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International hedge funds and private equity groups are pumping money into a tax-exempt Lloyd’s of London investment vehicle, as the 300-year-old UK institution broadens its net to attract overseas investors.
Lloyd’s launched the scheme in 2021 to tap the booming market for insurance-linked securities (ILS), which grew to $113bn last year, according to professional services company Aon.
Although Lloyd’s special purpose vehicle has only captured a small chunk of the market, the second phase of the “London Bridge” scheme doubled in size to $1.9bn in 2024 compared with the previous year, attracting growing interest from alternative fund managers.
It is also a fraction of Lloyd’s $70bn in gross written premiums that are underwritten by syndicates, according to the London insurance market. These are made up of companies or individuals that take on insurance risk.
Some Lloyd’s members have shunned the ILS scheme. One insurer active at Lloyd’s for more than a century said there was no compelling reason to move its ILS business from Bermuda, one of London’s biggest rivals.
However, Lloyd’s chief financial officer Burkhard Keese insisted the scheme has enabled London to regain its competitive edge.
Crucially, it allows investors to bypass corporation and withholding tax, in contrast to syndicate members that have to pay tax on profits. This in part explains why it has drawn nearly all of Lloyd’s “fresh money” since its launch, Keese added.
He also pointed to groups such as New York-based alternative investment manager Blackstone that now has direct access to the esoteric risks from oil tankers to footballers’ legs, which are underwritten at Lloyd’s.
In addition, pension funds such as the Ontario Teachers’ Pension Plan have invested in the programme.
One feature of the scheme is it allows funding of reinsurance contracts through debt securities, otherwise known as catastrophe bonds.
Cat bonds, where insurers exposed to natural disasters pay investors to take on some of the risk, open the door to a wider array of funds. The bonds make up nearly half of the ILS market at $46bn, according to Aon.
The scheme also simplifies regulatory hurdles as well as expanding agreements in what is known as excess-of-loss contracts, where reinsurers take on exposure for an insurer’s losses beyond a certain level.
UK financial regulators have come under criticism in recent years from executives who argued that the slow pace of sign-offs for ILS resulted in London losing business to other financial centres, such as Bermuda.
An investment through the scheme’s platform, managed by ILS specialist Artex Capital Solutions, works as a collateralised reinsurance contract with a Lloyd’s insurer, which is contained in a “cell”.
The cell is not subject to corporation tax on its profits or withholding tax on distributions, Lloyd’s says.
The market for ILS has grown in recent years as underwriters look for places to lay off their risks, while investors are lured by returns that are less correlated to traditional financial markets.
