Nephila Capital’s syndicate 2357 will educate investors about Lloyd’s

The approval and launch of the first Lloyd’s of London re/insurance market syndicate to be wholly backed by an insurance-linked securities (ILS) managers capital is expected to play a key role in educating a new audience of global investors about the Lloyd’s market.

In this way the approval to underwrite given to Syndicate 2357 on the 2nd August is seen as a key step forwards for the world’s oldest insurance and reinsurance market as it seeks to tap into the growing interest shown in the sector from third-party investors and alternative sources of capital.

Syndicate 2357 has been established by Nephila Capital as a way to broaden its access to risk for its investors. It is the first time that a syndicate has been formed solely backed by ILS or alternative capital in this way, although the Lloyd’s market is full of syndicates with backing from external investors.

Lloyd’s has published an article on its website discussing the importance of this first ILS capital backed syndicate joining the market. It says that the Nephila backed syndicate is the first of its kind as it is the only one to be backed by capital raised through an ILS type structure.

Nephila’s syndicate 2357 will focus on underwriting risk using its County Weighted Industry Loss (CWIL) product. So as well as bringing new capital to the Lloyd’s market Nephila is also bringing innovation in the form of products, something that Lloyd’s was particularly keen on. It will be of great benefit to Lloyd’s participants to have access to CWIL and the product should receive a lot of interest as an alternative to traditional catastrophe indemnity covers.

Tom Bolt, Director of Performance Management at Lloyd’s said; “This is the first syndicate we’ve approved that is solely focussed on writing reinsurance in this way. The syndicate adds a new dimension to a market that is better known for providing more traditional excess of loss coverage for catastrophe risks.”

Co-founder and principal of Nephila Capital Frank Majors explained the firms motivations for wanting to join the Lloyd’s market; “Lloyd’s can provide us with access to licences and ratings that as an ILS fund you just don’t have. That was the motivation for beginning the negotiations. Lloyd’s, however, made it clear to us they weren’t looking for just another catastrophe syndicate. With our CWIL product we were able to demonstrate that we can bring something new to the market. At the same time, the product is tried and tested and we bring with us an established book of business.”

The article says that one of the key benefits of having Nephila Capital in the Lloyd’s market is that it will help to educate a new audience of global investors about the Lloyd’s market and its players. That suggests that Lloyd’s sees Nephila’s participation as a way for it to reach out to the types of capital market and institutional investors that appreciate ILS and reinsurance-linked investments.

As we’ve written before, the Lloyd’s market contains many structures and mechanisms for external investors to gain access to the return of the market. Nephila’s participation has certainly helped to raise the profile of Lloyd’s with the investor community that Artemis speaks with regularly, so perhaps this is already having an effect.

Tom Bolt continued; “Lloyd’s has been very successful for hundreds of years in attracting capital. Traditionally individuals underwriting as Names, more recently with corporate capital in the form of corporate members. Almost all pension funds are looking for uncorrelated assets. ILS provides them with a bond substitute – an alternative return stream uncorrelated with other markets.”

Being the largest and likely best known ILS investment manager, Nephila Capital is a good name to have associated with the Lloyd’s market. Bolt explained; “Nephila is well experienced in bringing in big institutional investors, so this allows Lloyd’s to access that capital and diversify its capital base. Over the long term it makes a bigger universe of investors familiar with Lloyd’s and its mechanics. That opens up a lot of options for those investors and for Lloyd’s to attract more of that capital either through new or existing syndicates.”

This is likely just the start of Lloyd’s interaction with ILS markets and alternative reinsurance capital. The syndicate structured market approach is very attractive to ILS managers and offers access to new and diverse risks as well as interesting opportunities at the corporate insurance end of the scale as well.

This trend is just beginning and Lloyd’s itself clearly recognises its importance.