Lloyd’s to announce significant London Bridge 2 ILS expansion plan

Lloyd’s of London will today announce a significant expansion of its London Bridge insurance-linked securities (ILS) platform, with a plan to welcome more capital, new types of reinsurance transactions and make the transfer of different kinds of risks to capital market investors simpler.

Dubbed London Bridge 2, according to the Financial Times that was given an exclusive, Lloyd’s will announce what it believes is a major step that will allow it to catch up with offshore insurance-linked securities (ILS) jurisdictions.

Lloyd’s launched its first insurance-linked securities (ILS) vehicle over a year ago now and the London Bridge Risk PCC Ltd. structure was approved by regulators and available for use back in January 2021.

Since then, the structure has been used to fund a number of Lloyd’s underwriting operations, including by Canadian pension Ontario Teachers’ and ILS fund management giant Nephila Capital.

That only amounts to around $200 million of third-party capital being funnelled into the Lloyd’s marketplace so far.

But with the expansion of London Bridge to be announced today, which it turns out includes a brand new PCC named London Bridge 2 PCC Ltd. (LB2) the ambition is to attract billions in funds from capital market investors.

Changes to be announced include the ability to enter into excess-of-loss reinsurance contracts via London Bridge Risk PCC, according to the FT’s report.

Lloyd’s has been in negotiations with regulators over expanding the Scope of Permissions form London Bridge Risk PCC for some time, as we’ve reported before, with the ability to transact in excess-of-loss format a key reinsurance need.

Previously all the London Bridge Risk PCC could do was enter into quota shares with a Lloyd’s member.

The announcement will also reveal the ability for transactions to deliver different investment options, with now both preference shares and debt securities able to be issued by the cells of the structure, to allow investors to allocate capital to support reinsurance arrangements into the Lloyd’s market in their preferred way.

Other “regulatory hurdles” are also said ready to fall away, presumably through an expanded scope of permissions for London Bridge Risk.

Excess-of-loss reinsurance is perhaps the biggest change for the ILS market, making it possible to transact with underwriting members at Lloyd’s in a similar fashion to more typical reinsurance and retrocession, or catastrophe bonds, but on a collateralised basis through a vehicle regulated and domiciled in the United Kingdom.

Burkard Keese, CFO of Lloyd’s and set to deliver a keynote speech at our upcoming conference in London this September, told the FT that he considers the changes a “major step” in Lloyd’s ILS ambitions.

“Billions” of alternative capital could be attracted to Lloyd’s through the ILS structures and transactions it will be able to support now, levelling the playing field with other offshore jurisdictions.

“The speed of possible execution of transactions is now super fast, and we are at least as quick as other jurisdictions can be,” Keese told the FT. “It is the speed of execution that is awfully important for potential investors.

Keese also explained that Lloyd’s reinsurance to close (RTC) mechanism could be key for enabling ILS investors to access longer-tailed and non-catastrophe lines of business from the Lloyd’s marketplace.

This will allow books of business away from property catastrophe reinsurance risks to be securitised and transferred using the London Bridge 2 PCC ILS structure, he believes.

Lloyd’s said it has received the necessary regulatory approvals for the changes and a full announcement is expected to be made later today.

Register for our upcoming September 6th ILS conference in London today.