The capital provided by Names at Lloyd’s has fallen from 100% to just 10% – are we seeing the end of a long tradition?
For 325 years, much of Lloyd’s of London’s business has been funded by capital provided by individual people. These individuals, known as ‘Names’, once contributed 100% of the capacity for Lloyd’s but have slowly watched their prominence deteriorate due to the rise of new sources of capital.
In June 1993, Lloyd’s of London confirmed it would allow corporate capital to enter the market for the 1994 underwriting year. For over 300 years, the insurance market had raised capacity exclusively through private investment. Breaking with tradition, this shift would be the first time that corporate investment would enter the fold.
Over the past 23 years, Names have slowly watched as their influence has lessened and corporate capital has provided an increasing share of the market’s capacity. Today Names provide 10% of the total capacity of Lloyd’s, while corporations such as Amlin, AIG and Warren Buffett's Berkshire Hathaway provide more than 80% of the Lloyd's capital.
Behind the glass and steel clad façade of the Lloyd’s Lime Street headquarters, a battle is raging for when private capital drops below that 10%, Names will no longer have the right to sit a member on the Lloyd’s council and, therefore, they will no longer have a voice.
Names have been central to keeping Lloyd's alive. They were the ones who bailed out the market during the asbestosis crisis in the 1980s, when Lloyd’s had underwritten long-term health insurance, and asbestos-related claims caused many companies to go bust. The Names were required to bail out Lloyd’s again when it suffered huge losses in the 1990s from hurricanes and tsunamis. As Lloyd’s suffered, so did the Names, with hundreds of individuals declared bankrupt as they struggled to pay for the market’s vast losses.
The move from private to corporate capital Names such as Charlie Sturge pledge their fortunes to back insurance policies sold at the London Market. They cover all things from political risk and natural disasters to oil rigs, shipping, airplanes and spacecraft.
Sturge has deep roots in the Lloyd’s market. His family ran one of the largest managing agents in Lloyd’s, controlling 8% of the market back in the 1980s, with Sturge joining the family firm in 1972. After leaving Lloyd’s he went into commodities, remaining both a Lloyd’s member and a Name. He witnessed the change from private to corporate capital first hand.
“Until 1994, when corporate vehicles were allowed, 100% of the capital, the whole of Lloyd’s, was private capacity,” he recalls.
“When corporate capital came in, the Names were upset about it but there was nothing they could do.”
The beginning of private capital had little impact on the Names at first, he says. With over 100 syndicates available to join, Names carrying unlimited liability had little cause for concern.
“It didn’t make that much of a difference for the unlimited Names initially. But gradually as you went through the 1990s into the 21st century, increasingly syndicates became corporate and were bought up by private capital.
“Once there were 160 members agents. There are now only three members agents catering for 2000 Names, not many of whom are still unlimited. Everyone is now encouraged to go into limited liability. It goes back to 1994, when they allowed corporate vehicles in and any Name could become a limited liability vehicle.”
In December 2015, there were 97 syndicates at Lloyd’s. Some of the companies that manage Lloyd’s syndicates would like to push the dwindling Names out the door in the name of modernising the market. These companies say it is costly and inefficient to juggle lots of relatively small investors under the market’s complicated rules.
Sturge says that he can see how the complications associated with Named capital represent a challenge for the market.
“Lloyd’s likes the corporate capital because it’s far easier administratively,” he notes. “Names are a pain from an administrative point of view. Lloyd’s
has got 2000 or so individuals to deal with and when it has a single corporation that enters the market writing over a billion pounds of premium income, Lloyd’s has only got one unit to deal with. It’s far simpler and from a Lloyd’s perspective, I can see no reason why it wouldn’t want the whole thing to be corporate.”
The critical 10%
As Lloyd’s seeks to modernise, private capital is under threat, in Sturge’s view.
“There’s every chance the Names are going to be squeezed out,” he says. “When we drop below 10%, we lose our right to have a membership on the council. So that 10% is very critical.
“At the moment, private capital has two members on the council, so we have a voice where we can put our concerns on the council. The trouble is, when you’re only 10% of the capacity, no one really wants to listen to you.”
Despite a fear that they will lose their place in the market, Sturge says Names remain content as long as Lloyd’s remains profitable.
“Everyone is happy so long as it is making profit. No one will really criticise anything that’s going on until losses suddenly appear. There’s been a ‘golden run’ with uninterrupted profits since 2005, except for the year 2010.”
It is this profitability that makes the Lloyd’s market so attractive to both private and corporate investors, says Sturge.
“Everyone is pretty happy at the moment. They are nervous when they read about rates continuing to drop and they are very nervous about the way private capital is being treated. Private capital hasn’t got many friends in the corporation of Lloyd’s. The corporation would like to see the whole thing corporate.”
One of the problems facing private capital investors is finding capacity.
“There are only about 10 syndicates that are worth looking,” says Sturge. “You’ve now got to buy capacity in the auction.”
“When you’ve been a Name for as long as I have and your capacity was free, now to have to go out and buy it and pay as much as 80p in the pound for it and that can just go very quickly, it’s a big gamble and can result in a large capital loss.”
Sturge knows only too well the results of when the gamble doesn’t pay off for investors, having experienced first hand the pitfalls of being a Lloyd’s Name.
“Since 1960 we’ve had a series of waves that have hit Lloyd’s. We had a big catastrophe in 1965 with Hurricane Betsy and I was a Name at the time; I didn’t even get a cheque for seven years. It was as bad as that. I couldn’t believe my luck when in 1974 I received a cheque for £500; I was amazed.”
In 2002, Sax Riley, then Lloyd’s chairman, proposed a series of radical reforms designed to modernise the Lloyd’s market.
The reforms, presented through a consultation document, recommended putting an end to the market’s system of reporting profit and loss three years in arrears, and halting the ‘Annual Venture’ – the practice whereby Lloyd’s in effect disbands itself and reforms every year.
But the most radical of the suggested changes was to bring an end to the practice of allowing Names to risk all of their assets by underwriting insurance policies on an unlimited liability basis. And the plan called for forbidding anyone to join the market with unlimited liability after 2002 although individual Names at the time could continue to invest with unlimited liability.
From 2005, Lloyd’s said in the consultation, it wanted all Names to participate in the market on a limited liability basis – which would mean Names would not lose everything if the market does very badly but will also only receive part of any profits when it does well.
Speaking at the Association of Lloyd’s Members national conference in May 2002, Riley said: “We still hold the view that the concept of unlimited liability is no longer viable in this era of ever increasing risk. It is no longer appropriate for individual underwriting members of Lloyd’s to hazard their entire personal wealth.
“In today’s world, Lloyd’s can no longer sustain financial performance which goes from profit to a heart attack every five years,” Riley added. “If we do not get this right, any debate over the provision of capital to the market will be academic. Capital providers will just stop putting up money – it’s as basic as that.”
Some 14 years later and private capital is still present in the Lloyd’s market.
In 2012, Lloyd's launched its Vision 2025 plan for the future. On the subject of capital within the market, the plan states: “Lloyd’s capital base will be globally diverse. There will be overseas trade capital bringing in new specialist business and people to Lloyd’s from countries where Lloyd’s needs to increase its market share.
“Private Names capital will continue, but to grow and flourish it will need to be re-energised and provided on a more flexible and efficient client basis.”
The Future of Private Capital
A report on the future of private capital at Lloyd’s was authored by Resolution Underwriting chairman Christopher Harman and Ian Clark, a Deloitte partner, this year. It was co-commissioned by Alpha Insurance Analysts, Argenta Private Capital and Hampden Agencies.
It canvasses the views of 22 managing agents and various senior Lloyd’s market participants on the current provision of private capital to Lloyd’s and studies various ideas and opportunities that might enable the level of private capital in Lloyd’s to increase in the future.
“The private players are really pleased with this report, they’re very pleased that private capital is still relevant because corporates and hedge funds managers are waiting in the wings to move in,” said Howard Evans, executive secretary for the High Premium Group, which was set up in 1994 to advance the interests of private capital providers who underwrite at Lloyd’s.
“The report is saying that Lloyd’s likes a mixed capital base. The study says what makes Lloyd’s strong in their opinion, and the managing agents feel the same, is a diverse range of capital because it gives them security, it enhances the Lloyd’s rating and they don’t mind, provided the way in which they receive that capital is not too complex and not expensive.
“I must confess I thought private capital would have been squeezed out; we’re now emboldened and cheered by this report.”
The High Premium Group represents the interests of its members to the council of Lloyd’s and other appropriate authorities to ensure that they are taken into account in the development of regulations and the administration of the market.
Membership of the HPG is aimed primarily at those individuals underwriting at least £1m. Many members write considerably more than £1m and HPG members provide a substantial part of Lloyd’s private capital base. They underwrite as traditional unlimited Names or through Namecos (limited liability partnerships), Scottish Limited Partnerships and LLPs.
Evans sums up the report: “Providing private capital remains nifty and not too much of a pain in the neck, providing the speed and access to capital remains fast and without the need to jump through a series of hoops, then the market is very happy to have private capital in the mixed bag.”
There is an awareness that when the market goes sour, which unfortunately it does every so often, the capital from corporates and hedge funds won’t hang around after two or three years of bad returns but the Names tend to stay because they have seen it all before and because they have huge reserve funds as they are not able to draw out all of their profits.
“They are carrying forward a lot of capital that is tied up – the syndicates like that,” says Evans.
“Going forward, the market will be saying to Names that when we need the capacity, we want it and we want it fast; we don’t want to give you freehold capacity and make you a shareholder, which is what the old system was. On that basis I feel that Names will carry on.”
The benefit of loyalty
One of the prevailing messages about the benefits of private capital is that it is loyal and is generally very secure.
One syndicate, called Map, has taken this idea to the extreme and set up entirely on the funds of third-party and private capital, thereby in theory ensuring its survival.
“We favour the traditional third-party capital because in our experience it is very loyal,” explains James Denoon Duncan, managing director of Map.
“To be honest, private capital has been very good for us over the years, providing us with additional capacity quickly when we have asked for it.”
“Names remain a crucial part of the Lloyd’s market,” he insists. “There are those within Lloyd’s who want it to disappear because it’s viewed as a complicated, old-fashioned and more time-consuming means of securing capital.
“This is a rather simplistic view in my mind, an enormous mistake,” he concludes. “Within the market we have been discussing and worrying about Names for more than 20 years. I expect we will continue to debate the situation for another 20.”
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