WORLD stock markets swung wildly last week as the turmoil in financial markets continues, but astute investors are netting returns of 10%-plus by seeking out areas uncorrelated with equity markets.

Lloyd’s “names” — wealthy investors who put up their capital to underwrite insurance — are expected to make up to 13% this year and net greater returns next, as premiums look set to rise in the wake of Hurricane Ike and the near-collapse of the American insurer AIG.

Here is our guide to how smart investors are beating the bedlam.

LLOYD’S OF LONDON

Lloyd’s unveiled pre-tax profits last week of £949m for the first half of the year, down from £1.8 billion a year ago, because last year was a benign one for natural disasters, meaning insurers had to cut premiums.

However, Hurricane Gustav, which hit Louisiana this month, and Ike, which lashed Texas, are expected to lead to higher premiums — and better returns for Lloyd’s names.

Together the hurricanes are estimated to have caused claims of $16.5 billion (£8.8 billion). While this may cut insurers’ profits in the short term, ultimately premiums rise. Katrina resulted in claims amounting to $41 billion in 2005, according to Risk Management Solutions, but Lloyd’s made record profits the following year — and names made average returns of 48%.

The world’s largest insurance market — rated A+ by both Fitch and Standard & Poor’s — also stands to benefit from the near-collapse of AIG.

Neil Smith, of members’ agent Hampden Agencies, said: “We’re poised for a golden period. AIG has been rescued but when there’s uncertainty, brokers tend to look for alternative quotes — we could see business that was underwritten by AIG coming to the market.”

Last year, Lloyd’s names netted 23%. Returns for 2008 are expected to come in at up to 12.5% — still a good return with the FTSE 100 down 20% — and next year could be better.

Hampden is seeing a flood of money coming to the market — people who have sold companies or are sitting on cash, and are looking to place 5%-10% of their wealth with Lloyd’s.

Those who became names before 2003 have unlimited liability — they can lose more than they stake — but new names have limited liability.

Potential profits and losses are accentuated by the “double use of assets”. Names typically provide only 40p of capital per pound of insurance they underwrite. Lloyd’s takes a charge on that 40p and can call on it at any time to cover losses. Investors can keep their capital, though, and invest it how they choose, giving them a second potential return (or exaggerating their losses). In 2001, when the attacks on the World Trade Center contributed to a £3.1 billion loss at Lloyd’s, the largest in the market’s 320-year history, Hampden Agencies lost 12.4%, a figure that translated into a 31% loss.

Returns are free from inheritance tax after two years. The minimum capital required is £350,000, and investors usually commit about £1m and sometimes as much as £10m.

For less outlay, you can access the market through funds such as Hiscox Insurance, which has 20% of its portfolio in Lloyd’s and requires a minimum £1,000 investment. It is down only 5.6% this year.

TRADED ENDOWMENTS

Although bonuses on many policies taken out in the late 1980s and early 1990s to repay mortgages have been slashed, leaving people facing mortgage shortfalls, wealthy investors have been buying them up.

Alastair Beattie of Protected Asset TEP fund said demand had risen for policies underwritten by Aviva, Prudential and Legal & General, as they plan to release a portion of their “orphan assets” (surplus funds) to policyholders. The fund has returned 8.4% since its launch in 2001, and is up 7.3% in the year to date.

TRADED LIFE POLICIES

Death futures can offer steady, predictable returns that are uncorrelated with other asset classes.

These funds buy US life-insurance policies at a discount to their maturity value.

The EEA Life Settlements fund has returned 10.4% in the past year. It buys insurance policies of Americans with an average life expectancy of 36 months, and has grown by £40m to £141m since August.

The Assured Fund has made an annual average of 10.2% since its launch in 2005, while Managing Partners Traded Policies has returned 9.8% after charges in the past year.

Each fund has reinsurance, while US states provide protection of between $300,000 and $500,000 per policy in the event of an insurer’s collapse.

SOCIAL LENDING

Zopa.com brings together those who want to borrow money with potential lenders who have seen their average returns on new loans rise to more than 10% over the past two months.

“As unsecured personal loan rates in the wider market have gone up, this has had a knock-on effect on Zopa rates, allowing lenders to increase what they charge,” said Giles Andrews at Zopa, set up by the team that launched behind internet bank Egg.

Since March 2005, its 230,000 members have borrowed and lent each other over £26m.

Lynne’s return on lending beats the bank

MATURE student Lynne Martin knows a thing or two about lending: she used to work in banking.

The former loans administrator has taken a leaf out of her old employers’ book and has lent about £70,000 through Zopa.com.

She has seen returns rise to 10% in recent months, from an average of 8.3% in the past year. ‘I'm making far more than I would by saving at the bank,’ said Martin, 54, from St Albans in Hertfordshire.

She rates Zopa as a safe haven amid the stock market volatility.

Zopa lenders choose the rate they’re prepared to lend at and borrowers automatically get the best rates on offer. Loans are taken out over three years — most at a fixed rate — and Zopa’s default rate, the percentage of borrowers failing to meet repayments, has fallen to 0.04% from 0.2% since the start of the credit crunch.

To reduce risk, loans over £500 are spread across at least 50 borrowers. Martin has 1,400 borrowers in total.

She initially lent only £10 — the minimum entry level for Zopa — and gradually increased that sum. She now lends in £200 lots.

‘I’ve got more confidence in this than I have in the banks — and I used to work for them,’ she added.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained