The Association of Lloyd's Members (ALM) is grateful to Lord Levene and Lloyd's for their initiative which has given rise to an important announcement in the Budget. Unlimited liability Names will in future be allowed to carry forward losses when they convert to limited liability.
Currently, many unlimited Names have been prevented from conversion to limited liability by the fact that their often large losses from unlimited underwriting cannot be carried forward to offset against subsequent profits from their limited liability trading.
The change in the Budget means that Names who in future convert to limited liability through NameCos or Scottish limited partnerships (SLPs) will be able to utilise carried forward losses, resulting, for example, from the WTC tragedy. They will also be able to transfer assets to their new limited liability vehicles without incurring immediate capital gains tax liabilities..
But tax is not the only obstacle that prevents many unlimited Names from converting. The difficulty is that the existing vehicles, NameCos and SLPs, are far from ideal. The owner of a NameCo cannot offset any losses against his general income. And, although SLP partners can offset losses in this way, they are forced to be passive investors with decisions about syndicate selection being made by the general partner. These are both serious disadvantages and are major factors in the reluctance of many unlimited Names to convert to limited liability.
Members agents and the ALM have developed a solution to these problematic features of NameCos and SLPs. They have proposed that UK limited liability partnerships (LLPs) should be made available as a medium for underwriting.
Such LLPs would have the advantage of permitting the offset of losses against partners' general income and allowing partners to take an active role in decisions about the partnership's underwriting strategy.
Combined with the tax changes announced in the Budget, the introduction of LLPs for the 2005 account would accelerate the move towards individual Names converting to limited liability. It would also make it much easier for members agents to recruit more of the private capital that has weathered the loss cycle without the £500m damage to Lloyd's central fund caused by some corporate capital.
Lloyd's is keen to see the end of unlimited liability which it believes is unsuitable for a high risk activity. And naturally it wants to avoid having to deal with unlimited Names whose personal assets are exhausted by losses. So, despite the expense and inconvenience, Lloyd's should take the final step and introduce LLPs for the 2005 account, creating what would be an ideal framework for private capital.