Special Report on Investment Trusts: New blossom for a corporate breed: For the first time in the insurance market's 300-year history people can invest at Lloyd's without risking all. Alison Eadie reports

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The Independent Online
A NEW breed of investment trust started trading in November and December last year. Nearly all went to an immediate and significant premium to the offer price.

The 12 new trusts are among the first corporate members of Lloyd's of London insurance market. They raised capital of pounds 804m to underwrite insurance business at Lloyd's from the beginning of this year.

For the first time in the insurance market's 300-year history investors are able to place money at Lloyd's without risking their all. Instead of individual unlimited liability, corporate membership provides limited liability. Those investing through a corporate capital investment trust can lose no more than the money they put in.

A run of disastrous losses at Lloyd's forced it to change the structure of its capital base or risk shrinking into insignificance. In 1988, 1989 and 1990 (Lloyd's accounts three years in arrears) the insurance market accumulated losses of pounds 5.5bn. This spring Lloyd's expects to announce a loss of more than pounds 1bn for the 1991 year of account. The effect has been to drive individual members or 'names', who previously supplied all Lloyd's capital, out of the market.

From a peak of more than 33,000 names in 1988, only 19,500 signed up for business this year. Lloyd's capital base fell from pounds 11.4bn in 1991 to pounds 8.8bn last year. This year corporate capital has provided an extra pounds 1.6bn - for every pounds 1 of capital pounds 2 of insurance business can be written - boosting capacity to pounds 10bn.

The first returns on corporate capital will not be known until 1997, when the accounts of 1994 will be published. However, the investment rationale for piling money into a market losing billions is that the insurance cycle has turned, insurance premiums have risen and profits are around the corner.

Lloyd's hopes to show a 'pure year' profit in 1992 (after excluding old year liabilities) and believes that 1993 could be a vintage year. Its goal of achieving a 10 per cent return on premiums encouraged some investment trust companies to project returns of more than 20 per cent. The argument is that 10 per cent return on premiums is equivalent to a 20 per cent return on capital, because of the 1:2 ratio of capital to business written. In addition there will be a yield from the investment portfolio.

Lloyd's trusts not only offer limited liability, but far greater liquidity. Names have to wait three years to resign and may have to keep meeting obligations from problem syndicates. Investors in Lloyd's investment trusts can simply sell their shares, if they want out.

The new trusts are riskier than conventional UK equity investment trusts. Advisers put them on a par with emerging markets. Insurance is a cyclical business, prone to upset by natural and man-made disasters which can plunge Lloyd's syndicates into losses.

In practice the Lloyd's trusts are widely spread. The largest, London Insurance Market Investment Trust (Limit) with pounds 2280 capital ralsed, has capacity on 98 syndicates representing half Lloyd's total.

Syndicate selection is a vital ingredient in making profits. About half the trusts have Lloyd's members agents as advisers. The others draw on wider expertise including insurance brokers and regulators.

The argument in favour of agents is that they can demonstrate track record and have more influence with syndicate underwriters to secure the best quality capacity. Finsbury Underwriting Investment Trust is advised by Wren Underwriting Agencies, which showed the best performance between 1987 and 1990 of any member's agent with capacity over pounds 50m.

Other points of difference between Lloyd's trusts are their costs. Profit commission paid to advisers is usually between 5 per cent and 7.5 per cent but Limit, because of its in-house research, is charged only 1 per cent. Investment management fees also range widely.

Capital growth is expected to characterise Lloyd's trusts within the next three years, according to stockbrokers Gerrard Vivian Gray. From 1997, when income from underwriting becomes distributable, the attraction will be high yield. The trusts qualify for general Personal Equity Plan status, an added bonus for investors wishing to avoid income and capital gains tax.

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