Companies ready to pile into Lloyd's: Limited liability and promise of high returns attracts corporate investors

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The Independent Online
THE Lloyd's insurance market, traditionally the preserve of rich individuals - 'names' - is about to open its portals to corporate cash. This Wednesday, members will vote on proposals to let corporate investors enter the market without risking their shirts through unlimited liability.

Considerable interest has already been expressed, with a line-up of merchant bankers, brokers and underwriters all eager to get in on the act. Plans for 15 corporate vehicles have so far been confirmed, with up to eight more rumoured. Together they are expected to raise up to pounds 1.5bn, an astonishing sum for a market widely seen as such an unmitigated disaster.

Most have devised their schemes along similar lines. They will be set up as quoted investment trusts, with a series of subsidiary underwriting companies able to place capacity up to twice the value of the trust funds. The funds that provide this collateral will themselves be invested in FT-SE 100 stocks or gilt-edged securities, thereby generating dividend income in addition to the underwriting profits.

This double source of revenue partly accounts for the glowing returns promised by the new vehicles - which will apply for the capital gains tax exemption normally accorded to investment trusts. But the more important factor is what, in effect, equates to interest- free gearing.

Most hope to match or exceed the average annual underwriting profit of 10 per cent that Lloyd's has laid down as a target. This would produce a return on capital of about 20 per cent, since every pounds 100 of assets underwrites pounds 200 of insurance business. With a further 4.7 per cent yield from investments in the FT-SE 100, the total return (excluding costs) would amount to nearly 25 per cent.

However, big returns are generally the result of big risks, and the new investment trusts are unlikely to prove an exception. All say they will secure the best capacity on the best syndicates, but many privately doubt there is pounds 1bn worth of surplus quality capacity. So some trusts may be forced to compromise on the quality of the business they write.

In jockeying for capacity and customers, they are also split over how to secure the necessary underwriting know-how. Some, such as Premium Trust, have chosen to work with an existing underwriter on the grounds that this offers best value. Tim Noble, head of the sponsors Noble & Co, points out that it would cost a great deal of time and money to find out 'what's going on at Lloyd's, who's writing what and who's getting drunk every afternoon'.

Rival investment trusts admit that it costs a fortune, but they have none the less chosen to develop their own expertise. Limit, the investment trust jointly set up by Samuel Montagu and James Capel, has pioneered this approach. Since March, it has conducted exhaustive investigations into the performance and standing of every underwriter and syndicate at Lloyd's. Such analytical disciplines are reputed to have come as something of a shock to certain underwriters.

By skirting links with members agencies, Limit says it has avoided any conflict in deciding which business goes to names and which to corporate investors. It has also avoided too close an association with past practice or an underwriting institution of dubious repute.

The new schemesare strictly long-term investments. They will pay dividends in the usual way but, since it takes three years to determine the underwriting profits from any one year, the profit component will be postponed accordingly. This will reduce the trusts' trading liquidity.

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