The UK stock market may be lagging other indices but investors are often getting double digit returns by backing one of the country's oldest industries - insurance.
Investors gained around 25% by backing Lloyds of London syndicates last year, helping transfer the risk of insuring against events such as fire and floods.
The return on capital can vary but there are also plenty of tax benefits.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lloyd’s of London is one of the UK’s oldest marketplaces, helping syndicates and members' agents arrange and fund insurance and reinsurance for businesses, organisations and individuals.
It's building is a key landmark in the City of London and was setup as a coffee house more than 300 years ago to help insure ships.
But it has grown into a major sector across broad categories.
The insurance and reinsurance sector contributes almost £50 billion to the UK economy – 2% of GDP overall, an increase of 26% on 2020, according to trade body the London Market Group.
Investors and the syndicates they back are key to the market, providing returns uncorrelated to the stock market.
For example, during the 2008 financial crisis, UK equities dropped 29.9% in 2008 but Lloyds market was up 17.7%.
Similarly, during the coronavirus pandemic in 2020, UK stocks fell 26.1% while Lloyds of London's syndicates were up 16.9%.
If you are worried about the prospect of a capital gains tax raid under the new Labour government, there are a also reliefs that can be used through a Lloyd's syndicate.
On top of the returns, investing in a Lloyd’s syndicate can also help reduce your capital gains bill and your estate’s inheritance tax liability.
“There are lots of tax advantages, however these should be seen as the icing on the cake, rather than the cake itself,” says Jon Jacobs, Head of corporate tax client services for Lloyd’s syndicate members' agent Argenta Private Capital.
“The main reasons to invest should be the other benefits a Lloyd’s investment can offer, notably the double use of assets, the diversification of an investment portfolio, the low correlation with other asset classes and the strong returns on capital the market is currently generating. Professional advice should be taken on both the investment and tax aspects.”
Here is what you need to know.
What is a Lloyd’s of London syndicate?
Insurance is an important product for people and businesses, covering everything from cars to cyber-attacks.
An insurance product essentially reduces risk for a policyholder.
But the provider now has that risk to manage. It needs to have enough money in place to manage payouts, which is where the syndicates come in.
A Lloyd’s of London syndicate lets institutions and high-net worth individuals provide capital to back up insurance and reinsurance policies sold by insurer members and brokers, which reduces and transfers the risk for providers.
How to invest in a Lloyd's of London syndicate
Investing in a syndicate is more complex than building a stocks and shares ISA.
Investors are advised to only commit a maximum of 10% of their assets and you typically need at least £1 million as an initial investment to accommodate for initial fees to make the investment worthwhile
To invest in the Lloyd's market, you first need to find a members’ agent.
These are regulated firms that act as bespoke wealth managers for investors in the market and include brands such as Argenta Private Capital and Hampden Agencies.
You will need to pay a fee, which could range from around £13,000 and grow with the size of the investment
Syndicates operate across different areas of the insurance market specialising in various classes of business and areas of the world.
This means each has its own risk profile to consider.
Most will combine sectors such as shipping or even cover kidnapping or terrorism.
A members’ agent will assess an investor’s needs and risk profile to recommend a syndicate or portfolio of syndicates to invests in.
The returns on offer from Lloyd's of London syndicates
Investors make a profit from the difference between premiums and claims on the policies in the syndicate.
This means if there is a year with few claims, you have a good chance of making a profit, but this may be reduced when there are major insurance events such as an earthquake or major incident that pushes up payouts.
Any profits made by the syndicate are shared among investors.
Returns can potentially range from 15% to 25% in a good year, but there may be losses when there has been a period of large payouts.
An important figure for investors is the combined ratio. This is the ratio of total underwriting losses and the costs of running the business compared with the total amount of premium income received.
Every insurance company aims to have a ratio of below 100% as it means they are receiving more in premiums than what they are paying out, boosting syndicate profits.
The market posted an underwriting profit of £5.9 billion in 2023, up from £2.6 billion in 2022 and representing a combined ratio of 84%, the strongest since 2007.
Performance can differ depending on the syndicate.
For example, Argenta Private Capital's clients have seen an average return on capital of 11% over 15 years. The best annual return in the 15-year period up to 2023 was 40.1% and the worst was a 14.4% loss.
Yiannis Zourmpanos, an investment analyst at Yiazou Capital Research, says the main perk of backing a syndicate is that you could earn higher returns than you would from regular stocks and bonds but there are risks.
“You may lose cash if the syndicate has a bad year,” he says. “It also takes a while, usually three years, to know your exact earnings.
“The process can feel complex too - you work through middlemen instead of investing directly. And setting up a new syndicate costs a bundle in fees.”
Why consider a Lloyd's of London syndicate
There are other benefits to backing a syndicate beyond the returns,
One of the main ones is called double use of assets.
This is where investors pledge other assets such as cash or shares to support insurance underwriters with case claims i- known as funds at Lloyds (FAL).
It means an investor benefits from the return of their assets such as dividends from stocks as well as the syndicate performance.
Depending how your investment is structured, there may also be tax reliefs available.
Investments in Lloyds qualify for business relief, which exempt them from the value of the estate when calculating inheritance tax.
Business asset disposal relief (BADR) is available when exiting a Lloyds syndicate investment.
Gains qualifying for BADR are taxed at a flat rate of 10% and relief is available on up to £1 million of capital gains for each individual over their lifetime.
You can also use rollover relief, which means you don’t pay capital gains on the profits from the sale of an asset such as a business if the funds are put into a qualifying asset such as a Lloyds syndicate.
The double use of assets perk is also tax-efficient as you can use losses from your FAL to reduce your tax bill on profits from the rest of the syndicate or vice versa.
Beyond the syndicates
Investing in a Lloyd's syndicate is most suitable for high-net worth and sophisticated investors, but there are alternative ways for retail investors to get exposure to the market.
You could back insurance stocks such as Hiscox (LSE: HSX), Beazley (LSE: BEZ) or Lancashire Holdings (LSE: LRE) and hold them in an ISA.
Alternatively, investors can get exposure to a portfolio of syndicates by purchasing shares in alternative investment market listed Helios Underwriting.
The firm, which also has an investment partnership with Argenta, builds a portfolio of different syndicates, giving investors a lower-cost way to access the market as you buy a share in the company rather than investing directly in the underlying syndicates.
You also benefit from business relief and can include the stock in your ISA or self-invested personal pension.
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
Inheritance tax receipts jump 11% even before Autumn Budget overhaulOfficial figures show inheritance tax receipts are rising even before the chancellor’s changes to reliefs
