impeded should there be an initial shortfall in the collection of all or part of the $114.4 million in contributions expected from American Names seeking rescission. Nor would it be impeded if the average draw-down and new money expected from the American Names significantly exceed the average for all Names.

Based upon Lloyd's report of 1994 global results, Members' resources total $41.5 billion. After provisions for current and future liabilities totaling $31.6 billion, Lloyd's has net resources of $9.9 billion. If, in fact, $1.95 billion is needed from all Names to fund Equitas now as indicated in Lloyd's May, 1996 R&R Settlement Report, Lloyd's would only have to collect less than an additional $7,800 from each of the 14,700 active Names who stand to benefit the most from the formation of Equitas. Alternatively, Lloyd's can capitalize Equitas for $7.3856 billion now ($7.5 billion minus $114.4 million not collected from non-paying American Names seeking rescission) and create an Equitas trust to fund any ultimate deficiency through assessments levied on future premiums written by Lloyd's and upon Managing Agents' underwriting commissions and profits.

Lloyd's position in the global insurance market, and specifically the United States, can be measured by its written premium income. In 1994, Lloyd's wrote approximately $14.3 billion in premiums, 32% of which were written in the U.S. In contrast, it is estimated that $1,552 billion in premiums were written globally by all insurers, of which approximately $775 billion were written by U.S. domiciled insurance companies. Lloyd's accounted for only .092% of the world total and its share of U.S. premiums represented only .59% of the U.S. total, i.e. less than 1%.

Lloyd's is allowed by state insurance commissioners to conduct business in the United States as an "authorized" non-admitted insurer and reinsurer subject to its maintenance of specific amounts of premium deposits held in trust by Citibank, N.A. in New York (Lloyd's American Trust Fund [LATF]). In September, 1993, separate trust funds were established to be jointly and severally available to surplus lines and reinsured American policyholders. An audit of the LATF conducted by the N.Y. Insurance Department in 1994 disclosed that the trust funds were deficient. To preserve its status, Lloyd's executed a Stipulation Agreement with the N.Y. Department of Insurance on May 24, 1995, which required it to substantially strengthen its deposits and to modify the trust documents to allow the funds to be held for the Names' in accounts deposited in the names of "sponsoring" syndicates. Lloyd's recently stated it has $12.6 billion deposited in the LATF at Citibank. It is Westin's opinion that the withdrawal of Lloyd's status as an authorized or accredited non-admitted insurer or reinsurer is totally within the control of individual state regulators. Westin contends that as long as Lloyd's maintains the required trust deposits, the regulators have no justification for rescinding their approval.

In addition to the LATF and similar premium trust deposits maintained in the U.K., Lloyd's also maintains separate trust accounts, Central Fund and CFUS, which are not subject to regulatory control. The Central Fund and CFUS can be used at Lloyd's discretion to pay the claims of individual Names who are unable or unwilling to respond to calls for funds. Lloyd's obtains the funds by assessing the Names annual fees of 0.6% of their allocated premium capacity. According to Lloyd's 1994 Annual Report, at the close of 1994 the Central Fund deposits exceeded $1.1 billion. The actual amount held in CFUS was not stated. However, according to the N.Y. DOI audit, approximately $370 million was held in CFUS as of December 31, 1993.

It is Westin's opinion, based upon his careful analysis of relevant facts and figures, that published statements made by Lloyd's and California Insurance Commissioner Quackenbush that the restrictions sought by the Names seeking rescission would impair Lloyd's ability to pay its policyholders' claims and render insolvent numerous insurance companies doing business in California, Utah, Colorado, Tennessee and other states have no basis in fact and are untrue.

It is Westin's opinion that 1) the restrictions on CFUS and on 2,000 American members' funds on deposit with Lloyd's will have absolutely no effect upon the payment of claims to, or on behalf of, anyone insured or reinsured by a Lloyd's policy anywhere in the world; 2) the restrictions will not cause the insolvency of any insurance company admitted to do business in any state; and 3) the rescission of the American Names' Lloyd's memberships will have a minimal effect, if any, upon the financial efficacy of the Lloyd's market and should not materially effect Lloyd's plans to reorganize or trigger its collapse as a market place.

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