Beazley explores UK ILS, aims for third-party backed facilities SPA growth

by Artemis on February 9, 2018

Specialist Lloyd’s focused insurance and reinsurance player Beazley is actively exploring the use of more insurance-linked securities (ILS) capital within its business, as well as the UK ILS regulations, as it examines the potential for an ILS structure to sit alongside its reinsurance arrangements.

The Beazley team is revisiting the potential strategic ramifications of the use of an ILS arrangement within its business, the CEO said today, having previously investigated it but not found the timing right.

Since the UK’s new ILS regulations came into effect, the company is also assessing how a UK domiciled ILS transaction could sit against its other sources of reinsurance and capital as well.

In discussing its results today, the Beazley management team signaled that a greater use of alternative capital is one possible future for the re/insurer, adding to its activities with a sidecar style facilities focused syndicate, which is backed by some third-party capital.

As we wrote last year, Beazley launched a special purpose arrangement (SPA), Syndicate 5623, which takes a quota share of the broker facilities business that Beazley underwrites through its Syndicate 3623 and is backed by a range of third-party investors, including some capital from the ILS market.

That broker facility cession is designed to offer investors a lower-volatility way to access some of the Lloyd’s market returns, at least on the business that Beazley likes which comes through broker facilities. As such it offers investors a way to gain returns from almost a spread of the Lloyd’s market, an attractive prospect and leading Beazley to hope it will grow.

Beazley’s leadership is bullish on the potential for this to add significantly to the companies top-line, with expansion set to be targeted for Syndicate 5623 if the facilities business continues to expand.

Commenting on the Syndicate 5623 arrangement, CEO Andrew Horton said, “It started small, so its got a $30m capacity to write premiums this year. We’re seeing whether it works, trying to write facilities more cheaply than the following-market currently does. Having a lower cost-of-capital, building a sort of smart tracker type portfolio, trying to take costs out of the whole placement of insurance.”

Horton is clearly bullish about the prospects for the syndicate, if it proves popular, saying, “If it works I think it can scale up to half a billion dollars and beyond, because if it works there will be more and more facilities, and if it doesn’t work it will scale down to nothing.”

A tracker on the Lloyd’s market will suit certain investors risk and return appetites very well, making it an interesting initiative to keep an eye on.

But potentially more interesting going forwards is the fact that Beazley is revisiting the potential for ILS to become a more permanent capital partner within its business and with the new UK ILS regulations now enacted, the company is taking a look at how this could help the firm.

Neil Maidment, CUO at Beazley, commented on the prospects for more ILS activities, “Previously we’ve looked at that, as to whether we could develop something that’s complementary to our traditional reinsurance play.

“With the development of the supportive regulations here in the London market, we’re revisiting that analysis.”

Beazley, like many other London and Lloyd’s insurance or reinsurance firms, is now focused on adding efficiency to their business models, while also capitalising on higher available rates.

For Beazley, the better rates at 1/1 have led it to target growth into catastrophe risks this year, as Maidment explained, “We’re going to increase our catastrophe risk budget to take advantage of better market conditions.

“We’ll do that by buying slightly less reinsurance, so we’ll be growing our net exposure against the background of better rates.”

That could use the support of alternative capital and an ILS structure, which could augment Beazley’s capacity and help the re/insurer to go for significant growth into the property catastrophe market in a year when rates should be enhanced.

It will be interesting to see what is decided on at Beazley and whether it makes use of the UK domiciled ILS structures that are now available to it.

Also read: Lloyd’s should embrace ILS to secure its future: Tokio Marine Kiln CUO.

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