The real jewel in the City's crown

One of the most important parts of the British economy is the financial services industry, which is centred on the City of London.

"The City" is more than banks and the stock exchange. Many different businesses are based there, some of which are world leaders, such as commodity trading, foreign exchange, insurance, investment management, legal services and shipping. These are major contributors to our "invisible earnings" (non-physical trade), and they pay a lot of tax to the central government.

Roughly 50,000 people are employed by the UK's insurance industry, and a substantial number of them work in the City at the insurance market Lloyd's of London.

Many people mistakenly think that Lloyd's is part of Lloyds Banking Group (LSE: LLOY). This is an easy error to make, but the only connection is that they have similar names. Lloyd's is a very good business and its boss recently sang its praises by calling it "the real jewel in the City's crown."

A coffee house that's doing rather well
Lloyd's of London was founded in Edward Lloyd's Tower Street coffee house in the late 1680s. It moved out some years later, and since 1986 it has been based at 1 Lime Street, which is the youngest grade I listed building in the country.

Lloyd's is owned by its members, who provide the capital for "syndicates" through which its managing agents and underwriters sell insurance policies. Anyone who wants to buy insurance at Lloyd's will deal with these syndicates through a network of agents and brokers.

For most of its existence Lloyd's syndicates have raised money from "names"; individuals who pledge all of their wealth to pay for policyholders' claims. In theory being a name is a nice little earner; Lloyd's sends you regular cheques for your insurance profits, and you keep control of your assets which also pay you an income.

However, sometimes a syndicate will have a bad year, and its names will then have to send Lloyd's a cheque. Many names were ruined in the 1980s when a torrent of asbestosis claims hit a group of syndicates. Following this, in 1994, Lloyd's opened its doors to limited liability companies. Today individual names provide less than one-sixth of Lloyd's capacity.

A worldwide reputation
If you want to insure an unusual risk, the place to contact is Lloyd's. Amongst the things that Lloyd's has covered over the years are Betty Grable's legs, Rolling Stones guitarist Keith Richards' fingers, Aussie pace bowler Merv Hughes' moustache, Celine Dion's vocal chords, Ken Dodd's teeth and, more recently, Playboy model Holly Madison's breasts.

Another policy written by Lloyd's covers American football's Pittsburgh Steelers' Troy Polamalu. His hair was insured for $1 million in 2010 by Procter & Gamble as he appears in commercials for its Head and Shoulders shampoo. Polamalu has a fair bit of hair to wash as he last had it cut in 2000!

Lloyd's has an old-fashioned way of doing business. Unlike most of the City, business at Lloyd's is done on a face-to-face basis, and a lot of paper is moved around the building as policies are sold and claims are processed. However, a new back-office system to eliminate most of the paperwork is currently being tested and is expected to cut its operating costs.

Investing in Lloyd's
Unless you become a name you can't directly invest in Lloyd's. But you can get a piece of the action via the quoted companies which operate there. Whilst the large insurers such as Aviva and Berkshire Hathaway have a presence in Lloyd's, it's a relatively small part of their business.

For more exposure, you should consider the smaller companies which do most of their business there. Top of this list is Amlin, Lloyd's biggest underwriter, which is well known in rugby circles, because it is the headline sponsor of the Amlin Challenge Cup.

Yesterday my colleague Roland Head looked at Amlin's results for 2011, which were pretty grim, thanks to the massive damage inflicted by the Japanese and New Zealand earthquakes. Amlin lost almost £194 million last year, and at 336p its shares now yield 6.8%.

Some other FTSE250 members with a big presence at Lloyds are Hiscox, an underwriter which specialises in aerospace, kidnapping and hacking risks, whilst Lancashire Holdings focuses on property, energy, marine and aviation insurance.

Another company which operates through Lloyd's is Jardine Lloyd Thompson Group, an underwriter which also has a substantial employee benefits practice. JLT's biggest shareholder is Hong-Kong's Jardine Matheson which my colleague G. A. Chester covered yesterday.

People will come...
We hear a lot these days about big companies threatening to leave the UK. For example, Prudential has announced that it is thinking of moving its headquarters to Hong Kong, due to the European Union's Solvency II regulations, which will drive up insurers' costs.

Even so, some big firms are still coming to London because of its insurance market. The world's largest insurance broker AON Corporation, well known to football fans as it is Manchester United's shirt sponsor, recently announced that it is moving its HQ from Chicago to London to be closer to the insurance market.

AON will be very close to the market, as its new HQ is next door to Lloyd's!

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