Spitzer rains on Lloyd's parade: flexing its new-found financial muscle, Lloyd's looks to pump up further with a high profile debut in the international debt market

Risk & Insurance, Jan, 2005 by Graham Buck

Eliot Spitzer's broadside against the U.S. insurance industry served to relegate news of another major break with tradition by Lloyd's of London to the lower reaches of the financial pages.

CEO Nick Prettejohn announced in October that the venerable insurance market is to make its debut in the international debt market with plans to raise $900 million of long-term subordinated debt. Citigroup and Royal Bank of Scotland were named as joint book-runners for the transaction.

It is a sign of Lloyd's renewed confidence that it is ready to expose itself to the transparency required of a bond offering, rather than resort to raising the money via a levy on members--now mostly corporate as the individual Names have steadily made an exit.

"Lloyd's today is financially strong. We are now aiming to strengthen that position further by establishing a long-term, robust and flexible capital structure which is economically efficient for those firms which choose to operate at Lloyd's," said Prettejohn.

"Our strategy has widespread support from the market, our membership and the rating agencies. We believe there is currently a good appetite for this type of issue in the capital markets." The move got a positive reception from Britain's financial press, which observed that not so long ago it would have been greeted with "hoots of derision."

However, it now reflected the former mutual's transformation over the last few years into a "strong and profitable competitor." Despite the expected $2 billion-plus dent to profits from this fall's unusually fierce hurricane season, profits of around $1.8 billion are expected for 2004.

A dark cloud, however, has since been cast over this rosy scenario by the Spitzer lawsuit. Marsh & McLennan accounts for at least $4.5 billion of annual premiums written through Lloyd's, which could be lost to Bermuda if the maelstrom that has been unleashed blows the broking giant away.

The U.K. watchdog, the Financial Services Authority, plans its own Spitzer-style clampdown on errant British insurers when a new regulatory regime for the industry comes into effect in mid-January 2005. Lloyd's has called for greater disclosure of insurance commissions, but the appeal seems a little belated.