Lloyd's of London regains its lustre INSURANCE MARKET: In the 1990s to be a Name was a liability. Now the very wealthy are being attracted again to the investment offerings, writes Ellen Kelleher

Financial Times (London)

Feb 3, 2007, p. 13

By Ellen Kelleher

Wealthy investors are ploughing money once again into the syndicates of Lloyd's of London after years of turning a blind eye to the insurance market.

In recent years, scores of private investors have shunned Lloyds - which hit hard times in the early 1990s when it was pushed to the brink of bankruptcy by a deluge of claims. At the time, thousands of "Names" - private investors who underwrote Lloyd's with their own money - were driven out by huge losses incurred mainly from asbestos claims. In 1990, there were about 34,000 Names but that number has since shrunk to about 2,000.

But interest in Lloyd's as an investment vehicle is picking up up again. Many of those who are putting money into Lloyd's syndicates now are multi-millionaires with considerable assets who can withstand losing hundreds of thousands of pounds a year if the particular syndicates they are backing suffer giant underwriting losses.

"It's an interesting way to diversify your portfolio. It gives you direct access to the insurance market and offers an unusual return structure," says Charles Harbord-Hamond, managing director with CBS Private Capital, a managing agency that deals with private investors who want to put money in Lloyd's.

The revival of interest is owed to a favourable underwriting cycle and changes in the ownership structure that cap investors' total potential losses to the amount of their initial investment. "When the unlimited liability structure was in place it was a bit like owning a house that is uninsured," said someone who had been a Name for more than 20 years and wished to remain anonymous.

Crispin Odey, a renowned hedge fund manager and a Lloyd's investor, agrees: "Suddenly Lloyd's has the attraction that you can only lose what you put up."

While it remains risky, investing in Lloyd's syndicates has significant advantages for the uber-wealthy. As well as Odey, well- known Names reported to be investing in Lloyd's syndicates include David Ross, one of the founders of Carphone Warehouse, and Jonathan Marland, treasurer of the Tory party.

Though Lloyd's suffered a loss of Pounds 103m in 2005 in the wake of Hurricane Katrina and the subsequent string of storms across the US, interim results from the first half of last year indicate 2006 was a much better year as the syndicates reported a healthy pre-tax profit of Pounds 1.35bn.

At the moment, the only way to go about investing in the yearly cycle of a Lloyd's syndicate is to approach one of three member agencies - Argenta Private Capital, Hampden Private Capital and CBS Private Capital.

To take an underwriting stake in a syndicate on your own, you must have at least Pounds 450,000 in assets - Pounds 100,000 should be in cash and the remainder in assets that will be used as collateral against your investment, such as buy-to-let property or a share portfolio. Your investment can be structured as either a limited liability partnership or a limited liability company, depending on your needs. Also, you can pool resources and invest with others.

If you invest Pounds 450,000 in a particular syndicate, you underwrite about Pounds 1m-worth of premiums. "That's the inbuilt gearing of the market. Your profits or losses are determined in relation to that Pounds 1m," explains James Mackay, executive director at Argenta. So, if you were to make a 20 per cent profit for the 2006 underwriting period - the sort of returns Names expect in a good year - you would earn a return of Pounds 200,000. Your maximum downside, according to the new guidelines - which forbid new members from accepting unlimited liability - would be a loss of Pounds 450,000 for that year. Although one mild comfort is that any losses could be offset against your income tax bill.

There are 66 syndicates underwriting different types of risk that make up the Lloyd's market. Advisers and Names stress that syndicate performances vary. One rule of thumb offered by a Lloyd's investor is to increase your underwriting when premium rates are rising. "The thing to watch is rates," he says. "When rates are low, syndicates tend to lose money. What determines profits is not whether there is a windstorm."

A few sought-after franchises that have performed well in recent years, include Hiscox syndicate 33, Kiln syndicate 510 and Cathedral syndicate 2010, according to analysts.

If you do not have Pounds 450,000 worth of assets to put up in capital, you might want to consider investing in Insurance Capital Partners, a fund run by CBS Private Capital.

A minimum investment of € 50,000 is required to invest in a portfolio of syndicates.

Charles Harbord-Hamond expects returns on the fund for the 2006 underwriting season will fall between 30 and 35 per cent before tax.

Harbord-Hamond expects investors who put money into the 2005 underwriting portfolio that was ravaged by hurricanes Katrina, Rita and Wilma, should break even.

Investing in a Lloyd's syndicate also permits the super-rich to earn an additional return on some of their assets in a way that can also be advantageous for inheritance tax avoidance.

By putting up your equity portfolio or buy-to-let property as collateral, these investments can be claimed as "business assets" and therefore, after two years, fall outside your estate for inheritance tax purposes.

"I've made considerable money on my investment in the twenty or so years I've been a Name," says one private investor. "Yes, you have to be able to stand some losses, but if you're careful and you know what you're doing, you should be able to get quite good rates of return on your capital."