Lloyd’s of London is the world’s largest specialist insurance market. Although today it’s housed in the spectacular eponymous building designed by Richard Rogers at One Lime Street, it had much humbler beginnings. Its history dates back to a marine coffee house in 1686, which was popular with sailors, merchants and vessel owners. Within these four walls, the clientele would write details on a blackboard about their upcoming voyages, including details of cargo, crew, weather and destination. The bankers who also frequented the coffee house would write their names under the voyage which they were happy to financially back, and the word ‘underwriting’ was born.
Lloyd’s has provided cover for some of history’s prolific events, including the sinking of the Titanic and the World Trade Center attack. They have also provided cover for the less tangible, including Bruce Springsteen’s voice, Brooke Shield’s legs, and the Beatles. Historically, Lloyd’s has paid all valid claims and continues to do so today.
Today, Lloyd’s of London is backed by a variety of capital providers:
In return for providing capital to the syndicates, a Name will receive a share of profits accrued by the business underwritten by the syndicates. The downside is that, in years where losses are posted, the Name will be called to pay their share of these.
Names support ‘syndicates’ (formed by one or more members joining together to pool capital and accept insurance risks as a collective), which allows them to build a diversified portfolio of insurance risks. Each syndicate (of which there are 76 in total) has its own specialism and expertise, and transacts on behalf of its capital providers in investment cycles of one year. Each syndicate will have a maximum that they can underwrite in any given year, which is known as ‘capacity’.
The main attraction is the double use of assets in uncorrelated asset classes. That is, you can invest your Funds at Lloyd’s (FAL) into an investment portfolio, giving you exposure to investment returns as well as exposure to the return of Lloyd’s. As with anything, there is a risk/reward trade-off and this two-tiered exposure to the upside can also lead to a two-tiered exposure on the downside. Because of this extra level of risk, it is recommended that FAL portfolios should be professionally invested by a wealth manager and not have a higher risk level than medium.
All private individuals at Lloyd’s of London engage the services of a Members’ Agent, who are specialist insurance investment advisers. There are currently three Members’ Agents: Argenta Group, Alpha Insurance Analysts, and Hampden. It is their role to help the Name select an appropriate portfolio of insurance syndicates to invest in and to monitor these on an ongoing basis. The structures for the investment will be either a limited company or a limited partnership.
Simon Allister, Head of Wealth Planning, says, “Lloyd’s can be an interesting vehicle for estate planning, as any long-term interest should qualify for Business Property Relief, which means it falls outside of your estate for inheritance tax purposes.” There may be other tax benefits, depending on how the Funds at Lloyd’s are structured.
Andrew Palmer, Investment Manager and Partner, says, “You don’t need a specialist wealth manager to invest a FAL portfolio, but it certainly helps, especially when it comes to managing risk within the portfolio. I currently look after just under a hundred clients with Funds at Lloyd’s. It is important for clients to know that their wealth manager appreciates the nuances of the market. There are also certain rules around investing Funds at Lloyd’s which is important to be cognisant of. For example, there are currency restrictions and assets need to be readily realisable and, if funds, need to be pre-approved by Lloyd’s. Your wealth manager will also need to be an Approved Broker at Lloyd’s.”
It is recommended that clients should have a minimum of around £7 million of liquid assets and, because of the associated risks, should underwrite no more than 10-15% of their total wealth. It is also worth noting that, for new Members of Lloyd’s, there is no longer ‘unlimited liability’, meaning that losses are capped.
For example, if you wanted to underwrite £1 million of premiums, we would advise that you had liquid assets of at least £10 million. Your syndicate capacity would cost £300-400k, depending on the syndicates, and your Funds at Lloyd’s need to be around £350-450k.
In many cases, capacity gives you the freehold rights on a syndicate. Historically, capacity values have generated good returns for Names, although values have risen recently. Lloyd’s has a three-year accounting model which means only private individuals who are willing to trade at Lloyds for a period of more than three years or more should consider becoming a Name.
For clients who are interested in diversifying their investments and potentially mitigating inheritance tax liabilities on their estate, investing at Lloyd’s of London is an interesting proposition. “Lloyd’s has changed enormously since the fallout of the asbestos crisis in the Eighties,” says Andrew. “The barriers to entry are much higher than they were, the risk controls are much better and the exposure of private individuals has, correctly, been limited. For the right client, the uncorrelated nature of returns between the insurance market and traditional asset classes which are held in their Funds at Lloyd’s is appealing.”
LGT Wealth Management is an Approved Broker at Lloyd’s of London.
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