As a child, the very name Lloyd’s made me shudder. I am just about old enough to remember the dark days of the 1990s when many underwriters, known as ‘names’ or ‘members’, were bankrupted by historic asbestosis claims, for which they had unlimited liability. My elderly neighbours in Chelsea lost their house and eked out the rest of their days in sheltered accommodation. I was six at the time, but when my parents explained why the couple were leaving, I had the horrible realisation that what had happened to them could happen to us. I could not believe that my father had signed us up for such a risky proposition.
Yet last year, at the age of 30, I found myself becoming Lloyd’s youngest private underwriter, having inherited my father’s portfolio. Am I afraid? Only a little bit.
Following the asbestosis crisis, in 1993 Lloyd’s was effectively allowed to start afresh. Its ‘Reconstruction and Renewal’ programme involved putting its earlier liabilities into a new reinsurance company, Equitas, which was eventually sold to Berkshire Hathaway, Warren Buffett’s investment company. The reforms also introduced limited liability for the first time. This is now the only basis upon which new members can join, although there are still 200 names with unlimited liability who’ve been members since before the reforms.
Those improvements took away the danger of losing vastly more than you have invested, making being a Lloyd’s name a bit more like investing in equities — hardly risk-free, but unlikely to bankrupt you. Yet for ordinary investors the reputation of Lloyd’s has never recovered. These days, private capital is a niche part of the Lloyd’s marketplace. Before the asbestosis disaster there were 30,000 ‘names’; now there are just 2,000 making up only 9 per cent of its total underwriting capacity. Deaths and resignations chip away at their number every year.
Thankfully, it was on a limited liability basis that I took over my father’s portfolio. Many names, who joined in the peak of popularity in the 1970s and 1980s, are leaving their investment to their adult children, creating an intergenerational hand-over dilemma. So why would I, or anyone else, undertake this investment with such an infamous past?
Having become an underwriter by accident rather than design, my first instinct was to sell up. But market conditions scuppered my plan: last year was the first overall loss-making year for Lloyd’s names since 2001. The Association of Lloyd’s Members (ALM) believes that as many as 40 members put their portfolios up for sale last year. Many younger investors have understandably taken fright at the poor conditions and want to move their money into something safer.
However, for all the disappointment of last year’s results, there are temptations to stay. Post-financial crisis, insurance has been one of the most lucrative asset classes: the average return at Hampden — the members’ agency that looks after my portfolio — has been just over 11 per cent from 2001 to 2016. If you have idle capital, and do not require a consistent income from it, then Lloyd’s is well worth looking into.
With the exception of a few years, my father made a great deal of money from when he started as a Lloyd’s name in 1978, so for me there is the personal hope I could enjoy a good run myself. Profits are released each May, which happened to coincide with his birthday. In a fallow year we celebrated at home; in a good year we took a last-minute flight to the south of France. More than once I was picked up from school with no warning that we were going away.
Alongside the bountiful, if fitful, returns, there is the draw of tax benefits, and of diversifying your assets. Your Lloyd’s portfolio performance is not closely correlated to the stock market, so there is always the hope it will be doing well for you when the other is not. HMRC also considers underwriting to be a trade rather than an investment, which makes Business Property Relief (BPR) and Entrepreneurs’ Relief available. BPR allowed me to inherit the portfolio tax-free — the main reason I agreed to take it on.
Becoming a name, however, requires an aptitude for grasping a multitude of acronyms and for convoluted reporting, making it suited only to experienced investors. The lowest amount of risk you are recommended to underwrite, known as your Premium Income Limit (PIL), is usually about £1 million. Very bluntly, in what they call a ‘benign’ year you will make a profit from your premiums, but in a year of high claims you might make a loss. As Lloyd’s works on a three-year cycle, one year of profit may be retained to pay for a future loss. So at the moment, all of my 2015 profit is being held back to cover losses revealed this month. It looks as though that profit will just about cover 2017’s projected losses — although no one can be sure until 2020, when that account closes.
2015’s profits are kept in my ‘Funds at Lloyd’s’ — assets that amount to 50 to 60 per cent of your PIL. So if it is £1 million, you need to put in £500,000 to £600,000 in cash, stocks, or bank guarantees. Your Funds at Lloyd’s are assessed twice-yearly. If they fall short, you need to lower the amount of risk to which you are exposed, or be prepared to write a cheque.
The more volatile the insurance syndicates you choose to underwrite, the more capital is required. Nuclear, for example, requires the highest. Every three months there is a chance your chosen syndicates will request money at short notice — known as a ‘cash call’. At Hampden, they like to ask prospective names how they would react to being asked to pay £70,000 at short notice. If you baulk, you are advised not to go ahead.
Being a member is still a high-octane, bumpy ride. On the downside, you will spend hurricane season fretting over cyclones in Florida. On the upside, you might suddenly find yourself flying there one weekend.