Why Invest in Lloyd’s?
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What can Lloyd’s offer today’s Investors?
The single most significant attraction to underwriting at Lloyd’s remains the potential to use certain investment assets twice. The collateral to support underwriting does not have to be paid up in advance in cash but can be provided via a bank guarantee or letter of credit secured on a portion of an existing investment portfolio. For example, this can enable investors to retain income and gains on a portfolio of property outside of their principal private residence whilst also benefiting from insurance returns from Lloyd’s. When used in a qualifying trade such as Lloyd’s, the same assets may also benefit from Business Property Relief for inheritance tax purposes, making Lloyd’s vehicles an interesting estate planning consideration.
In addition to a double use of assets, Lloyd’s investments exhibit a low correlation with other more traditional assets and therefore can provide valuable diversification for investors seeking to spread risk amongst alternative asset classes.
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How do investors participate?
All but the largest corporate Lloyd’s investors (members) appoint a specialist insurance investment adviser (APCL) known as a “Members’ Agent “ to structure and manage a Lloyd’s investment vehicle. With our assistance, the investor will select an appropriate portfolio of insurance Syndicates to invest in and our research team will monitor those Syndicates once the investment has commenced. We, often together with an investor’s accountant or tax adviser, will help him choose an appropriate structure for the investment (typically a choice between a limited company or limited partnership) and guide the investor through the application process. All new member applications need to be completed by mid-August each year to commence underwriting for the following year.
Investors at (or members of) Lloyd’s collectively pledge capital to “Syndicates” which are separately managed to underwrite on their behalf. Each “managing agent” employs a team of underwriters on the Syndicates to accept a portfolio of diverse insurance risks. At the end of a three year account, if claims are less than premiums net of expenses, a profit is declared and shared among the supporting capital providers. Running alongside this traditional three year cycle at Lloyd’s is a system of annual accounting.
Investors may elect to underwrite a managed portfolio of Syndicates with diversified risks chosen by us, based on recommendations from AIRL, or choose a “bespoke” portfolio tailored to suit individual risk/reward objectives.
Returns on capital will vary according to the level of diversification and risk in a portfolio. For example, a well-diversified portfolio could initially have a 50% capital ratio so £1,000,000 of premiums can be underwritten with £500,000 of collateral at Lloyd’s. Conversely, if the entire investment was focused on a single Syndicate, £1,000,000 of premium capacity may require £1,000,000 of capital or even more.