- IPO seeks to get off the ground
- Lloyd's insurance market in boom phase
There still exists enduring memories of the Lloyd’s Names scandal. In our case, the sudden appearance of a second-hand “new” quad bike in the garage, plus the discounted purchase of an adjoining field to drive it around in, was the first inkling that all was not well with our neighbour’s finances in the autumn of 1988.
A year after a terrible hurricane had devastated the country, often oblivious households were suddenly presented with vast bills to cover the damages after often inadvertently finding themselves to be official Lloyd’s Names – named members of an under-writing syndicate. Lloyd’s racked up total losses of £8bn between 1987 and 1991 after a series of closely spaced and unusual manmade and natural disasters, and handed the bills onto shareholders who had unlimited liability exposure. It took years of reform, an Act of Parliament and a long compensation process to try draw a line under the worst crisis in the recent history of the world’s oldest insurance market.
However, it is now clear that more than a generation after the event, the reforms that have been put in place, plus 22 consecutive quarters of insurance rates improvement, have started to attract the attention of new investors. Indeed, retail investors might have another route to investing in the booming Lloyd’s market if a potential IPO from special purpose acquisition vehicle (Spac) Financials Acquisition Corp (FNWR) can successfully get off the ground.
The company has been flagging a possible £500mn offering, aimed partly at retail investors, since the summer that will engineer a listing on the stock exchange via a reverse takeover of London Innovation Underwriters (LIU). The offering is technically classed as a placing, but with a primary bid system managed by joint-bookrunners HSBC and UBS. The newly created entity will then use the proceeds to invest directly in acquiring a book of Lloyd’s market syndicates. If the reverse takeover is completed as expected in the coming weeks, it will have the distinction of being one of the few, and largest, on the London market this year.
The Spac structure may not be to everyone's taste, however. Even those who bought in initially were not sold on the Lloyd's plan, with investors pulling back over £130mn out of £150mn raised at listing in 2022 through the redeemable share arrangement.
Accessing Lloyd’s
By any measure, the Lloyd’s market has had a successful year, so far. The market posted £3.9bn pre-tax profits at its interim results, based on a combined ratio of 85 per cent.
There are existing ways in which retail investors can access Lloyd’s. The simplest route now is simply to buy shares in specialist reinsurer Beazley (BEZ), whose own underwriting of cyber-security reinsurance has been one of the most successful areas on the market. Investors with plenty of capital, and lots of time to fill out the 125-page client suitability form, can also buy into a limited liability vehicle (LLV) that comes with a book of syndicates.
These can be purchased via so-called members’ agents, companies like Hampden Agencies, Argenta Private Capital and Alpha Insurance. Unfortunately, the requirements can be very high with an advised investment of £1mn that should typically represent no more than 10 per cent of an investor’s capital, according to Argenta. The days where investors could put up their stately homes as capital for an LLV are long gone, but the upside is that limited liability vehicles come with inheritance tax relief for onshore UK taxpayers.
LLV’s regularly come up for sale via the intermediary companies and investors can also use their assets by pledging qualifying shares or bonds to the underwriting of an LLV, potentially locking in a double return from both the investments themselves and from the underwriting profits, with capital gains also possible from the disposal of a syndicate.
By contrast, the full free float offering from Finsac/LIU would seem to have naturally more appeal with the company accessing and managing the syndicate holdings on investors’ behalf. So, if there is the advantage of ease of access with this IPO, what return can investors expect?
Lloyd’s syndicates have a record on long-term returns that average 10 per cent annually through most economic cycles, according to Argenta. An uptick in natural disasters, particularly for vulnerable US property in markets like Florida, would be a risk factor. However, other than share price attrition, equity investors aren’t liable personally for underwriting losses. A further benefit that extends corporately is that syndicates enjoy a similar lower tax status to Reits or investment trusts and this benefit can be handed on to shareholders in higher returns.
To begin with, investors should earn the first 5.25 per cent return risk free as this represents the basic cost of capital, the rest will depend on the underwriting profits that syndicates generate, but the company should be able to at least match the average 10 per cent annual return that the rest of the market achieves. This is based on £500mn of investor capital invested by Finsac/LIU backing around £1bn of written premiums. Overall, a 20 a per cent return on equity is achievable based on the experience of other listed Lloyd’s companies. Await the prospectus for details.
