LONDON -- Pharmaceuticals giant SmithKline Beecham P.L.C. has set up Lloyd's of London's first captive syndicate.

Lloyd's expects the company to be the first of a number of multinationals that choose Lloyd's as a domicile to take advantage of its network of more than 60 licenses.

SmithKline Beecham's captive started writing business Jan. 1 with capacity of L25 million ($41.9 million), taking over the casualty program from its Guernsey-based captive, SB Insurance Ltd. Managed by London-based Amlin Capital Management Ltd., syndicate 1250 aims to assume the company's property damage, business interruption and marine business during this year.

Because Lloyd's does not allow portfolio transfers from existing captive operations, SB Insurance likely will be run off, said Colin Witheat, risk manager at SmithKline Beecham in London.

The main reason for setting up the new captive is that despite high start-up costs, the use of Lloyd's licenses rather than fronting insurers will "significantly reduce fronting fees," said Mr. Witheat.

Although Lloyd's traditionally has been viewed as cost-heavy, the Council recently decided to lower annual charges for all corporate investors to 2.45% from 3.1% for 1998. These charges comprise: 1% of overall premium limit for Central Fund contributions; 0.35% of overall premium limit for central services; and 1.1% of premiums written for the loan taken out by Lloyd's to fund its reconstruction and renewal program.

Captive parents also must pay a L25,000 ($41,905) application fee, plus tax, to set up as a corporate Lloyd's member, and an additional L10,000 ($16,762) application fee to set up the captive syndicate.

Mitch Dowland, syndicate operations manager at Amlin, is confident, however, that captive owners at Lloyd's would find other savings to offset those costs. "The management costs are probably higher (than other jurisdictions), but the win is the saving in fronting fees."

In addition, Lloyd's captives are not required to put up cash and instead can back their underwriting with letters of credit, said Alistair Rodger, a director at Amlin.

These funds kept at Lloyd's to back underwriting by captive syndicates must be half the overall premium limit of the syndicate.

As controlled foreign companies legislation has taken hold, requiring parents to pay tax on a captive's profits, offshore locations have lost some luster as tax-efficient domiciles. Mr. Witheat said an onshore captive gives a company greater control and management, while the syndicate automatically has an A+ claims-paying ability rating under Standard & Poor's marketwide rating of Lloyd's.

The S&P rating could attract other captive parents, suggested Mr. Rodger, particularly those involved in joint ventures.

"A lot of reinsurers (of captives) insist on a letter of credit for the full limit of indemnity," added Mr. Dowland. "This need disappears from Lloyd's-domiciled captives because the captive is issuing rated paper with the Lloyd's Central Fund behind it." The Central Fund guarantees payment to policyholders if a Lloyd's member is unable to pay a valid claim.

Most of the two-year debate surrounding the admission of captive syndicates into Lloyd's has hinged on protection of the Central Fund. Some market executives have argued that unscrupulous captive owners could walk away from their liabilities, leaving the rest of the membership with the losses. To prevent this, Lloyd's has implemented parental guarantees and funds held at Lloyd's to provide maximum protection for the Central Fund, explained Mr. Rodger.

"The parental guarantee varies massively on a case-by-case basis," he explained. "It depends on the business being written, and in some cases the syndicate may not need a parental guarantee because there is no risk gap between the premium paid and the funds at Lloyd's."

Mr. Witheat sees the network of Lloyd's licenses around the world as one of the most attractive aspects for a captive.

Global organizations such as SmithKline Beecham are most likely to benefit from setting up a captive at Lloyd's, according to Christopher Moore, adviser to Lloyd's, because of the ability to write directly in an ever-increasing number of countries around the world.

"The initial focus has been on the major FTSE 100 and Fortune 500 companies," he said.

A number of organizations have shown an interest in setting up captive syndicates, and Mr. Moore expects a few to set up during the year.

"Now that the process is up and running, we are looking to raise the profile of Lloyd's captives in 1999," with a view to a number of start-ups at the beginning of 2000, Mr. Moore said.