Has Lloyd’s of London lost favour as a reinsurance-linked investment?

by Artemis on October 2, 2012

Lloyd’s of London, the world’s oldest insurance and reinsurance market, where large amounts of the globes risk comes to be transferred into and between the syndicates and companies operating there. Lloyd’s is the market where reinsurance-linked investments began, as backers put capital into syndicates to back underwriting of risks and members could be individuals or corporate investors.

Investors in Lloyd’s, these days, also include the world’s institutional investors, but the market has in the last year seemingly lost favour as an investment opportunity.

According to reinsurance broker Guy Carpenter, Lloyd’s capacity jumped from $26 billion to a little over $37 billion over the course of 2007 to 2011, an increase of 48% over the period. From 2009 to 2010 capacity jumped by 35%, but then the UK recession and broader economic woes around the Eurozone and rest of the world slowed that capacity growth. Guy Carpenter says that over the course of 2011 there was only an increase of 1% in capacity at the Lloyd’s market, really demonstrating the slowdown in investments into re/insurance operations there.

This is interesting as 2011 saw significant capital inflows into other areas of the reinsurance market. Collateralized reinsurers did extremely well in raising funds during 2011, similarly the insurance-linked security and catastrophe bond market saw signficant sums of money flow into the sector. Sidecar launches in 2011 were also successful with their fundraising in 2011 and the few new reinsurance company formations during the year did not seem to have too much difficulty raising capital from institutional investors. Also, just in case you thought that the Lloyd’s issue was a UK only problem, then consider that there was at least one large reinsurance-linked fund launch in London in 2011, backed predominantly by UK investors.

So, other sectors of the reinsurance market did not exhibit major difficulties in fundraising during the year, so why did Lloyd’s capacity grow so little? It’s very hard to answer such a question, but it is possible that investors are becoming more savvy about the insurance and reinsurance investment space and learning where their capital can be put to work most efficiently and effectively. Perhaps Lloyd’s is not a good match for the ambitions of your average re/insurance focused investor these days and other opportunities are looking more attractive.

Interest in putting capital to work in the Lloyd’s market will likely continue, but whether it will ever recover to the levels seen pre- financial crisis is hard to say. There are a much wider variety of ways to put capital to work in the reinsurance sector now, with funds even launching for retail investors and opportunities in collateralized reinsurance funds looking extremely attractive right now. There is also the issue of whether Lloyd’s is able to be as agile in its underwriting as some of the new, capital market backed, reinsurance entities. There is some questioning going on, of what is the right business model for an investor backed re/insurance entity and in many cases the new fund and collateralized instruments and investment opportunities can be a better fit for an investors target return profile..

It will be interesting to see how Lloyd’s copes with the widening of the reinsurance-linked investment space. There is now much more competition and many more options available for the investor capital that they would typically have targeted. With investor interest in the ILS, cat bond, collateralized and sidecar type investment opportunities at an all time high, will Lloyd’s be able to attract these sources of capital back into the market?

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