View from City Road: Finsbury Trust jumps the gun

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The Independent Online
Rea Brothers, the small merchant bank, and Finsbury Asset Management have stolen a march on larger competitors by producing a mini-prospectus for their Finsbury Underwriting Investment Trust, one of the seemingly numerous vehicles that are keen to provide limited liability capital to the Lloyd's insurance market.

Since Lloyd's is still two weeks away from setting out its corporate capital requirements, Finsbury has taken a bit of a flyer, and its eight-page pamphlet is accordingly sketchy. It is still not entirely clear whether corporate investors will be able to make use of investment trust status - though the Stock Exchange is keen to help Lloyd's out of its hole.

Finsbury Underwriting is seeking to raise pounds 35m and has recruited UBS to help Rea Brothers look for investors.

Lloyd's has acquired the reputation of a financial basket-case; so who will invest? Many pension fund trustees will be frightened off by Lloyd's reputation and the risks. Insurance companies are already in the business, and do not need anyone else to run their insurance investments. Fund managers are too short-term in their outlook to be interested in an investment that will rely on Lloyd's three-year accounting.

This is the case against Finsbury Underwriting and the other corporate capital providers. But there is near-unanimity that the insurance cycle is, thankfully, on its upswing. US investors have already piled hundreds of millions of dollars into Bermuda-based insurance companies. Investing in Lloyd's seems to offer a similar opportunity for attractive returns.

The arrival of corporate capital will force underwriting syndicates to provide much better information about the business they are accepting and earlier indications of their claims record. If the limited liability investors are doing their job, this should be communicated to their shareholders. Those who do not like what they hear will be able to sell their interests in the stock market - perhaps the biggest change from Lloyd's traditional way of working.

The arrival of corporate capital could quickly see the end of the traditional Lloyd's 'name'. Given recent experience, it is hard to imagine why most of the existing members would want to expose themselves to unlimited liability.

Finsbury Underwriting intends to select its syndicates using Wren Underwriting Agencies, which claims a better record than many of its competitors. None the less, Wren still lost 8 per cent of its members' premium income limit in the 1990 year of account.

Relying on members' agents who have failed in the past may be the weakest part of the case for corporate capital.

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