Unlimited liability names: why does anyone do it?

[Shillington]

In Chapter 2 there is a section which "answers" why would anyone be an unlimited liability name. The answer (to make a profit) is the same answer as to why someone would become a limited liability name.

So my question is: what is the advantage of being an unlimited liability name over a limited liability name?

My hunch is that the contributions to FAL and to the central fund at Lloyds will be less arduous but I would like a full answer, please.

 

[Ian Senator]

Hi Shillington

The question is a little academic these days, since you can't enter with unlimited liability any more. The question made better sense years ago, in the days when unlimited liability was the norm, ie "why would anyone join Lloyd's with such a huge potential downside", to which the answer still makes sense - in the hope of high returns. Perhaps the question would read better now in a different tense, ie "Why would anyone in the past have wanted to join knowing they had unlimited liability".

I don't know how the capital requirements in those days worked - but what you suggest sounds reasonable if both options had been available.

Hope this helps!
Ian

 

[jjjkkk]

Hi Ian,

I guess seeing as there are still unlimited liability members at LLoyds the question becomes why would they maintain their I=unlimited liability membership when instead they could become limited liability members?

 

[Ian Senator]

Good question, but I'm not even sure whether there are any left. According to a quick Wikipedia search, I found this:

"Members' agents co-ordinate the members' underwriting and act as a buffer between Lloyd's, the managing agents and the members. They were introduced in the mid-1970s and grew in number until many went bust; many of the businesses merged, and there are now only four left (Argenta, Hampden, Alpha and LMAS, which has no active Names). It is mandatory that unlimited Names write through a members' agent, and many limited liability members choose to do so."

Sort of implies there aren't any, if none of those agents have active Names yet it was mandatory for unlimited Names to write through them.

All I can think of is that unlimited liability meant all the losses, but all the gains too. Limited liability would maybe mean limited upside too? Perhaps someone who works at Lloyd's could investigate further, out of interest!

 

[maz1987]

This is something I pondered during my study of ST7, and despite asking around the market I'm not any closer to answering it!

I wonder if it's to do with the winding up of their participations in Syndicates - perhaps to convert to limited liability you have to re-enter as a new Name, which might involve auctioning off your existing participations at the risk of another Name outbidding you for them. They may view the risk of unlimited liability as lower than the risk of being unable to maintain existing participations, particularly due to the increased risk management of underwriters managing agents. Just a thought!

 

[MorningtonCrescent]

To be an individual Name with limited liability you have to set up a special purpose entity called a Limited Liability Vehicle (LLV), or buy an existing one. I think individual Names provided about 15% of the Lloyd's 2015 capacity, either on a limited or unlimited liabiliy basis.

It looks like some unlimited liability Names do still exist. See the ALM (Association of Lloyd's Member) website at:
http://www.alm.ltd.uk/ourrecord.php

The incentives for individual members are clear. This article shows the returns achieved by some Names in the early years of this century:
http://moneyweek.com/how-to-become-a-lloyds-name-42723/

 

[leechang]

There are a number of answers to why a member may wish to retain status as unlimited liability

1) The way you can enter the market now is only through an LLP or NameCo through which its usual to have many people, family members and shareholders behind these vehicles which are passed down to future generations.

2) In 2002 many unlimited liability members rejected proposals to become limited liability members as they would lose the right to carry forward income tax losses and set them against future underwriting income although the law changed to remove some of this barrier for changing to limited name.

3) The main reason for some older names remaining as unlimited liability names is TAX advantages. They are a big cumbersome to explain but if there is any interest, I can make another post.

a. They still exist today (as of 2016 there were 1902 active names, 929 Namecos, 625 LLP’s, 53 SLPs and 300 unlimited liability) and blind auctions for the evergreen capacity rights owned by the members are often held for individual Syndicates.

4) Most names in Lloyd’s have very complicated tax affairs often involving trust, spouses, divorces, multinational companies, differing jurisdictions. So considerations involving transfer are not always as simple as you think Lloyd’s would make it out to be. Those on unlimited liability status have liabilities which do not extinguish on death, they are inherited by the estate who has to again go through a complicated process with executors to release funds from the estate on death.

a. Some names have hidden the vast majority of their wealth through complex structured trust, privacy islands and keep the bear minimal that Lloyd’s could come after in the event of a CAT so they are indifferent to structure.

5) Old boys mentality. Generally the individual name may be of old age and use to the “old” traditional way of transacting business through Lloyd’s of London and do not wish to move to limited liability status.

6) Another reason why some hold the status is to sort of pay respect to friends who lost a lot/faced bankruptcy/suicide in the 70’s/80’s and early 90’s as a sort of – “we started this together and I wont take the easy way out”. It’s probably hard to understand from the outside looking in but Lloyd’s has changed remarkably in the last 50 years and in the 20th Century was like a Gentlemans club.

7) Some often wonder why Lloyd’s bother with individual names (who pose an administrational pain) however Lloyd’s cares about its credit rating and the agencies love diversification of capital between corporate/individuals which is they still accommodate them although they are slowly decreasing in number its still cyclical (to an extent, nothing like the same number pre 90’s) however some old Nameco’s and LLV’s are now selling to Helios Underwriting listed on the AIM market giving diversification through the public markets.