Lloyd’s central fund ILS deal “not off the table” (but not actively pursued)

An insurance-linked securities (ILS) transaction to protect the Central Fund of the Lloyd’s insurance and reinsurance market is “not off the table” according to executives speaking at a media briefing today.

Lloyd’s of London is actively seeking ways to bring new forms of third-party capital more meaningfully into the market, partly as response to investor demand for insurance and reinsurance linked returns, partly as a realisation it needs to be doing more in this space.

As we explained earlier today, Lloyd’s CFO Burkhard Keese responded to our question at an earlier analyst briefing this morning to say that ILS investors are showing “huge interest” in accessing the Lloyd’s market.

But another initiative involving ILS capital, the previously mooted and loosely marketed by Lloyd’s, investigations into the potential use of insurance-linked securities (ILS) to protect its Central Fund, remains an option but does not sound as if it is being actively pursued right now.

Answering questions from journalists at a midday briefing today, CFO Keese explained that there has been no additional movement on the Central Fund ILS deal.

He explained that it’s a case of, “Not at the moment, frankly. We are always reviewing all opportunities but as usual we are not disclosing any details on any transactions. But, at the moment, I’m not aware of anything.”

Pressed as to whether the Central Fund ILS deal is still under consideration, Lloyd’s Director of Performance Management John Hancock stressed, “Not actively right now, although it is not off the table.”

The idea of bringing a layer of ILS capacity into the market as an almost retrocessional reinsurance protection to sit across and cover certain return periods of losses to its Central Fund, the initiative had gained some traction last year.

Pitched as a kind of catastrophe bond or securitisation of a portion of the Central Fund’s risks, the mooted ILS deal had gained some support among investors.

This initiative to put some kind of ILS backed layer of protection across (or alongside) the Central Fund was put on hold back in Q3 2018.

With the Lloyd’s market still well-capitalised, something that hasn’t changed and in fact has only improved over the first-half of 2019, it seems unlikely the market feels the immediate need for such an ILS transaction.

Perhaps preferring to focus on the upcoming publication of the Blueprint and initiatives that seek to bring ILS capital into Lloyd’s as supportive to its members, while enabling investors to access its insurance and reinsurance linked returns.

The Central Fund ILS transaction had been mooted as more of a hedge, which right now may not seem as urgent given the build-up of capital and solvency in the Lloyd’s market.

The transaction was also a complex one, given it suggested a more whole-account approach to hedging Lloyd’s performance, involving multiple lines of business, across both catastrophe and non-catastrophe books.

Of course, we’d say the more current initiatives to enable ILS investors to access the market are a little better-aligned with investor motivations for accessing the market. However Lloyd’s must be careful not to just treat ILS investors as hedging capacity, or following support for their underwriters.

ILS capital wants to access the business selectively at Lloyd’s, hence enabling ILS fund managers to access and operate in the market more readily, bringing their investors with them, may ultimately prove a better solution than some of the others on the table.

Although, an ETF type approach to letting investors allocate to a fund delivering Lloyd’s market-like returns may prove attractive to some, just so long as the continuing performance issues continue to be improved first.

A kind of quota-share sidecar vehicle, perhaps even exchange listed, could meet a wide variety of investor needs and provide a spread of market-wide returns.

We understand that structures such as this have been under consideration. While they won’t solve for all investors (the most sophisticated want more specific alpha generation from underwriting), a better performing Lloyd’s underwriting book could be a particularly diversified way to access insurance-linked returns.

Keese is confident Lloyd’s will prove an attractive option to investors, saying “We’re going to make it easier and I’m pretty sure that we will attract different sources of capital.”

While attracting capital shouldn’t be a problem, the main issue is finding a way for ILS investors to tap the insurance and reinsurance market’s returns that is aligned both with the ambitions of the Corporation and the ambitions of the underwriting members themselves.