Beazley, the Lloyd’s market focused specialist insurance and reinsurance underwriter, has ambitious targets for bringing significant amounts of third-party capital under its management through facilities, or beta-like market tracking structures, according to analysts.
In particular, Beazley sees a huge opportunity to grow its third-party capital backed ‘smart tracker’ special purpose arrangement (SPA) syndicate 5623 significantly over the coming years.
The target for this growth is to have the smart tracker writing more than $1 billion of insurance and reinsurance premiums.
That’s an ambitious growth target, as syndicate 5623 wrote just $36 million of premiums in 2019, suggesting significant growth is in the plan for 2020 and beyond.
The smart tracker acts as a following capacity syndicate, underwriting insurance and reinsurance business for the account of third party investors, some of which include insurance-linked securities (ILS) style investors we understand.
The goal of Beazley’s smart tracker syndicate is to be able to offer a low-cost mechanism for placing follow business within the Lloyd’s market, leveraging third-party capital with a lower-cost associated with it.
Analysts at investment bank Jefferies explained in a new report that market facilities are seen as the future at Beazley, with the beta-like exposure to its underwriting book and the Lloyd’s market seen as an attractive opportunity for certain investors via the smart tracker.
The intention is to grow the market facilities tracking syndicate business to around $1 billion of premium, with Beazley aiming to retain roughly 10% and cede the rest to investor backed sources of reinsurance capital.
Beazley will then earn fees on the ceded business, while also retaining skin in the game which is key for any investor backed strategy.
The Jefferies analysts said, “We see this as an ideal avenue for growth as it does not strain the balance sheet and such low risk earnings should be valued at a high P/E.”
In meeting with Beazley’s management, including CEO Andrew Horton this week, the Jefferies team said that the view at the company is for hardening to persist into 2021.
For Beazley this alone should drive growth and higher margins, but the addition of an expansive facilities focus, through the beta-like smart tracker and associated strategies, has the potential to drive significant benefits as it grows the premium base passing through such structures.
At the same time as driving low-risk earnings, the interesting thing to us about a greatly expanded smart tracker is how it changes the game for Beazley as a whole.
A $1 billion premium smart tracker, where roughly $900 million of premium is managed on behalf of third-party investors would mean Beazley transitions further towards a hybrid underwriting model, underpinned by both owned and rented capital sources.
Certain investors are sure to like the strategy, given it can offer them relatively uncorrelated insurance and reinsurance market returns based on the underwriting selection, albeit following, of a company like Beazley.
That’s not to say it will be for everyone. Many institutional investors don’t like the following market approach, feeling that their capital often ends up being the cheapest in the market for the wrong reasons.
A marketplace designed on following lead underwriters is not for everyone, but it’s certainly interesting for the types of investors that would have backed Beazley’s own recent equity capital raise.
Buying an equity-life stake in a market facilities tracker, like the syndicate 5623 smart tracker, offers a way to access the insurance and reinsurance marker returns of Lloyd’s without taking on any of the operational and corporate risks embedded in an investment in the equity of a company like Beazley.
Some believe trackers and following market capacity are the future of Lloyd’s. But to us that suggests a Lloyd’s with an increasingly small number of players, managing ever larger pools of capital.
Perhaps not a paradigm for the healthiest of market environments, certainly not as healthy as one where capital makes its risk appetite fully known by making informed bids for the risk.
But the delivery mechanism and market paradigm aside, these structures that aim to provide a beta style return of certain segments of the insurance market will gain traction for sure, especially when under the management of ambitious blue-chip players like Beazley.
One final point. Expanding market tracking structures are set to drive underwriters and brokers head-to-head as well.
But that’s a complaint of everyone in re/insurance, on the underwriting side, that broker related costs elevate the price of underwriting capital and there are many cases where this could be reduced, or minimised, especially where broker interaction is reduced by the risk assumption strategy (such as in market trackers like this).
Should Beazley be successful in growing its facilities tracking business to around $1 billion of premium, it will carry significant weight in the market and could exert even greater pressure on broker fees for following business.
With Lloyd’s also trying to modernise lead/follow, there’s a chance we find increasing conflicts between underwriting and broking sides on these types of initiative to more efficiently bring lower-cost capital into structures that follow lead underwriters fortunes. That should make for interesting watching…