The black cloud hanging over the American International Group (AIG) may be poor news for the US economy, but it is good news for the syndicates of Lloyd’s of London which are already seeing business flow their way as a result.
The troubles at AIG, which has received $123bn in emerging lending from the US Federal Reserve, are forcing both underwriters and clients of AIG to defect to Lloyd’s. So the UK group’s trading prospects are set to improve even after a long hurricane season, as rates are expected to rise in the wake of the US insurance giant’s near-collapse and the credit crisis.
Indeed, some of the most popular of Lloyd’s 75 syndicates, including Hiscox, are already looking to increase their capacity – or the amount of business they are able to write – next year to prepare for growing demand. And the tectonic shifts in the balance of power of the world’s insurance sector are being welcomed by the 2,500 or so private investors who now underwrite about 17 per cent of the £16bn Lloyd’s has in capacity. As rates rise, profits tend to rise with them.
“We believe that the effective nationalisation of AIG, the losses from hurricanes Gustav and Ike and the damaged financial health of several other leading insurers and reinsurers will lead to a steady improvement in Lloyd’s prospects over the next two to three years,” said James Sparrow, chief executive of Alpha Insurance Analysts, a members agency which offers private investors the chance to underwrite premiums in Lloyd’s syndicates.
The costs of investing in the Lloyd’s market remain high, as investors must have at least £350,000 in assets, which is used as collateral, and about £200,000 in cash, which is used to buy the rights to participate in the profits of syndicates. In addition, another £7,000 to £10,000 is required to start a limited liability partnership (LLP).
But high-net-worth investors are attracted to the market for several reasons. Losses are now capped as investors can now underwrite a group of syndicates through a LLP, which means the maximum loss they face will be restricted to the capital pledged upfront.
A second benefit is that assets invested in Lloyd’s can be used twice to achieve returns. For example, an investor could put up, say, a buy-to-let property or a share portfolio as collateral. This allows investors to earn a double return on their assets. The structure also permits wealthy investors to purchase capacity rights and keep assets used as collateral out of their inheritance tax net after two years. Also, any losses can be offset against income tax.
Amid the financial crisis, investing in Lloyd’s has become more attractive as investors look for investments that are not correlated to equities. And a “safer” portolio of assets such as cash, gilts and bank guarantees can be used to secure a Lloyd’s underwriting position.
Since 2001, when Lloyd’s reported a loss of £3.1bn in the wake of the attacks on the World Trade Center, the market’s results have been strong. In 2002, when the FTSE 100 fell 24.5 per cent, Lloyd’s results were particularly robust.
The way to go about investing in a Lloyd’s syndicate is to approach one of the main member agencies – Alpha, Argenta Private Capital and Hampden Agencies. These groups can set up LLPs and represent clients seeking to invest in particular syndicates at auction. Investors can also participate in a pooled collection of syndicates selected by the member agency.
Every September, member’s agents represent clients at the three auctions where participation in the 30 Lloyd’s syndicates open to private investors can be purchased or sold for the year ahead.
Investments must be made for at least three years to allow time for profits or losses to be determined on the policies underwritten.
A LLP can be set up by Argenta for £7,500, according to director James MacKay. The agency charges a 1 per cent fee on capacity of up to £1m and 0.5 per cent on capacity from £1m to £1.5m. About £350,000 in capital permits the underwriting of about £875,000-worth of capacity. It costs £200,000 to acquire this amount of capacity at the 2008 auctions.
If you make a profit in an underwriting year, Argenta charges a 5 per cent commission. If you were to earn a profit of 12.5 per cent in a particular year, then your gross profit on capacity of £875,000, before fees and commissions, would be £109,375.
