About Lloyd's

About Lloyd’s membership and investment in Lloyd’s

An overview of membership of Lloyd’s

Lloyd’s is not an insurance company, but a specialist insurance market. For 2021, the Lloyd’s market is forecast to underwrite a gross premium income of approximately £41 billion which will constitute an increase of 6% over 2020, and which will make it one of the larger (re)insurance providers in the world. For over 300 years, Lloyd’s has never failed to pay a valid insurance claim. This has been achieved by building a Central Fund of pooled reserves which stands as a guarantee behind each of its syndicates. As a result of its unique capital structure, and its recent remediation work, Lloyd’s now has the following credit ratings: A.M. Best ‘A’ (Excellent), Standard and Poor’s ‘A+’ (Strong) and Fitch ‘AA-’ (Very Strong).

Within the Lloyd’s marketplace, different managing agents operate 99 insurance syndicates which underwrite different classes of (re)insurance business. Investors provide capital to these syndicates, and receive a share of the profits or losses that accrue from the underwriting business of these syndicates in proportion to their commitment.

The investor base at Lloyd’s is now predominantly composed of corporate capital, but does also include third party Members of Lloyd’s, who still provide about 10% of the capital committed to the syndicates. For 2021, there are 25 syndicates that are open to third party Members of Lloyd’s. Each syndicate has different areas of business expertise and transacts a wide variety of insurance business on behalf of its capital providers. Members of Lloyd’s usually underwrite on a spread portfolio of syndicates in order to achieve diversification and to avoid concentration of risk. 

Members of Lloyd’s trade on a three year of account basis. Each year of account lasts for 36 months, which allows enough time to recognise claims, especially on some of the longer tail liability classes. This means that the last year of account to close was 2017, which closed at 31 December 2019. Although the 2018 year of account was officially closed at 31 December 2020, the full results will not be released to Members until this February.

Becoming a Member of Lloyd’s, and trading through a limited liability vehicle (LLV), may offer a number of potential attractions. 

      • Direct investment into the Lloyd’s market: Members of Lloyd’s obtain direct access to the insurance and reinsurance business that is transacted by the syndicates underwriting in the Lloyd’s market. 
      • Direct investment into a historically low-correlated asset class: Returns from underwriting at Lloyd’s have historically had a very low correlation with those of other asset classes.
      • Limited liability: Since 2003, all new Members of Lloyd’s have traded through a LLV, where liability is limited to the assets of the LLV. 
      • Double use of assets: Members of Lloyd’s enjoy the double use of their assets, in that qualifying investments (such as stocks, shares, or bonds) can be used to support the underwriting of their LLV. The Member earns a return from both their investments and from their Lloyd’s underwriting, which is supported by those assets (known as Funds at Lloyd’s, which is often abbreviated to FaL).
      • The potential to make underwriting profits and capital gains: Underwriting at Lloyd’s has the potential to make profits, not only from the results of underwriting, but also from any capital gain that might accrue from the acquisition and disposal of the Member’s syndicate capacity through the Lloyd’s capacity auctions.
      • Potential tax and estate planning benefits: Underwriting at Lloyd’s is not considered to be an investment, but is deemed by HMRC to be a trade, and it is taxed accordingly. Amongst the benefits of such treatment are the availability of Business Relief and Entrepreneurs’ Relief. This is an important and complex area where specific advice from an accountant should be sought.

Figure 1 shows the historical performance of the Lloyd’s market (on a three year of account basis) measured as a percentage of capacity between 2008 and 2017. Capacity is a Lloyd’s term, which can apply to both a Member and a syndicate. In relation to a Member, capacity is the maximum amount of insurance premium (gross of reinsurance, but net of brokerage) which a Member can underwrite for a particular year of account. In relation to a syndicate, capacity is the aggregate of each Member’s capacity that is allocated to that syndicate in any given year.

2017 is currently the most recent year of account that has been officially closed and reported to Members.  2018 and 2019 are both currently forecast to produce losses, of 5.5% and 4.2% respectively (based on figures issued in September 2020). The figures shown in Figure 1 do not include Members’ agents’ charges and fees (which are marginally different depending on the Members’ agent in question). 

Figure 1: Lloyd’s results as a percentage of capacity 2008 to 2017

 

2008

2009

2010

2011

2012

2103

2014

2015

2016

2017

Lloyd’s results

10.2%

17.1%

2.5%

3.9%

11.9%

9.1%

10.7%

6.2%

-3.1%

-8.0%

Source: Lloyd’s

For each year of account, individual Members have to put up capital, or FaL, to back their underwriting. For most of the years of account shown in Figure 1, the average FaL was about 50% of the amount of capacity that was underwritten by the Member in any given year. This means that the percentage return/loss on capital was therefore double the return/loss on capacity shown in Figure 1.

Some Members of Lloyd’s have outperformed the overall Lloyd’s results in some of these years, but this has depended on the composition of individual Members’ syndicate portfolios, which are chosen by, or in conjunction with, their members’ agents. Details of the average results that have been produced by the members’ agents can be found at their respective websites (see below).

Given the nature of both the (re)insurance market as a whole, and the Lloyd’s market in particular, past results may be an unreliable guide to future prospects. Though insurance pricing has been cyclical in the past, loss frequency and severity has not, and is not, correlated to the underlying strength or weakness of prices at any point in the insurance cycle. Therefore, it is perfectly possible for the market to make losses even in years when prices are high.

There are a number of stages a prospective Member has to go through, and a number of key decisions to be made, before they can become a Member of Lloyd’s. 

Choose a Members’ agent

Prospective Members of Lloyd’s must choose a Members’ agent. There are currently three members’ agents at Lloyd’s who represent the interests of Members of Lloyd’s. The members’ agent’s main roles are to provide administrative services and support to the Member and to advise the Member on which syndicates to participate on for each year, as well as what the level of that participation should be. The members’ agents also regularly report on developments and results pertaining to their Members’ syndicates.

Decide whether to form a NameCo or Limited Liability Partnership

In conjunction with their professional advisers and their members’ agent, prospective Members must decide whether to underwrite via a NameCo or a Limited Liability Partnership (LLP). The choice of a NameCo or an LLP will depend upon the circumstances of each prospective investor. Some of the key issues that are usually taken into consideration by prospective Members are their personal tax position, funding flexibility and their future ambitions. Both structures provide limited liability investment, but there are some key differences between them.

The NameCo structure

NameCos are UK registered, private, limited liability companies trading as corporate Members of Lloyd’s and, subject to the appropriate approval of controllers by Lloyd’s, they can be formed for a single individual or for larger groups of connected investors.  A NameCo is subject to UK Corporation Tax on any profits it makes. NameCos have been a popular form of limited liability vehicle at Lloyd’s due to the flexibility of their structure and the ability (again subject to Lloyd’s approval) for them to be incorporated within existing corporate groups. Another attraction of NameCos has been the fact that the directors can opt to retain the underwriting profits within the company for an indefinite period of time.

The LLP structure

An LLP is a body corporate that is a separate legal entity which is distinct from its members who may be individuals or bodies corporate. In general terms, an LLP is transparent for tax purposes in the UK, and is consequently not a taxable entity in its own right. Profits from an LLP are treated as earned income in the hands of its members and taxed as such. Members pay tax at their marginal rate on the money paid out of the LLP. A key attraction of the LLP is that after two years, 100% Business Relief for UK Inheritance Tax purposes is available on the assets employed.

In both cases, it is vital to understand that it is the LLV that is the Member of Lloyd’s and not its shareholders or partners themselves. This means that both types of LLV are inter-generational vehicles that can trade on after the death of a given shareholder or partner. This has important tax implications. 

The documentation for the creation of a new LLV must be submitted to Lloyd’s before mid-September, prior to commencing underwriting the following January.

As from 1st January 2015, the Council of Lloyd’s also mandated that all Members of Lloyd’s must be UK tax resident. This effectively means that Members of Lloyd’s may now only participate through UK tax resident companies, a NameCo, or if trading in an LLP, all of the partners must be UK tax resident.

The minimum capital funding requirement for both a NameCo and an LLP is £350,000. In the case of an LLP, however, each individual member of the LLP is required to put up assets of £100,000.

There is an option to either create a new LLV or to buy an existing one

Buying an existing LLV

Prospective new Members have the option to either create a new LLV, or buy an existing one (that is put up for sale by a Member leaving Lloyd’s). One advantage of a new vehicle is that it has no legacy issues from previous years of account. LLV’s are regularly advertised for sale on the Members’ agents’ websites. LLVs are valued based upon the previous year’s auction prices and the latest syndicate mid-point forecasts for the open years. No value or liability is attributed to the current underwriting year. Bids may be submitted at a premium or a discount to the valuation. Purchasing an existing LLV allows for immediate underwriting cash flows, the potential to select a balanced portfolio (in that any unwanted syndicate capacity can be sold at the next Lloyd’s capacity auctions) and a more flexible timescale that suits the Member. 

Creating a new LLV

Unless they buy an existing LLV outright, Members must purchase a portfolio of syndicate capacity at the Lloyd’s capacity auctions, held each October, in order to build their new portfolio for the coming year’s underwriting. Capacity on some syndicates can be in short supply, and therefore very expensive, or even completely unavailable; and this may mean that it may be hard, or even impossible, for a Member to purchase the exact portfolio that they want when they first join Lloyd’s.

Buying capacity at the auctions

It should also be realised that purchasing capacity in the auctions requires a significant up-front capital investment. In 2020, the Lloyd’s weighted average price for syndicate capacity at the auctions was 20.9p per £ of capacity, which means that a £1 million portfolio would have cost a Member £209,000. This sum of money would have had to have been paid in November. The syndicate capacity is then owned by the Member/LLV, but Members should be aware that its value may fluctuate from year to year. It will also be deemed to be an asset of the LLV in the event of a loss. Capacity can be traded each year via the Lloyd’s capacity auctions as and when the Member wishes to change the composition of their portfolio. 

Pre-emption rights on syndicates

Once a Member owns capacity on a syndicate they benefit from ongoing pre-emption rights on the syndicate. A managing agent offers pre-emption to Members when it wishes to increase the underwriting capacity of its syndicate (for example, if and when it expects to write more business in the future, as rates are expected to increase). It is required to offer the same percentage increase in capacity to all Members of the syndicate in question. The participations of the Members of the syndicate are therefore increased proportionately to the extent of the managing agent’s pre-emption offer. For example, if a syndicate pre-empts its capacity by 10% then each Member’s line would increase by 10%. Members also have the option of selling unwanted pre-emption rights in the Lloyd’s capacity auctions.

Coming-into-line

In November each year, Members are required to come-into-line for the following year’s trading. In practical terms, this means that they have to deposit their FaL with Lloyd’s in order to capitalise their underwriting for the following year. As noted, Members of Lloyd’s enjoy the double use of their assets, in that qualifying investments (such as stocks, shares, or bonds) can be used to support the underwriting of their LLV. The Member earns a return from both their investments and from their Lloyd’s underwriting, which is supported by those assets, or FaL.

The LLV goes “on risk”

The new year of account, in this case 2022, officially begins on 1 January 2022. The Member is then “on risk” for the year, which closes in 36 months, and which is usually settled at month 42.

Lloyd’s is not suitable for all investors

Membership of Lloyd’s is not suitable for all investors. Prospective Members should seek independent financial advice before considering underwriting at Lloyd’s. It is very important that prospective Members of Lloyd’s understand the basic elements of insurance and the nature of the risks inherent in underwriting insurance at Lloyd’s.

(Re)insurance is a high risk business

Prospective Members of Lloyd’s should also be aware that underwriting (re)insurance risks is a very high risk undertaking. Members of Lloyd’s may experience underwriting losses as well as profits and any underwriting should normally be viewed as a long-term investment. Although the members’ agent plans a portfolio of syndicates that best reflects the financial circumstances and individual risk appetite of each Member, for each year of account, making use of all of the risk modelling tools at its disposal such as the syndicates’ realistic disaster scenarios, there is no absolute guarantee that a loss can be avoided.  

There is also the possibility that Members may be exposed to the risk of underwriting losses from not only the current underwriting year, but also from exposure to prior years’ losses. In the event that syndicates’ claims reserves prove to be inadequate, Members remain liable for losses until the liability issues of all the syndicates on which they participated have been resolved. This could take longer than the three years allotted to the year of account in question. 

The value of syndicate capacity may fluctuate and/or decline permanently

As discussed, the capacity that the LLV owns is an asset. However, it needs to be stressed that the capital value of syndicate capacity, that is owned by the Member, can also go up and down from year to year as a result of annual fluctuations in the auction prices, so there is a risk of mark-to-market capital losses as well as underwriting losses.

What does limited liability really mean in a LLV?

For limited liability Members of Lloyd’s, it is vital to understand that their liability is limited to their total FaL, the value of their syndicate capacity, any funds held in the LLV and any pipeline profits from the open years. In some senses, it could be argued that there is a marginally greater risk associated with trading in a NameCo than an LLP. This is the result of the fact that the directors of a NameCo have the option to retain some, or all, of the company’s underwriting profits each year. It would therefore be possible to hold substantial sums of money within the NameCo, which would be deemed to be assets of the company in the event of a loss and these could theoretically be called upon.

Is now a good time to join Lloyd’s?

The Future at Lloyd’s heralds positive change and evolution

On a positive note, there has been a great deal of change within Lloyd’s over the past two years, and this has coincided with an improvement in trading conditions.  Lloyd’s appointed a new executive team in late 2018, and it has undertaken the biggest and most radical strategic review of the market since the mid-1990s, in order to try and ensure that Lloyd’s can meet the future demands of the marketplace in a rapidly evolving world. In 2019, Lloyd’s launched the Future at Lloyd’s Blueprint One. Blueprint Two was released in 2020. A number of workstreams have now been created and are now developing processes to improve the efficiency, efficacy and profitability of Lloyd’s. Ultimately, Lloyd’s aim is to increase its trading efficiency, cut its costs and to deliver more consistent profitability across the market.

(Re)insurance rates are increasing

The worldwide (re)insurance market, in which Lloyd’s is a significant player, has just suffered four consecutive years of underwriting losses. As has been the case in the past, these recent losses have led to an upturn in rates and a re-wording of terms and conditions across many individual classes of business. These rating increases may continue to be imposed into the medium term future. 

Excess capital remains an issue

One of the biggest issues that Lloyd’s faces is that the worldwide (re)insurance industry still suffers from an over-abundance of capital. As has been the case in the past, excess capital can easily be committed to sectors of the (re)insurance market where rates are seen to be improving, and this over-commitment of capital can quickly lead to a downward turn in rating momentum.

Losses will still occur

In terms of its exposure to underwriting losses, it could be argued that whilst some of these, such as hurricanes, can be successfully built into Lloyd’s risk and rating calculations and models, others cannot be. It would be fair to say that there are other risks that can best be described as still-unknown, potential “black swan” events, which cannot be mitigated or planned for in advance. The most obvious example of this has been COVID-19 in 2020. Another issue whose potential effect is proving very hard to forecast is that of climate change and global warming.

Choose a Members’ agent

Prospective Members of Lloyd’s must choose a Members’ agent. There are currently three members’ agents at Lloyd’s who represent the interests of Members of Lloyd’s. The members’ agent’s main roles are to provide administrative services and support to the Member and to advise the Member on which syndicates to participate on for each year, as well as what the level of that participation should be. The members’ agents also regularly report on developments and results pertaining to their Members’ syndicates.

Decide whether to form a NameCo or Limited Liability Partnership

In conjunction with their professional advisers and their members’ agent, prospective Members must decide whether to underwrite via a NameCo or a Limited Liability Partnership (LLP). The choice of a NameCo or an LLP will depend upon the circumstances of each prospective investor. Some of the key issues that are usually taken into consideration by prospective Members are their personal tax position, funding flexibility and their future ambitions. Both structures provide limited liability investment, but there are some key differences between them.

The NameCo structure

NameCos are UK registered, private, limited liability companies trading as corporate Members of Lloyd’s and, subject to the appropriate approval of controllers by Lloyd’s, they can be formed for a single individual or for larger groups of connected investors.  A NameCo is subject to UK Corporation Tax on any profits it makes. NameCos have been a popular form of limited liability vehicle at Lloyd’s due to the flexibility of their structure and the ability (again subject to Lloyd’s approval) for them to be incorporated within existing corporate groups. Another attraction of NameCos has been the fact that the directors can opt to retain the underwriting profits within the company for an indefinite period of time.

The LLP structure

An LLP is a body corporate that is a separate legal entity which is distinct from its members who may be individuals or bodies corporate. In general terms, an LLP is transparent for tax purposes in the UK, and is consequently not a taxable entity in its own right. Profits from an LLP are treated as earned income in the hands of its members and taxed as such. Members pay tax at their marginal rate on the money paid out of the LLP. A key attraction of the LLP is that after two years, 100% Business Relief for UK Inheritance Tax purposes is available on the assets employed.

In both cases, it is vital to understand that it is the LLV that is the Member of Lloyd’s and not its shareholders or partners themselves. This means that both types of LLV are inter-generational vehicles that can trade on after the death of a given shareholder or partner. This has important tax implications. 

The documentation for the creation of a new LLV must be submitted to Lloyd’s before mid-September, prior to commencing underwriting the following January.

As from 1st January 2015, the Council of Lloyd’s also mandated that all Members of Lloyd’s must be UK tax resident. This effectively means that Members of Lloyd’s may now only participate through UK tax resident companies, a NameCo, or if trading in an LLP, all of the partners must be UK tax resident.

The minimum capital funding requirement for both a NameCo and an LLP is £350,000. In the case of an LLP, however, each individual member of the LLP is required to put up assets of £100,000.

There is an option to either create a new LLV or to buy an existing one

Buying an existing LLV

Prospective new Members have the option to either create a new LLV, or buy an existing one (that is put up for sale by a Member leaving Lloyd’s). One advantage of a new vehicle is that it has no legacy issues from previous years of account. LLV’s are regularly advertised for sale on the Members’ agents’ websites. LLVs are valued based upon the previous year’s auction prices and the latest syndicate mid-point forecasts for the open years. No value or liability is attributed to the current underwriting year. Bids may be submitted at a premium or a discount to the valuation. Purchasing an existing LLV allows for immediate underwriting cash flows, the potential to select a balanced portfolio (in that any unwanted syndicate capacity can be sold at the next Lloyd’s capacity auctions) and a more flexible timescale that suits the Member. 

Creating a new LLV

Unless they buy an existing LLV outright, Members must purchase a portfolio of syndicate capacity at the Lloyd’s capacity auctions, held each October, in order to build their new portfolio for the coming year’s underwriting. Capacity on some syndicates can be in short supply, and therefore very expensive, or even completely unavailable; and this may mean that it may be hard, or even impossible, for a Member to purchase the exact portfolio that they want when they first join Lloyd’s.

Buying capacity at the auctions

It should also be realised that purchasing capacity in the auctions requires a significant up-front capital investment. In 2020, the Lloyd’s weighted average price for syndicate capacity at the auctions was 20.9p per £ of capacity, which means that a £1 million portfolio would have cost a Member £209,000. This sum of money would have had to have been paid in November. The syndicate capacity is then owned by the Member/LLV, but Members should be aware that its value may fluctuate from year to year. It will also be deemed to be an asset of the LLV in the event of a loss. Capacity can be traded each year via the Lloyd’s capacity auctions as and when the Member wishes to change the composition of their portfolio. 

Pre-emption rights on syndicates

Once a Member owns capacity on a syndicate they benefit from ongoing pre-emption rights on the syndicate. A managing agent offers pre-emption to Members when it wishes to increase the underwriting capacity of its syndicate (for example, if and when it expects to write more business in the future, as rates are expected to increase). It is required to offer the same percentage increase in capacity to all Members of the syndicate in question. The participations of the Members of the syndicate are therefore increased proportionately to the extent of the managing agent’s pre-emption offer. For example, if a syndicate pre-empts its capacity by 10% then each Member’s line would increase by 10%. Members also have the option of selling unwanted pre-emption rights in the Lloyd’s capacity auctions.

Coming-into-line

In November each year, Members are required to come-into-line for the following year’s trading. In practical terms, this means that they have to deposit their FaL with Lloyd’s in order to capitalise their underwriting for the following year. As noted, Members of Lloyd’s enjoy the double use of their assets, in that qualifying investments (such as stocks, shares, or bonds) can be used to support the underwriting of their LLV. The Member earns a return from both their investments and from their Lloyd’s underwriting, which is supported by those assets, or FaL.

The LLV goes “on risk”

The new year of account, in this case 2022, officially begins on 1 January 2022. The Member is then “on risk” for the year, which closes in 36 months, and which is usually settled at month 42.

Members’ agents contact details

Alpha Insurance Analysts Limited

Websitehttps://www.aianalysts.com

Alpha Insurance Analysts Limited
107 Fenchurch Street
London
EC3M 5JF

Tel: +44(0)20 7767 342

Contact Ronnie Gray by emailing:

ronnie@aianalysts.com

Argenta Private Capital Limited

Websitehttp://www.argentagroup.com/investing-at-lloyds

Argenta Private Capital Limited
70 Gracehchurch Street
London
EC3V 0XL

Tel: +44 (0) 207 825 7241

Contact Guy Hudson by emailing:

guy.hudson@argentagroup.com

Hampden Agencies Limited

Websitehttps://www.hampden.co.uk/hampden-agencies

Hampden Agencies Limited
40 Gracechurch Street
London

Tel: +44(0)202 7863 6500

Contact Alistair Troughton by emailing:

alistair.troughton@hampden.co.uk

Further reading and resources

The Lloyd’s website contains some valuable background material which will be of assistance to prospective new Members.

Find out about Lloyd’s from its website:

https://www.lloyds.com/about-lloyds/what-is-lloyds

Find out more about Member Sevices here:

https://www.lloyds.com/conducting-business/member-services

Lloyd’s also publishes a useful glossary of insurance and Lloyd’s terms here:

https://www.lloyds.com/help/glossary-and-acronyms

Lloyd’s also has a separate section of its website that details the work that it is doing on the Future at Lloyd’s project:

https://futureat.lloyds.com

For further information, or if you wish to discuss any aspect of Lloyd’s membership in more detail, please contact the Association of Lloyd’s Members’ CEO, Belinda Schofield

Email              belinda.schofield@alm.ltd.uk

Telephone      0207-283-0931

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