Lloyd’s secures £650m Central Fund cover, £450m of it collateralised

Lloyd’s, the London insurance and reinsurance marketplace, has secured a £650 million cover for its Central Fund, with £450 million of it provided by an investment bank and fully collateralised, according to a report.

The FT reported first this morning that Lloyd’s has taken the plunge and secured a reinsurance or retrocession protection for its near £3 billion Central Fund.

The Fund, that protects the market and its members in case of major loss events, has been targeted for protection for some time, with Lloyd’s even exploring a catastrophe bond or insurance-linked securities (ILS) structure to cover it in the past.

Those ILS discussions went on hold previously, but perhaps the pandemic outbreak has sharpened focuses at Lloyd’s on what could happen in really significant loss scenarios, resulting in this cover being bought.

The FT reports that the £650 million cover consists of a £450 million fully collateralised layer provided via a cell structure and funded by investment bank JP Morgan.

It’s not clear at this time whether this was funded by the bank, or perhaps by third-party investors and sold by the bank.

The remaining £200 million comes from a group of eight major global reinsurance firms, which were Arch Capital, Berkshire Hathaway, Everest Re, Hannover Re, Munich Re, RenaissanceRe, SCOR and Swiss Re.

The £650 million cover for Lloyd’s Central Fund will provide aggregate protection across a five-year term beginning January 2021, the report states.

Thee aggregate cover will kick in at an attachment point of £600 million and exhaust at £1.25 billion of losses to Lloyd’s Central Fund.

This reinsurance agreement to cover Lloyd’s Central Fund is designed to protect the market and its members against major loss and stress events, ranging from pandemics to financial crises.

Which would appear to mean it’s not a named peril cover in any way, rather an indemnity protection, covering the Central Fund when market losses attach to it and rise above a certain level.

Burkhard Keesee, CFO of Lloyd’s, told the FT, “In the event that something really, really big happens, this makes it much more safe for our policyholders that we will basically pay out the claims they are entitled to receive some money for.”

He also explained that because of the low cost-of-capital of the structure it will provide some leverage and allow the Lloyd’s market to underwriting more business, perhaps as much as 30% to 40% more in overall premiums.

Which in the current harder market environment could go a long way to explaining why this has now been possible, where perhaps it did not make such economic sense before.

Aon is the broker responsible for structuring and placing this reinsurance cover for the Lloyd’s Central Fund.

The first £450 million, which was fully collateralised and placed using a JP Morgan financed cell structure, has had its funds invested in safe assets, Keese said.

Which makes it sound like an ILS cover, although perhaps backed by investment bank financing rather than ILS funds or investors.

However, this would give Lloyd’s an established structure into which to introduce third-party capital in time, should that be appealing.

As well as enhancing the leverage within Lloyd’s, so allowing it to do more with its capital, it’s also expected the Central Fund reinsurance cover will improve the markets solvency ratio.

This is the first time the Central Fund has had a reinsurance arrangement since 1999, but the structure is a first for Lloyd’s.

The last time the Central Fund was claimed against was back in 2007, but aggregate claims against it have never exceeded the attachment point for this new cover before, Lloyd’s explained, which makes this a relatively remote cover and so one that ILS investors could be interested in, in time.

Burkhard Keese, CFO of Lloyd’s, commented, “We are very proud to place this innovative cover with eight of the world’s leading reinsurance companies and secure the support and commitment from one of the largest investment banks, J.P. Morgan. This unique structure will enable us to support the market’s growth ambitions over the next few years, whilst also strengthening the resilience of our balance sheet. Our capital management and position are now more resilient than ever, providing enhanced protection for customers.”