60 seconds with David Williams, managing director of Argenta Private Capital Limited
Thu 05 Sep 2013
In the last of our series of interviews with Lloyd’s members' agents, David Williams, managing director of Argenta Private Capital Limited, explains how and why individuals and corporations participate in insurance at Lloyd's.
What’s the attraction of participating at Lloyd’s?
There are many reasons why participating at Lloyd’s can be appealing to investors; most important is the opportunity to make an attractive return on a given investment. While Lloyd’s average return on capital has been around 15% in the past decade, returns to individual members have been in excess of 20%. These returns are a second income on an existing asset base, as members are able to use bank letters of credit or share or bond portfolios as the Funds at Lloyd’s to support their underwriting.
Sophisticated investors are showing increasing interest in insurance risk as it exhibits limited correlation with equities and bonds. Most alternative assets such as commodities, fine wines and hedge funds tend to move much more closely in conjunction with the big asset classes than insurance.
What is the role of the members’ agent?
Members’ agents advise new and existing investors (members) on selecting a portfolio of insurance risk being mindful of a wide range of factors including the investors’ risk appetite, tax circumstances, liquidity requirements and overall financial objectives for an investment at Lloyd's. All members’ agents also look after the day to day administration of the limited liability company or partnership that an investor uses to access a portfolio of insurance risk. Members' agents are regulated by the Financial Conduct Authority.
So how do you participate at Lloyd’s via a members’ agent?
All new investors at Lloyd's today do so through limited companies and/or partnerships. These are referred to as corporate members. Most members today are highly sophisticated investors who want to take advantage of the very low correlation between insurance and other major asset classes. Although investors come from many walks of life, underwriting at Lloyd's is often best suited to High Net Worth Individuals with highly diversified portfolios. Lloyd’s is a high risk investment with high potential returns. Given the nature of insurance, there is also the potential, when participating at Lloyd’s, to incur unexpected losses. Argenta recommends that client should commit no more than 15% of their investable asset base to their participation at Lloyd’s. Given the minimum asset requirement, Argenta requires its investors to have a minimum net wealth of £5m.
At Argenta, we believe that underwriting membership should only be considered by individuals with a high net worth profile and our detailed assessment of suitability looking at risk appetite, capacity for loss, ability to recapitalise and the impact on lifestyle of a total loss of Funds at Lloyd’sreflects this.
Membership of Lloyd’s is not suitable for everyone. Investors need to have a high degree of risk tolerance and financial liquidity. Investors need to spend time with their agent, so that the latter can understand the investors’ needs and their medium and long term financial aspirations.
What is the required minimum investment?
Argenta currently offers investors three possible investment vehicles for participation at Lloyd's. The minimum investment at Lloyd’s for a new corporate member (a limited “Nameco” company or limited partnership (LLP)) is £350,000, which would allow the underwriting of up to £875,000 of premium income capacity.
Argenta has also launched a third opportunity called VisionRe where investors will hold shares in an unlisted Guernsey company, and the minimum investment will be £100,000. Despite the lower entry qualification, the VisionRe opportunity is still aimed squarely at High Net Worth Individuals.
Could a member lose all their money if there is a big disaster?
In a limited liability vehicle, the member’s liability is restricted to the funds committed to the vehicle. Lloyd’s requires managing agents to calculate the capital required to support their syndicates’ business plans to be sufficiently robust to withstand losses only likely to be experienced once in every 200 years. This capital calculation is itself subject to further uplift by Lloyd’s centrally. Individual Members generally have diverse portfolios, both by type of business written and also by supporting a range of different syndicates.
Because rating levels often increase in the aftermath of a major catastrophe, members tend to position themselves so as to be able to commit extra capital to their underwriting business following such as loss to take maximum advantage of that upswing in rates.
Can a member’s liabilities extend long into the future?
Members participate in an annual joint venture called a “year of account” for each syndicate they join. At the end of the 36 month accounting period, the managing agent will assess the outstanding liabilities of the syndicate and calculate a premium to “reinsure to close” the books of the year of account. This “RITC” process means that members who leave the syndicate can do so without any legacy of outstanding liabilities. Technical improvements and greater use of actuaries in the RITC process has produced an aggregate surplus to members in each of the last eight closed years.
With a members’ agent, can a member choose which syndicates or line of business it wants to invest in?
Members acquire the right to participate through two main routes; the first is the annual capacity auction, where members can adjust their exposure to each of their syndicates up or down according to the prevailing market conditions. The second is through special purpose syndicates, formed for one year at a time with no enduring rights of tenure, and often writing a specialist book of business where particular opportunities exist. These allow the member to fine tune underwriting exposures to his/her requirements.
How has Lloyd’s performed in recent years?
Lloyd’s results over the past decade bear favourable comparison with almost any other insurance business. Insurers measure their performance by way of the combined operating ratio (claims and expenses divided by premiums). Lower is better, and less than 100% indicates that the business is making underwriting profits before the benefit of any investment income. By this measure, Lloyd’s has outperformed all comparable peer groups over the past five years.
What makes a good member’s agent?
The best member’s agents are an amalgam of the private banking and research houses found elsewhere in the City of London. Attention to detail and strong research are essential attributes plus good relations with the managing agents around Lloyd’s.
Most importantly, agents need to preach patience to their client base as opportunities for profitable underwriting may not come along every day. Trust, between client and agent, and between members and managing agent, is the essential glue that binds us together.