Nephila syndicate shows Lloyd’s willingness to engage with new capital

The launch of Nephila Syndicate 2357, the first Lloyd’s of London syndicate backed by an insurance-linked securities (ILS) manager, underlines the Lloyd’s re/insurance markets commitment to engage with new sources of capital, according to a report from Aon Benfield.

The latest report on the Lloyd’s market from Aon Benfield’s Analytics market analysis team (available here) looks at trends seen so far this year at Lloyd’s. The report suggests that while interest from investors in opportunities Lloyd’s provides to profit from the return of the insurance and reinsurance market is at a high, Lloyd’s is increasingly committed to embracing new sources of capital.

Mike Van Slooten, international head of Market Analysis at Aon Benfield Analytics, commented on the launch of the report; “Lloyd’s results in the first half of 2013 extended an impressive track record and investor interest remains at high levels. These traits are likely to be rewarded with rating upgrades over the next 12 months, which in turn will potentially widen the market’s access to business.”

Aon Benfield highlights the launch of the Nephila Capital backed syndicate, which was approved to begin underwriting at the beginning of August and aims to bring industry-loss index based reinsurance products like its CWIL to the Lloyd’s market, as a key occurrence in 2013.

Nephila Syndicate 2357 will underwrite non-traditional catastrophe excess of loss business on a fully-collateralized basis with the backing of Nephila Capital and its investors. This demonstrates that the Lloyd’s market is willing and ready to engage with non-traditional or alternative sources of reinsurance capital from the ILS market.

The launch of Nephila’s syndicate along with two others in 2013, as well as strong M&A activity, demonstrates the continued attractiveness of the Lloyd’s market to investors, says the report. However despite beginning to embrace alternative capital Lloyd’s is also pressured by it to some extent, as capital flows from non-traditional sources created additional pricing pressure through 2013.

Alongside investment pressures created by continued historically low-interest rates, Aon Benfield believes that the top priority for Lloyd’s is a continued emphasis on underwriting discipline.

The report notes that capital lodged and held in trust at Lloyd’s to support market participants underwriting commitments rose by 3% or £400m to £16.1 billion at 30th June 2013. Interestingly, 52% of this capital was held in the form of LOCs (letters of credit) and bank guarantees, but Aon Benfield notes that under the latest Solvency II proposals so-called Tier 1 capital must make up 50% of regulatory capital, but LOC’s are currently only eligible as Tier 2 capital.

This raises an interesting prospect which could see Lloyd’s having to take on more collateral assets that meet Tier 1 requirements, which of course fully-collateralized cash assets would be ideal. That could make alternative capital an even more enticing prospect for Lloyd’s in the future, depending on how Solvency II eventually pans out.

Nephila Capital’s syndicate is expected to up its capacity in 2014, according to Aon Benfield’s report, bringing more capital from third-party ILS investors into the market.

Further injections of capital from Nephila are not the only things expected to help the Lloyd’s market increase its capacity in 2014. Aon Benfield says that early indications for 2014 syndicate capacity suggest planned increases to at least £1 billion at Brit Syndicate 2987 and Hiscox Syndicate 33, as well as ‘in principle’ approval of three new syndicates.

So the Lloyd’s market looks set to keep growing its capacity, keeping up with the growing insurance and reinsurance market. We’ll keep updating you as new initiatives to bring third-party capital, particularly from ILS investors, into the Lloyd’s market appear.

Further reading:

– Alternative capital is efficient capital: Frank Majors, Nephila Capital

– Nephila Capital’s syndicate 2357 will educate investors about Lloyd’s

– Old meets new as alternative reinsurance capital grows share

– Lloyd’s: Third-party ILS capital is both a threat and opportunity

– Nephila Capital to back $100m Lloyd’s Syndicate 2357, managed by Asta