The announcement today of a new insurance-linked securities (ILS) structure for the Lloyd’s of London insurance and reinsurance market brings much greater flexibility to the way Lloyd’s participants can access the capital markets and investors access risk from underwriters in the market.
The news was broken by the Financial Times overnight, as we reported earlier, but now Lloyd’s has released more details on its new insurance-linked securities (ILS) structure, which is a second protected cell company, not just an expansion of its first.
The new structure, London Bridge 2 PCC Ltd. (LB2), is an entirely new protected cell company, established to have much broader permissions for insurance-linked securities (ILS) business and so give greater flexibility and optionality to the market and investors.
Lloyd’s had been in discussions with regulators about expanding the scope of permissions for London Bridge Risk PCC, the first Lloyd’s ILS structure that was established in early 2021, but it seems those discussions have morphed into setting up an entirely new vehicle instead.
Lloyd’s said this morning that it has now received the necessary regulatory approvals from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to set up its second Protected Cell Company (PCC).
The new ILS PCC vehicle will provide “a broadened range of capabilities for the market and an enhanced accessibility for investors; a key deliverable of the Future at Lloyd’s strategy,” the market said.
Lloyd’s said it aims to build on the success of its first ILS structure with this new vehicle, as it will offer the market and investors greater optionality for how they transact and connect insurance or reinsurance risks with third-party capital.
The London Bridge 2 PCC provides a number of extensions to the range of coverages it can write, as well as to the way in which those obligations can be funded, plus other improvements in the execution of collateralised transactions, Lloyd’s explained.
LB2 provides “an access point for qualifying institutional investors, to deploy funds in a tax transparent way into the Lloyd’s market,” Lloyd’s said.
Adding that, “Lloyd’s members and managing agents will be able to use the new vehicle to manage their capital and risk management requirements by attracting new sources of capital and reinsurance protection.”
Importantly, the range of differences to the first London Bridge Risk PCC are significant and will answer a lot of the questions people have had over the usefulness of the first Lloyd’s ILS vehicle.
Right since the launch of London Bridge Risk PCC in 2021, it was recognised that its scope of permissions fell short of what both Lloyd’s participants and institutional investors really needed.
London Bridge 2 PCC (LB2) has been authorised to undertake three additional activities, Lloyd’s said.
First, for a Lloyd’s Corporate Member, as well as writing quota share reinsurance, LB2 will also be able to write excess of loss reinsurance coverages.
This is key, as London Bridge Risk PCC had been restricted to solely writing quota shares with a Member at Lloyd’s.
One point to note though, is that this new LB2 PCC structure perhaps renders London Bridge Risk PCC obsolete, in being able to undertake the same transaction types as well as a range of new activities.
Second and this could actually be the most transformative addition, the new LB2 PCC vehicle will be able to provide collateralised reinsurance, on both an excess of loss and quota share basis, to a syndicate at Lloyd’s.
So that expands the scope beyond Corporate Members only, which means the ILS fund market will be able to deliver their capacity to Lloyd’s Syndicates using a UK domiciled and Lloyd’s aligned special purpose vehicle, instead of having to use their offshore domiciled structures.
This move, to allow syndicates to enter into collateralised reinsurance via LB2, could actually be the most important step taken to-date in delivering on the UK’s ambitions to become a more important player in the global ILS market.
Thirdly, for all of the structures that are supported, LB2 can fund its reinsurance obligation through the offer, by the segregated cells of the PCC, of either preference share or debt securities.
Previously it was preference shares only, which was ok for the narrow quota share to Members scenario, but would have made it less appealing under excess-of-loss reinsurance and collateralised reinsurance arrangements for some ILS funds and other institutional investors.
Lloyd’s said that the work to set up the new ILS vehicle has also involved the development of a set of mandatory terms for the principal transaction documentation, designed specifically to provide greater commercial flexibility whilst maintaining regulatory compliance.
The Scope of Permissions will also enable new cells to be set up and reinsurance written without the need for any additional regulatory approval, providing these pre-defined and documented permissions are complied with.
That gets around one of the speed to market questions as well and means that once Lloyd’s syndicates, or members, enter into ILS arrangements through LB2, their renewal and expansion should be much simpler and faster to implement.
Which is key for ILS funds and investors, as they do not want to have to go through lengthy regulatory permissions every renewal season, just to recommit to the same partner on very similar underwriting terms.
In addition, as we reported earlier as well, Lloyd’s has an ambition to expand its ILS activities to longer-tailed and non-catastrophe lines, with the market’s reinsurance to close (RTC) mechanism seen as key.
As with the first London Bridge Risk PCC vehicle, Lloyd’s has acted as the sponsor for the application to form the new PCC.
The LB2 PCC will be owned by an Orphan Charitable Trust, as was the case with LBR, which will provide an independently managed Transformer vehicle to the market, directly regulated by the PRA and FCA.
LB2 is designed to provide independent services to investors, Members and/ or Syndicates of Lloyd’s, depending on the nature of reinsurance written, with Artex Capital Solutions the insurance manager, we understand.
Burkhard Keese, CFO of Lloyd’s commented on the news, “I am delighted that we are able to build on the success of our initial risk transformation vehicle to offer the market a new vehicle with broader capabilities, thus enabling market participants to have more options to attract capital markets investors to support their underwriting at Lloyd’s.
“Both PCC vehicles will complement the more traditional approaches to deploying capital and managing risks at Lloyd’s, with LB2 offering an efficient route for institutional investors to support the growth and diversity of risks written in the market.”