Dear Mr Presser

Thank you for making available some of your time to see me on Wednesday. As requested, I enclose a copy of the letter that the ALM recently sent to its members.

While we were talking it was announced that ACE, the Bermudan insurers, have just taken control of the Charman Underwriting Group at Lloyd's for a payment of $500m in shares. This has made a massive amount of money for Mr Charman originally employed as an agent for Names. On the basis of information given by Mr Charman to the Names, the majority of his Names had sold out their capacity at auction to Mr Charman's corporate vehicle, Tarquin. Tarquin has now made a huge profit on reselling its capacity to ACE. It is the belief of many of the Names involved that Mr Charman made a false prospectus to them and that the Lloyd's regulators have been slack in the extreme in failing to take any action to protect their Principals or to safeguard the Central Fund from the new threat posed by the consolidation of all this capacity under the control of ACE. ACE further announced this week their intention to merge 4 other syndicates under their control and in the process both de-empt some of those syndicates' capacities and start a new corporate syndicate. They declared the intention of purchasing the outstanding capacity on the merged syndicates if they are able to do so. It is our belief that the whole merger strategy is designed to consolidate their control over the capacity. It is this consolidation of capacity under the control of Bermudan insurance companies that we believe poses a fundamental threat to the Central Fund and the security it offers to policyholders.

It would perhaps be of some assistance to you if I amplified our concern about threats to the Central Fund and to policyholders' security. As you know, the calculations of the appropriateness of capitalisation levels at Lloyd's, and the adequacy of the Central Fund to give security to policyholders, are based on the assumption that the capital base at Lloyd's is provided by Names writing on a wide range of syndicates. When the capitalisation of a syndicate is provided by a single limited liability dedicated ILV (Integrated Lloyd's Vehicle), the security threat to the Central Fund is fundamentally different. Take for example the case of the specialist nuclear syndicate (e.g., 1176). This syndicate has a highly profitable track record, based on there being no claims. The underwriters declared policy is that he reinsures at a level where, if there are claims, the syndicate is likely to make a 250% loss on capacity. Names are therefore discouraged from having more than 1% of their total underwriting on such a syndicate. This means that if a syndicate makes a loss of 250% the Name will only be losing 2.5% of his capacity and there is a high probability that this will be off-set against profits on other business. If, in fact, he had losses elsewhere, then the 2.5% loss on the syndicate would be set against his 40% of Funds at Lloyd's and ultimately against his other personal wealth. The Central Fund is therefore protected by the Name's capital which is sixteen times greater than the loss as well as by the cushion of the Name's other wealth and income.

Compare this with the position of dedicated ILVs. If the syndicate makes a loss of 250% of capacity then that loss will represent five times the total capital deposited as Funds at Lloyd's by the limited liability dedicated vehicle. There is no cushion of other underwriting against which the loss can be set and there is no "other wealth". The chances are therefore high that there will be a call on the Central Fund of some 200% of the stamp of the syndicate. If the underwriting was provided by individual Names the chances are minimal that there would be any call on the Central Fund. In the case of this one syndicate alone, a nuclear disaster in 1999 would be perfectly capable of wiping out the existing new Central Fund in its entirety. Lloyd's has totally failed to adjust the risk-based capital mechanisms to reflect the changing reality of this syndicate's capacity being provided principally by Cox dedicated instead of by a large number of individual Names. This is a matter that should be of immense concern to external regulators because of the major threat that it poses to all policyholders at Lloyd's - not just those on the nuclear syndicate. Long-term, Lloyd's is proposing a major re-assessment of risk-based capital requirements. In the short-term urgent interim measures are required.

I hope this extreme example, based on a syndicate currently underwriting and its declared underwriting policies, makes my point clearly to you. It is a matter of extreme urgency that the regulators intervene in what is happening at Lloyd's at present.

If I can be of any further help to you with more information, please do let me know.

Kind regards.

Yours sincerely

Christopher Stockwell

Chairman