Beazley targets more third-party capital, as renewal rates rise 15%

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Beazley, the Lloyd’s market focused specialist insurance and reinsurance underwriter, fell to a $50.4 million loss for 2020, with a combined ratio of 109%, but targets a more profitable year in 2021 with no additions to its COVID-19 pandemic claims in the fourth-quarter.

beazley-logoThe company is bullish on the forward-potential for its largely third-party capital backed Smart Tracker facility, which acts as a following market and deploys capacity from institutional investors into the Lloyd’s marketplace.

Beazley said that for 2021 its offering of Smart Tracker capacity to investors received strong demand, becoming oversubscribed in the process and that Lloyd’s has now given the facility an upsized $200 million of premium target for 2021.

To summarise the Beazley results, which recall were impacted by $340 million of losses from the COVID-19 pandemic in 2020 as well as the U.S. hurricane activity and other catastrophe events.

As a result, Beazley paid some $1.96 billion of claims during the year, a 35% increase from 2019.

The $50.4 million loss was softened by a strong investment result though, perhaps why it seems lower despite the underwriting was unprofitable with the combined ratio up at 109%.

On the back of these claims and the impacts of the pandemic, analysts this morning are pleased at the smaller than anticipated loss from Beazley, as well as the very strong capital position the company remains in.

Also positive for the analysts, Beazley has grown its premiums underwritten strongly in 2020, by 19%, and pricing is on the rise.

Andrew Horton, Chief Executive Officer, explained, “Beazley’s gross premiums written increased by 19% to $3,563.8m, supported by rate rises across most of our divisions. We also achieved a strong investment income in the face of volatile conditions.

“I am very positive about the year ahead. We have the capital strength to support our growth plans and look forward to a continued favourable rate environment and expansion of our specialist products globally. I am confident we can return to paying dividends during the course of 2021.”

Rates on renewal business on average increased by 15% across Beazley’s portfolio, which suggests forward-looking profitability is up significantly for the firm, especially if the COVID losses remain capped.

On that front, Beazley said that it only forecasts a maximum $50 million rise in its COVID reserves, after reinsurance, if the pandemic drives further losses in 2021.

The area of Beazley’s business we are most interested in, of course revolve around property catastrophe reinsurance and its third-party capital activities with the Smart Tracker.

On catastrophe underwriting, Beazley said it has refocused its reinsurance book towards property cat in 2020.

Explaining, “A new dynamic in the market saw the reinsurance division refocus on core property catastrophe business and reduce exposure to niche areas including miscellaneous treaty and also crop, which is the area of the portfolio most exposed to climate change risk.”

Which is interesting, as this is perhaps one of the first signs of an underwriter pulling back from areas where climate risk are most evident, in favour of perhaps better modelled and understood peak catastrophe peril risks, a dynamic to watch out for from other players maybe.

When we look at Beazley’s renewal rate increases from 2020, it’s clear that the Lloyd’s market has seen significant acceleration.

Positively for the third-party capital investors backing the Smart Tracker, that market facilities unit saw 23% rate increases during the year, while property saw 35% and reinsurance 18%.

The market facilities unit, where the Smart Tracker sits, doubled its premiums written in 2020, to $133.4 million.

It remains a long-way short of the $1 billion of premium target Beazley said it had for the Smart Tracker, but Lloyd’s is allowing further growth to $200 million of premiums for 2021, the company said today, which Beazley believes can be achieved at lower expense as the facility scales.

Beazley has had success in raising funds for the largely third-party capital backed facility, as investors look for sources of quality insurance and reinsurance market return.

“Backed by Beazley and third-party capital, the model has shown resilience in the hardening market environment, with investors over- subscribing to back the syndicate during this year’s round of funding.

“This inspires confidence in the model as a diversification opportunity in the new trading environment as well as the old, attracting a range of investors from Lloyd’s Names and hedge funds through to larger pension funds and traditional reinsurers,” the company explained today.

It’s a model that Beazley hopes will grow, as it brings more efficient capital into the Lloyd’s market and enables investors to back the best of the market’s underwriting.

“Beazley Smart Tracker aims to deliver lower acquisition costs and fees, and greater efficiency for the follow market,” the company said.

Adding that, “Its future success hinges on ongoing appetite for market facilities and consortia to follow in the market, which have both grown in number in 2020.

“We anticipate and hope the influx of third-party capital will continue to fuel more similarly styled follow-only syndicates, which will only help to drive greater efficiency within the London market.”

Lloyd’s, of course, now also has its own ILS structure, the London Bridge Risk PCC vehicle.

But Beazley has found a way to attract third-party capital using its own established methods, adding to efficient capacity in the market.

As we also explained this week, ILS fund manager Nephila Capital has also launched a new Lloyd’s focused ILS fund, using its own infrastructure and presumably its managing agent at Lloyd’s.

All of which shows the opportunities for third-party investors to access the returns of the Lloyd’s market more efficiently are growing and becoming more numerous, which may have implications for the market dynamic and some older routes for capital to enter the market further down the line, we believe.

Adrian Cox, CUO at Beazley said the Smart Tracker is, “Designed to reduce underwriting costs in the Lloyd’s market by making the follow-market work more efficiently, the tracker is now working with 30 facilities alongside some newer similarly styled syndicates within the market.”

With premium growth ahead for the facility and having been oversubscribed for 2020, it looks like Beazley will be bringing more third-party capital into its business through 2021, adding efficiency to its own book of business and more fee income to support profits.

Finally, a reminder, expanding market tracking structures and facilities for driving new capital into established markets like Lloyd’s, are set to drive underwriters and brokers head-to-head as well.

Beazley itself had previously said that brokers should lower their commissions for this type of following business, as otherwise the price of underwriting capital would be higher than it could be.

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