Lloyd’s advancing ILS investor discussions on London Bridge Risk use

Lloyd’s is said to be in “advanced discussions” with some major investors that are looking to use its insurance-linked securities (ILS) structure, the multi Insurance Special Purpose Vehicle (mISPV) named London Bridge Risk PCC Ltd.

The London Bridge Risk PCC Ltd. structure was approved by regulators and launched back in January 2021.

The FT reported this week that Lloyd’s CFO Burkhard Keese said the Corporation is in “advanced discussions” with two large investors about using the new ILS structure to access reinsurance linked underwriting returns from market participants.

As we explained the last time we covered Lloyd’s London Bridge Risk PCC ILS structure, for now it is limited in how it can be used to quota share reinsurance transactions with a Lloyd’s member.

What this means is that an investor can enter into a quota share reinsurance arrangement with a specific Lloyd’s member, thereby gaining direct exposure to member-linked underwriting performance.

It’s an efficient alternative through which investors can access underwriting returns from the Lloyd’s market, while remaining tax neutral and avoiding some of the expense and regulatory overheads of other routes to access the market.

As a result, it should be particularly appealing to investors that are looking to broaden their allocations to the global reinsurance or insurance-linked securities (ILS) market with a focus on specialty classes of business, or to investors simply looking for a low-friction way to generate returns from Lloyd’s.

Keese also told the FT that major institutional investors are “hunting” for investments that are uncorrelated, one of the key attractions to direct reinsurance investments through ILS securities and structures.

At the same time London Bridge Risk PCC offers Lloyd’s members and syndicates a way to lower their cost-of-capital by accessing efficient institutional funding.

A spokesperson from Lloyd’s explained the importance of London Bridge Risk PCC to the Corporation and market participants, “Lloyd’s sponsored the creation of London Bridge as it is important for our members and their syndicates to have all types of equity financing available to remain competitive and to optimise their cost of capital.

“So far Names, insurance groups and third party capital are invested in Lloyd’s. But structurally, it was not very attractive or easy, and quite burdensome for institutional investors to deploy their money into the Lloyd’s market.

“Now, with the sponsorship of the new London Bridge Risk platform, we are introducing the only on-shore ILS option for investing at Lloyd’s. ILS investment is of course not new to Lloyd’s, but it was not previously available in the UK.”

Lloyd’s spokesperson highlighted the efficient nature of the ILS structure, how it allows for rapid deployment of capital through a multi-celled structure and that given the standardised nature of contracts it does not need regulatory approval for new cells to be established.

That’s important as it should allow for investors to get up and running relatively quickly and this will also be simpler due to the quota share nature of the reinsurance contracts that can be entered into through it, given these can be relatively standardised as well.

“London bridge is the only multi-cell PCC structure registered in the UK and now fully available to the market, allowing for transparent investments into the Lloyd’s market,” the spokesperson explained.

Lloyd’s also hopes that its ILS structure London Bridge Risk PCC will help investors to access a broader range of perils than just catastrophe risk alone, which is more typical in insurance-linked securities (ILS).

“In terms of scope, the ILS market is currently dominated by catastrophe risk. However, Lloyd’s unique structures, such as the ‘reinsurance to close process’ allows for new classes of business accessible to institutional investors,” the spokesperson highlighted.

Adding, “We are currently in discussions with investors about setting up such an arrangement.”

Lloyd’s had previously told us that it hoped to see the London Bridge Risk ILS structure used in advance of the year-end ‘Coming into Line’ process, which is typically in November.

Given the advanced discussions said to be ongoing with investors, it seems highly possible that target will be met.