A New Twist On Smart Diversification - The Insurance Syndicate Path
This article argues that investing in the historic Lloyd's of London insurance market generates average annual returns of 10 per cent over the long run, but also gives real diversification by asset type and the business cycle.
The following article comes from Argenta Private Capital and concerns the well-trodden but crucial topic of diversification. The author is Robert Flach, managing director at Argenta Private Capital Limited.This article looks at what comes in investing in the Lloyd’s of London insurance syndicate market (this news service has looked at this topic before). While readers may think they’ve encountered every view possible on this topic, there is always a new way to frame discussions. The editors are pleased to share this content. The usual disclaimers apply. Respond by emailing email@example.com
Throughout 2022 and at the beginning of 2023 there was one word that kept coming up in the conversations we were having with investors and the investment management community: diversification.
Building a portfolio diversified by asset type, geographic exposure and sectors has always been critical for all types of investors, but for family offices and high net worths who have options in both private and public markets, the question becomes more about which opportunities they should take up.
Investing at the historic Lloyd’s of London insurance market not only generates average annual returns of 10 per cent* over the long term, but it provides significant diversity by asset type and economic cycle coupled with low correlation to other asset classes**. In fact, when looking at the returns profile at Lloyd’s, it has often performed best counter cyclically. For example, in 2008 at the height of the global financial crisis APCL achieved a 17.7 per cent return on funds in Lloyd’s, followed by a 40.1 per cent return in 2009.
Investors at Lloyd’s of London pledge their capital to a pool of around 90 specialist insurance syndicates, all of whom underwrite a variety of different risks across the globe, comprising a range of different business lines. While US Property has traditionally been the largest class of insurance underwritten, investors will often have exposure to a range of esoteric or emerging sectors such as cyber risk, terrorism or fine art.
Whatever the class, the basic principle is the same across the board: in good years, premiums exceed pay-outs and investors profit, while in bad years, pay-outs exceed premiums, and a limited loss is incurred***.
Current market conditions
Lloyd’s is currently during one of the hardest markets in years. Insurance rates have risen for 21 consecutive quarters, with rates in certain classes having increased as much as 37 per cent year on year****. This leaves the insured paying more for their insurance cover to the benefit of the syndicates and their investors. Lloyd’s market result has recently been posted and is 91.9 per cent for 2022, or the equivalent of only paying out 91p in claims and expenses for every £1 of premium received; in their view, Lloyds's is about to experience its best returns since 2014.
Investing for the long-term
Family offices and high net worth individuals are uniquely placed to benefit from the time horizons that are typically involved at Lloyd’s. Investment vehicles set up at Lloyd’s are often structured with the expectation that they’ll be passed through generations, making them an ideal asset for those interested in estate planning and the transition of wealth to the younger generations.
Investors have the option to build bespoke investment vehicles which are suitable to their individual set of circumstances, whether that be from a risk or regulatory perspective.
And when looking at longer term investment horizons, the tax treatment of these vehicles becomes an important factor, as it is with any asset class. This is particularly pertinent as we approach the beginning of April and the end of the UK tax year when people’s minds are focused in on their tax bills.
Investors in the Lloyd’s of London market who are subject to UK Inheritance Tax and have been invested in Lloyd’s for more than two years qualify for Business Relief, which provides 100 per cent relief for the value of the assets for Inheritance Tax purposes, subject to meeting certain requirements. This has obvious advantages for those looking to pass on assets to the next generation and is a favourable tax treatment compared to many asset classes.
A high net worth investment
Investing at Lloyd’s is an attractive option for family offices and HNW individuals. To gain maximum benefit from it, investors should look to invest a minimum of £1,000,000, accounting for no more than 15 per cent of their total net worth.
*based on Argenta’s clients’ annualised average returns over the last 10 years
** These figures demonstrate the average returns since 2003
***Losses are limited to the capital pledged to the limited liability underwriting vehicle
**** Source The Marsh Market Index Global Insurance Market Index
2022 | Global Insurance Market Index | Marsh