The Window Is Closing for This 'Coffee Shop' Industry

Editor's note: The market and our offices are closed on Monday, September 2 for Labor Day. Because of this, we won't be publishing Altimetry Daily Authority. Please look for your next edition on Tuesday, September 3.

A penny could buy you a 'syrup of soot'... and a little more could protect your ship.

Although coffee was new to the United Kingdom in the 1600s, it became a fast favorite among merchants and other professionals. Brewed gritty, strong, and shockingly bitter, folks compared its taste with everything from old shoes and soot to mud and even feces.

It was a far cry from what you might buy at a modern-day Starbucks. Nonetheless, the drink took London by storm. By 1688, there were at least 80 coffeehouses in the city.

While they all served the same product, they attracted different customers. The shops were dubbed "penny universities" for their tendency to house debates on politics and science. And they became little business hubs for a variety of professions...

Stockbrokers barred from the Royal Exchange for rude behavior, for example, frequented Jonathan's Coffee House in Exchange Alley. Members of the clergy favored shops near St. Paul's Cathedral.

And Lloyd's Coffee House, originally located just off the River Thames, catered to members of the maritime industry.

While Lloyd's started as a coffee shop, it pioneered a lucrative industry that's still around to this day. And it has made for a great investment in the current high-interest-rate environment... But that window may be closing soon.

Captains, shipowners, and savvy financiers regarded Lloyd's as the best source for up-to-date shipping information in London...

While they sipped their brews and reviewed the latest maritime news, these folks would also conduct some industry business...

Shipowners would approach captains about new ventures. Captains getting back from voyages would share information on pirate activity.

And businessmen would approach shipowners... offering to protect their ships against the great unknown.

Ocean travel was dangerous, and not just because of pirates. Storms could sink ships, dragging their wares to the bottom of the sea. Entire crews could be wiped out by diseases like scurvy and smallpox.

Savvy businessmen realized they could make money by selling shipowners an assurance that they'd recoup their investments. Lloyd's quickly caught on to the burgeoning enterprise. It started renting out tables for these men to set up shop.

For a small fee, the businessmen would cover any losses if the ship didn't return. Most of the time, ships ended up coming back... and the businessmen made a nice profit for covering the risk. But occasionally, pirates or bad weather would get the better of a voyage.

In those cases, the businessmen ended up out a lot of cash.

That's when Lloyd's popularity came in handy...

You see, the businessmen realized they didn't have to cover an entire ship by themselves. It was smarter to spread out the risk by having several "underwriters" protect a single voyage.

That way, if one ship failed to return home, it wouldn't make an underwriter insolvent.

This approach to ship protection became known as syndicated insurance. It rapidly became the standard not just in maritime insurance, but across all sorts of industries.

Over the next three-plus centuries, Lloyd's grew from its humble coffee shop beginnings into one of the biggest insurance marketplaces on Earth... and syndication became the gold standard for insurers to manage their risk.

Modern insurance companies still perform syndication in various ways. They spread out risk by doing business with as many clients as possible. Some offer multiple kinds of insurance to limit the chances of one catastrophe causing massive losses.

At their core, insurance companies still operate the same way they did when Lloyd's came on the scene...

You pay an insurance company a premium to protect you from financial loss... whether it's from a car accident, home damage, or health issues. The insurer agrees to pay out claims when these events occur.

But unlike the insurance companies of the past, modern-day insurers aren't looking to profit from these premiums. They aim to collect enough to balance their premiums with the claims they pay out.

When you pay your premium, the insurance company holds onto that money until it needs to pay out a claim. The cash sitting in their account is known as the "float."

And float is how these businesses really make money.

Insurance companies profit by investing the float. And since they have to be able to pay out all of their claims, they can't afford to invest in any risky assets.

They tend to put their money in lower-risk investments like corporate and government bonds. And that means their profits rise and fall with interest rates.

High interest rates have made insurance companies a fortune...

And that's still true today, as rates sit around their highest level in two decades.

But if you've been following our research, you know we're expecting rate cuts as soon as September.

These insurance businesses can still keep investing at top interest rates for a bit longer. However, the clock is ticking. And your window to profit alongside insurance companies may be starting to close.

Wishing you love, joy, and peace,

Joel
August 30, 2024