Beazley’s market facilities line expands, expects economies of scale

Beazley, the Lloyd’s market focused specialist insurance and reinsurance underwriter, has continued to expand its market facilities business line which includes its third-party capital backed beta-like market tracking structures.

Reporting its first-half interim results this morning, in which it posted a $13.8 million pre-tax loss as impacts from the Covid-19 pandemic dented its performance as our sister site Reinsurance News reported earlier, the company revealed an expectation that the expense ratio on on its facilities business will continue to drop as it gains scale.

As we’ve reported before, Beazley sees a huge opportunity to grow its third-party capital backed ‘smart tracker’ special purpose arrangement (SPA) syndicate 5623 over the coming years.

This arrangement sits as part of what the re/insurer now calls “market facilities” and is broken out as its own business line.

The goal is to bring lower-cost capital more efficiently into the Lloyd’s underwriting market, to provide more efficient products to clients and beta-like returns to investors.

The company believes that it could have as much as $1 billion of insurance and reinsurance premiums written through its smart tracker and market facilities.

There’s a long way to go, but the strategy is seeing good growth, with Beazley reporting that its newly formed market facilities division saw premiums increase by 173% in the first-half of this year.

Beazley wrote $60.7 million of gross premiums under its market facilities division in the six months to June 30th 2020, up from $22.2 million in the prior year.

The segment made a slight loss, as expenses came out ahead of revenues for the period, but Beazley expects this will change over time and as it scales up.

Discussing the market facilities, Andrew Horton, CEO, said, “The largest growth was seen in our newly formed market facilities division with premiums increasing by 173%, albeit from a small base. At the start of 2020 we took the decision to split out this business from specialty lines into its own division.

“This new division, under the leadership of Will Roscoe, underwrites entire portfolios of business with the aim of offering a low cost mechanism for placing follow business within the Lloyd’s market.

“The expense ratio for this business is expected to reduce as we gain economies of scale from writing this business.”

Key to delivering on that is also the efficiency of capital, hence the use of the third-party capital backed ‘smart tracker’ special purpose arrangement (SPA) syndicate 5623 to channel this business to capital, via a quota share of broker facilities business that Beazley underwrites through its Syndicate 3623.

Unfortunately, the need for scale is indicative of the Lloyd’s market and the cost of doing business there, as well as intermediation costs.

Also of note today, Beazley said that its appetite for catastrophe reinsurance has increased due to the improving market pricing.

While overall Beazley’s reinsurance premiums shrank slightly, as the company took actions on underperforming segments. Catastrophe reinsurance underwriting actually increased at the recent July renewals.

CEO Horton explained that, “We have taken prompt action in our reinsurance division to actively manage the portfolio to ensure we are maximising profitability. This involved reducing our risk appetite for catastrophe reinsurance after the large natural catastrophes seen in 2017, 2018 and 2019 did not lead to large enough rate movements meaning that the margins for this business did not meet our profitability expectations.

“However, at the July renewals we have started to see rates improving and so have decided to allocate more of our overall risk appetite for the second half of the year.”

This is aligned with numerous traditional underwriters that are turning back to catastrophe reinsurance markets as rates firm and hoping to be in a position to increase their appetites for catastrophe risks at the end of year renewal season.