Investors in Lloyd’s, who are known as names, have doubled their money over the past three years after the market overhauled its structure and introduced new safeguards.
Lloyd’s operates as a society of companies and individual names who provide capital to underwrite insurance. Until January 2003, names had unlimited liability: losses could exceed the capital they had put up.
Many names were driven to bankruptcy in the 1980s and 1990s after a string of big losses, including the Piper Alpha oil rig disaster, the San Francisco earthquake and asbestos claims from the US.
Then in September 2001, the terrorist attacks on the World Trade Center became the biggest loss in the market’s 317-year history and plunged it £3.1 billion into the red.
It appears to have turned the corner, however. In 2002 it made a £834m profit, followed by £1.89 billion in 2003 and £1.36 billion last year, even though 2004 was the worst-ever year for natural catastrophes, including hurricanes in the US.
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Ed Burke, manager of the Invesco Perpetual UK Aggressive fund and a big investor in Lloyd’s companies, said: “Lloyd’s is in better shape than it has been for a long time — perhaps any time in its history. Its underwriting activities have been injected with a new discipline through tighter regulation and it has offloaded long-term liabilities, such as asbestos- related claims.”
This has translated into big profits for names. The typical name underwrites £1m of insurance, on which he or she is estimated to have made a profit of £416,000 in the past three years. But names usually put up capital of only 40% of their underwriting capacity, or £400,000 for £1m, so the typical name has in fact doubled his or her money since 2002.
Lloyd’s is now on the look-out for new names, whose numbers have dwindled from 34,000 in 1990 to 2,800 today.
Last week CBS Private Capital, an agent for members, launched a fund that will give the public access to the market for a minimum investment of £50,000, compared with £350,000 if you want to become a name. This month the government has also approved a new investment vehicle for individual names, called a limited- liability partnership, which has some big advantages over current vehicles. LLPs are expected to be available from next year.
At present, names can invest in the Lloyd’s market through two vehicles — a Scottish limited partnership or a type of company called a Nameco. With both, your capital is generally free from inheritance tax (IHT). The main advantage of an SLP over a Nameco is that you can offset your losses against other income for tax purposes. The key disadvantage of an SLP is that you must cede control of the underwriting selection.
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With an LLP, members will be able to offset losses and maintain control of the underwriting decisions. Capital will generally be free from IHT, and profits from LLPs will be treated as earned income. This will allow names to use their profits to make pension contributions from April next year.
Nigel Hanbury of Hampden Agencies, a members’ agent, said: “Many names are wealthy but do not necessarily have an income, so the ability to contribute their profits from an LLP to a pension will be attractive.”
To become a name, you need to be wealthy: while the minimum capital required is £350,000, investors usually commit to about £1m and sometimes as much as £10m.
One of the main benefits of being a name is the “double use of assets”. When you become a name, you typically provide only 40p of capital for every £1 of insurance you underwrite. Lloyd’s takes a charge on your 40p, but you can keep it and invest it how you like. You therefore get two returns on your 40p — one from your investments and one from the insurance that it underwrites. But remember that Lloyd’s can call on the entire 40p at any time to cover losses.
You must be willing to lose your entire stake. New names, though, are not exposed to unlimited liability — they cannot lose more than they commit to.
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Graham White, chairman of CBS Private Capital, said: “Lloyd’s is still a high-risk investment even though names now have limited liability. Returns can be extremely volatile and it takes only one catastrophe for you to lose all your capital. Names need to take a minimum 10-year view.”
Alternatively, you could buy shares in Lloyd’s syndicates that have listed on the stock market.
A number of unit trusts have big holdings in such stocks. The Hiscox Insurance Portfolio, for example, has 20% of its fund in Lloyd’s syndicates such as Amlin and Atrium. Invesco Perpetual UK Aggressive is a big shareholder in Hiscox, which operates a syndicate as well as an insurance and investment management business.
If you get access to Lloyd’s through a fund, rather than as a name, you will benefit from a lower minimum investment and extra protection. But there are also disadvantages. First, you do not get the IHT exemption. Second, shareholders do not benefit from the double use of assets.
Experts also point out that the insurance cycle and the stock market do not always move in tandem. If you are a name, you are plugged in to the insurance cycle; if you are a shareholder in a Lloyd’s firm, however, your returns may be more correlated with the stock market.
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Robert Miller of the Association of Lloyd’s Members said: “The insurance and stock-market cycles are thought to be out of line because when shares perform well, capital floods the insurance market and pushes premiums down. But when the stock market performs poorly, insurance premiums rise.”
Whichever route you choose, there are big risks. Miller said: “We have had the cream of the insurance cycle and returns are likely to be slower in future, although there is no sign of premiums falling off a cliff.”
THREE WAYS TO INVEST IN LLOYD'S
Become a name: Individual investors in Lloyd’s, called ‘names’, put up capital to underwrite insurance. New names have limited liability — they cannot lose more than they put up. A typical name underwrites £1m of insurance, for which they put up capital of 40% or £400,000.
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Buy shares: Several Lloyd’s syndicates are listed on the stock market, such as Amlin, costing 178p, and Atrium at 217.5p.
Buy a fund: Funds such as Hiscox Insurance Portfolio and Invesco Perpetual UK Aggressive have big holdings in Lloyd’s firms. You can invest cheaply through fund supermarkets.