Fabled Lloyd's Takes a Bath

Cleaned out by computers and a honey-tongued Texan

For Lloyd's of London, risk has always meant opportunity. The celebrated market of hundreds of risk-sharing insurance syndicates prides itself on being the first to offer coverage on the new, the colossal, the bizarre. But as technology grows ever more complex, the risks keep rising, and each year the amounts that Lloyd's underwriters pay out on litigious losses, from oil tanker disasters to Mafia-set arson jobs, keep swelling. Yet this year is one that even Lloyd's risk-hardened underwriters are not likely to forget.

First there was the crash in May of the American Airlines DC-10 in Chicago, taking the lives of 275 people in the worst U.S. air disaster. Lloyd's underwriters hold 16.5% of the coverage of that flight, which could cost them many millions. If the plane is found defective, the product liability claims against the builder, McDonnell Douglas, would be even larger. Lloyd's underwriters carry much of that insurance.

Yet even these losses would pale beside a far less publicized jolt that the insurance group is suffering. It involves the labyrinthine world of computer leasing, a honey-tongued Texas hustler, the big gest and most prestigious U.S. banks and IBM. As a result of many forces, the Lloyd's insurance group faces the biggest loss in its 291-year history -- up to $225 million, vs. the present record of $100 million paid to cover damages from Hurricane Betsy in 1965.

The underwriters' latest loss began with a promotion by Charles ("Chris") Christopher, now 33, a Dallas sharpie who honed his selling skills peddling encyclopedias and waterbeds in his teens, and then created Surety Industries, a computer leasing firm. The business worked this way: Surety bought computers from manufacturers. It financed the purchases with multimillion-dollar loans from banks, using the computers themselves as collateral. Then Surety leased the computers to corporations or government agencies. Typically, the leasing contract is for seven years, with the proviso that the customer can break it after three or four years. Before 1974 the banks were unwilling to make loans for more than four years. They feared that giant IBM might roll out new models that would make the leased computers obsolete. Thus the growth of the leasing firms was hindered.

Eager to expand his business, Christopher met in 1974 with Lloyd's Broker Peter Nottage and persuasively proposed an idea for a computer-leasing policy that the underwriters eventually accepted. Under it, if corporations or government agencies broke a lease after the obligatory noncancellation period, Lloyd's underwriters would pay the leasing company any balance due to the bank on the purchase price of the computer. With this magical policy, Christopher found it easy to persuade banks to lend him the huge sums that he needed to buy computers. The company or agency that leased the equipment agreed to make monthly payments that Christopher used to retire bank debt and turn a large profit.

Executives of other leasing companies were soon rushing to London to buy the new policy. San Francisco-based Itel became the biggest user, taking out 48% of all the computer policies that Lloyd's underwriters issued. The leasing companies owned by Citicorp, Chase Manhattan and Bank of America, among many other big firms, got similiar policies. In all, the 57 Lloyd's underwriting syndicates and 17 individual insurance companies that were involved in the deal wrote more than 14,000 policies covering potential claims of more than $ 1 billion.

Early on, when Lloyd's underwriters offered only a limited number of policies, competition for them grew rough. Christopher, suspecting that Lloyd's members might be ready to cut off his coverage in favor of another leasing company, arranged for the electronic bugging of a Manhattan meeting between Nottage and representatives of the Chemical Bank. Unluckily for Christopher, the expert he hired to do the job was an FBI informer. Christopher was indicted in 1976 by a federal grand jury in Manhattan and wound up pleading guilty to illegal electronic eavesdropping. He was fined $10,000 and put on probation for two years; he closed his company and sold his leasing portfolio to Bank of America.

Last January the unexpected happened: IBM announced its new 4300 series of computers, which are faster and more powerful than anything else on the market--and cost 30% less to lease. Immediately, some firms began switching to the new computers and canceling their leases of other models. Lloyd's underwriters stopped issuing their policy, as claims began to flow in from leasing companies. Last month one of them, Federal Leasing Inc. of McLean, Va., filed a $627 million damage suit against the London insurance group. Itel, though badly shaken by the new IBM machines, is more patient. Says a spokesman: "There is nothing to indicate that Lloyd's will not pay."

Lloyd's underwriters say they intend to pay all valid claims. The 57 syndicates and the 17 insurance companies involved all share the loss. This spreading out is a main reason that Lloyd's group can take the risks it does. The underwriters have already paid about $30 million and set aside $220 million to cover future claims. The assumption in London is that many firms that use leased computers will not want to switch to better, new machines, because change requires reprogramming, new software, personnel training and other costly extras.

Lloyd's calculating oddsmakers are ruefully philosophical about their mishap. Says Underwriter Murray Lawrence: "If we didn't have losses we wouldn't be in business." The group draws some satisfaction from the recent strengthening of sterling, now at $2.22, which means that members will have to lay out fewer pounds to pay off claims in dollars. But that is sore solace. As Underwriter Peter Cameron-Webb noted, "I doubt if a broker will ever try to place this policy again at Lloyd's." qed

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