Business Focus: Rare breed of high-rollers still playing Name game at Lloyd’s

“There are not a huge number of syndicates now that are capitalised with private capital,” says David Gittings, chief executive of underwriters’ trade body Lloyd’s Market Association. “Most of them are capitalised with corporate capital, although there are lot of syndicates which do have Names on them.”

The Association of Lloyd’s Members says about 10% of the total capital invested in Lloyd’s comes from individuals, down from 15% a decade ago.

Most individuals have limited liability but old-school Lloyd’s investors — known as Names, who are on the hook for unlimited losses if disaster strikes — still exist.

There were 32,000 of them in 1988 but today there are just 295, writing about 1% of capital at Lloyd’s.

New entrants on an unlimited basis were banned in 2003 following large losses after 9/11 and are declining by about 10% a year.

The other 90% of Lloyd’s £28 billion capacity comes from corporate giants ranging from US billionaire Warren Buffett’s Berkshire Hathaway to big Japanese insurers.

They may be a niche element of Lloyd’s these days but with the 328-year-old institution facing further upheaval over the next few years — from Brexit, low interest rates and a looming leadership overhaul — many believe private capital has never had a better opportunity to grow.

“I’m very bullish,” says David Monksfield, executive chairman of Argenta, which helps private investors tap the market. “So long as it’s the right opportunity with the right potential on the right terms, we want to grow our footprint.”

Argenta has on its books about 600 wealthy people, who will collectively invest around £1.8 billion in Lloyd’s syndicates next year.

“Private capital is an integral part of Lloyd’s. If you were to take private capital away, you would change the structure quite significantly,” Monksfield adds.

Lloyd’s likes private capital because rating agencies such as S&P give it a higher credit score (the greater variety of capital at Lloyd’s, the higher its rating).

Historically, large landowners were attracted to Lloyd’s because they could pledge their land as collateral for their investments, helping them earn an income on their country piles.

Today, a similar principle applies. For every £1 private investors commit, they are allowed to underwrite £2 of premium. They can use stocks and shares as collateral, meaning they get a double return on their assets.

The amount of private wealth at Lloyd’s has remained at between £2.4 billion and £2.8 billion over the past decade, despite the benefits.

One reason may be the archaic rules governing the rights of individual investors, which often put syndicate managers off accepting their investments.

Under the freehold tenancy in perpetuity rule, individual investors can in theory request to remain on a syndicate forever, often at the expense of deeper-pocketed corporate capital trying to buy in.

Getting onto a Lloyd’s syndicate can be costly for individuals, who have to pay upfront — typically 35p in the pound — to join, which dilutes the money they can make. Add in low levels of return, a common grumble across the insurance industry, and the picture becomes more mixed.

But there are tremors of change that could spark an increase in private investment.

James Sparrow, a veteran who founded Alpha Insurance Analysts to help individuals invest in Lloyd’s, looks after about 230 — most with assets of £10 million upwards. He says they have the firepower to ramp up their investments by 200% to 300% when the markets return to health.

“There is a lot of powder being kept dry at the moment,” he adds. “[Lloyd’s chairman] John Nelson has been keen to encourage further participation by private capital but we have been slow in going forward because we think the market terms are weak. Although Lloyd’s is a long-term investment, timing is everything.”

Two new syndicates are launching in January, backed predominantly by private capital. Blenheim, a £150 million underwriting syndicate, is backed with £100 million of cash supplied by clients of Argent, Alpha and others plus £50 million of corporate cash from hedge fund Nephila.

Another, Verto, is bankrolled by individual investors linked to Hampden Agencies, Lloyd’s biggest supplier of private capital.

Says Gittings: “Starting up a business capitalised privately is definitely one to watch. A lot of successful underwriters who are working for some of the larger businesses which have got merged or acquired have been dislodged from their positions and are looking at opportunities.”

Lloyd’s entrepreneurial bent, which has been diluted by corporate capital, also often keeps costs lower and creates more loyalty. Says Monksfield: “If you go to the capital markets, it’s very expensive to raise capital. Private capital is very independent and well-structured.”

What could really drive up private capital numbers is an exodus of corporate capital. Lloyd’s members have enjoyed record profits for several years because there has been no major disaster.

Some say insurers are due to be hit by an event that could cause severe losses and spark an exit of corporate capital. Private investors, imbued with a loyalty to Lloyd’s, could steal back some market share as corporations flee.

Whatever happens, for some, insurance’s inherent riskiness will always keep them coming back to Lloyd’s for more despite the bumps ahead.

“The results are more even but some members used to like the excitement of seeing a lovely Bentley and thinking that maybe if Lloyd’s had a really good year they might be able to have one,” Broughton says with a glint in her eye.

The heiress and her fellow investors will be hoping they see more Bentleys in future.