LONDON (Bloomberg) — Lloyd's of London, the world's biggest insurance market, is selling bonds to help reduce costs for members of the mutually owned institution.Lloyd's, which began 319 years ago as a place where merchants, ship owners and captains exchanged shipping news, is under pressure to cut the contributions required of member firms as so-called Lloyd's syndicates relocate to Bermuda, lured by lower taxes and less regulation. Members are obliged to lend the market 0.75 percent of the amount of insurance they could underwrite; repayment is at Lloyd's discretion.

The bonds will "strengthen the capital advantages of Lloyd's, enhancing the return our members can achieve," chief executive officer Richard Ward said in a statement.

Citigroup Inc. and HSBC Holdings Plc are organising the sale of so-called Tier 1 subordinated debt with no stated maturity, Lloyd's said in the statement. It's Lloyd's second sale of subordinated debt after issuing the equivalent of about $500 million ($995 million) in euros and the UK currency in 2004.

The proceeds of the issue will be used to repay loans syndicates made to a central fund to supply the market with capital. While the market invests the cash and returns proceeds to members, the syndicates lose out because they aren't able to invest the capital in higher-yielding assets.

The so-called hybrid bonds combine characteristics of equity and debt. Holders of the notes would rank behind holders of existing subordinated debt for repayment in the event of a bankruptcy, Fitch Ratings said.

Fitch expects to rate the bonds A-, the seventh-highest investment grade, and will view 75 percent of the proceeds as equity.

"This is positive for members of Lloyd's," said Chris Waterman, managing director at Fitch in London. The capital structure will be "more efficient".

The bond sale will be "benchmark" in size and will take place after presentations to investors in the UK, when the final amount and terms of the issue will be set, the statement said, without being more specific. Fitch Ratings yesterday said the bonds will replace $335 million of syndicate loans.

The notes will provide "a more stable capital base" and will "reduce the opportunity cost of mutuality for members," Fitch said.

The debt is likely to be rated A- by Standard & Poor's, Lloyd's said. Lloyd's posted a profit of $3.7 billion in 2006, compared with a loss of $103 million in 2005 when the market suffered claims from hurricanes Katrina, Wilma and Rita in the worst-ever storm season. That was the first loss at Lloyd's since the terrorist attacks in 2001.

The existence of the market came under threat in the early 1990s because of potential asbestos claims. In response, Lloyd's set up Equitas Inc. to protect it from claims dating from before 1993. Warren Buffett's Berkshire Hathaway Inc. in March completed its assumption of as much as $7 billion of risks held by former investors in Lloyd's. In return, Berkshire Hathaway is paid a premium and gets the $8.7 billion already set aside for claims by Equitas.