Demonstrating how challenging it can be to bring third-party capital into the Lloyd’s insurance and reinsurance market, Brit’s newly launched insurance-linked securities (ILS) fund strategy takes a roundabout route to connect the capacity with the returns of its underwriting in the market.
Brit announced the launch of its Sussex Specialty Insurance Fund yesterday, calling it the first ILS structure of its kind to offer investors access to the returns of Lloyd’s business.
Now, the company has disclosed some more details surrounding the structure and they portray the challenges of connecting ILS capital with the Lloyd’s market, underlining the importance that Lloyd’s makes this much simpler with its ongoing Future at Lloyd’s Blueprint initiative.
The fund itself is a Bermuda based structure, part of Brit’s Sussex Capital offering which is based on the island.
To gain access to the returns of Brit’s underwriting business at Lloyd’s, the Sussex Specialty Insurance Fund will take whole account exposure to Brit’s Syndicate 2988, via a corporate member vehicle.
The collateral is being lodged as funds at Lloyd’s (FAL) through the corporate member vehicle. Unusually for an ILS strategy, there will be an investment strategy as a result of this and Brit explained that it will take a conservative approach to investment risk with the corporate members FAL account.
Funds at Lloyd’s can also provide some leverage as well, although we’re not sure whether Brit is taking advantage of this, or staying true to the ILS market in keeping closer to fully collateralised reinsurance in this case. The option to add leverage, as members can typically underwrite a multiple of their FAL’s, will be there should Brit decide to use it, we suppose.
Brit sees the new ILS fund strategy as a way to access its underwriting capability through the Lloyd’s market.
The company believes that investors in insurance-linked securities (ILS) and reinsurance linked investing are looking for new options, to access risk in different ways and from a wider array of sources.
Some investors are just looking for more ways to access pure property catastrophe risks, while others seek to diversify ILS holdings into more esoteric risk classes, Brit explained.
The company sees its new Sussex Specialty Fund as sitting in a higher return bucket, but offering investors access to the returns of a highly diversified underlying portfolio consisting of short and long-tail exposures across property & casualty business.
As a result, Brit is targeting the new strategy at more sophisticated investors, that are familiar with ILS and comfortable with taking a longer-term investment view than your typical ILS fund strategy would require.
Syndicate 2988, which the fund acts as a feeder into, underwrites a broad range of specialty lines from Lloyd’s, so will have more tail-risk associated with it than most ILS strategies as a result.
In fact, Syndicate 2988 underwrote risk classes in 2019 that included, property, political risks and violence, marine, aviation, accident & health, longer-tailed professional lines, specialist liability, some U.S. casualty, property and some reinsurance (short and longer-tailed).
Whole account structures have existed in ILS, but this is perhaps one of the first to offer such a diverse range of risks to its investors.
The syndicate only launched in 2016 and began underwriting in 2017, but fell to an underwriting loss in its first two years largely due to the impacts of catastrophe events, with combined ratios of almost 173% for 2017 and 128% for 2018.
The additional capacity that Brit can now source through its ILS fund for the syndicate will help it to grow its portfolio, hopefully profitably as long as major catastrophe losses remain more scarce.
It’s likely that Brit will look to capitalise this new fund in time for the January renewals, so investors would only enter the structure at the beginning of a new underwriting year.
We assume there will be a longer lock-in than a typical ILS fund, to ensure continuity of capital for paying claims, given the tail evident in many of the classes of business that the syndicate underwrites.
Brit has done a great job of wrangling the ILS market structures and Lloyd’s mechanisms to create this investment opportunity, which is going to be a relatively unique proposition in the marketplace at this time given the broad spread of risks it will feature.
The company said it aims to offer a full range of insurance and reinsurance ILS funds to investors and would also offer the ability to blend portfolios to achieve specific risk return characteristics in future as well.