ILS investor capital could enter Lloyd’s like Acappella syndicate

by Artemis on December 6, 2013

The approval this week at Lloyd’s of London of Acappella Syndicate 2014 could be a demonstration for a mechanism that would allow third-party and alternative reinsurance capital to become serious participants in the Lloyd’s insurance and reinsurance market.

Acappella Syndicate 2014 is the first time in the Lloyd’s insurance and reinsurance market’s history that a special purpose syndicate, backed by third-party capital from Lloyd’s Names, has been successfully converted into a stand-alone syndicate in the market and now it has been approved to underwrite business.

Bermuda based insurance and reinsurance holding company Ironshore announced earlier this week that it had received formal approval from Lloyd’s to manage Acappella for the 2014 Year of Account. The newly formed stand-alone syndicate is targeting £60.5 million of premium in its first year and has a £75 million stamp capacity.

First a little background. Syndicate 2014 will be created from a conversion of Special Purpose Syndicate (SPS) 6110, whose business has been solely sourced through quota share reinsurance of certain classes of business underwritten by Pembroke Syndicate 4000. The SPS was launched back in 2012, with a stamp capacity of £25 million, and was backed entirely by Names’ capital (effectively third-party investors) and had been advised by Hampden Agencies Limited.

SPS 6110 stamp capacity was increased for 2013 to £45 million. The SPS has focused on underwriting business including Property Treaty, Personal Accident and Contingency, as well as some short tail lines. It is the first special purpose syndicate to convert into a stand-alone syndicate, and after the conversion Syndicate 2014 will continue to be well supported by third-party capital from Lloyd’s Names and also TransRe’s corporate name “TRe IMCO Ltd.”, according to Ironshore.

Ironshore and Pembroke see this as pure third-party capital, which of course it is. The Special Purpose Syndicate (SPS) structure was introduced at Lloyd’s to allow third-party capital to access the market in a simpler vehicle. The type of third-party capital is unimportant, it could be Lloyd’s Names, a corporate name such as TransRe, or the type of capital market investors who are currently so interested in insurance-linked securities (ILS) and other reinsurance-linked investments.

There is no obvious reason why large global pension funds could not be the capital provider to a special purpose syndicate (SPS), operating with the assistance of an underwriter and managing agency such as Pembroke. That would give alternative reinsurance capital investors access to a very interesting opportunity at Lloyd’s, quite different to some of the more typical ILS and reinsurance-linked investment opportunities we cover.

Now that one SPS has been successfully converted into a stand-alone syndicate it would seem another could follow suit. Entering Lloyd’s as an SPS would likely be attractive to pension funds, giving them a simpler vehicle to begin with while building a track-record and assessing whether the market is for them. If they found the returns attractive they could potentially convert the SPS into a syndicate and seek approval to underwrite, as in Acappella’s case.

For a pension fund this is likely not as straightforward as allocating capital to an ILS investment manager, but for some more sophisticated and experienced reinsurance investors it may be an attractive option. Firms like Ironshore seem keen to leverage third-party capital more frequently and perhaps we will see ILS investors seeking new opportunities at Lloyd’s in this way in the future.

“The new syndicate demonstrates Ironshore’s ongoing commitment in building Pembroke’s third-party business,” commented Justin Wash, Managing Director of Pembroke. “Private investors bring a diverse dimension to the Lloyd’s market, which provides a foundation for enabling Pembroke to broaden its distribution platform for competitive industry advantage.”

Mark Johnson, formerly of Talbot, is to be appointed to the Pembroke Board of Directors, subject to PRA approval and will be responsible for Syndicate 2014 and other third-party capital, including the development of other third-party business for Pembroke Managing Agency.

As appetite for reinsurance risk increases among investors and some become more sophisticated after years of investing through ILS managers and funds, we may see large institutional investors such as pension funds looking to Lloyd’s as a new source of risk to deploy capital into.

The way the Lloyd’s market is structured, with underwriting expertise at the syndicate boxes and capital from many diverse sources, including third-party, seems eminently suitable to the entry of pension funds and other ILS investors. It would not surprise Artemis at all if ten years down the line the Lloyd’s market became another piece of the reinsurance market that had been disrupted by appetite from the ILS space.

Of course Lloyd’s has always been a third-party capital reinsurance market. Perhaps in the future, as the global insurance and reinsurance market continues to evolve, we’ll begin to talk about traditional and alternative third-party capital sources when we refer to Lloyd’s.

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