Pioneer to run-off Syndicate 1980, favouring other capital arrangements

Pioneer Underwriters, the specialist underwriting services organisation that looks to match its risks with various sources of capital, is to run-off its Syndicate 1980 at Lloyd’s saying that “the syndicate structure is no longer economically efficient when compared with its other capital arrangements.”

Pioneer Underwriters has always been open to other forms of capital, writes some collateralised reinsurance business and even ILW’s, and we understand in recent months has increased its discussions with alternative sources of reinsurance capital, including ILS funds and investors, in particular in relation to its catastrophe facilities.

But it is telling, in the current market environment with all the discussion of the need for efficiency in matching risk and capital (something Pioneer strives for), that an underwriter would pull its syndicate operation at Lloyd’s as it believes it can manage and marshal capital more cost-effectively through other means.

Pioneer has been undertaking an internal strategic review to align risks it underwrites with effective and cost-efficient forms of capital, which will drive its underwriting strategy going forwards.

The company’s underwriting services business (MGA) has already been adjusted to focus more on underwriting business where Pioneer can offer clients more differentiated value through its expertise and distribution routes.

As a result, the company has already withdrawn from some lines of business in the last year, which it now says has led to encouraging results.

At its Lloyd’s operation, the Pioneer Syndicate 1980, the cmpany said performance has improved, resulting in a forecast 2019 underwriting year of account combined ratio of 96%, much lower than the catastrophe hit 130% it saw in 2018.

But, despite this and also Lloyd’s approval of a 2020 Syndicate business plan with a small increase in underwriting capacity, Pioneer says that “the cost of capital within the syndicate structure is no longer economically efficient when compared with its other capital arrangements.”

Because of this, the board of Pioneer has decided not move forwards with the syndicate for the 2020 underwriting year.

Asta, the managing agency looking after Syndicate 1980 for Pioneer, will assist in ensuring the run off of the syndicate is a smooth process, with work undertaken with brokers and clients to facilitate business transfer to replacement capital providers, where appropriate.

Pioneer works with a wide-range of capital providers, including increasingly with insurance-linked securities (ILS) investors and also some ILS funds we believe.

The company is in the process of renewing its more than 20 capital providers across a range of facilities, with the largest facility already finalised and commitments received on others.

The company has both renewal and new capital, Pioneer said, which will replace a significant proportion of Syndicate 1980 capacity across a number of classes of its underwriting business and the company now plans to underwrite more than £200 million of gross written premium in 2020.

Syndicate 1980 wrote around £126 million of premium, while Pioneer as a whole managed roughly £300 million.

We’re told the company has been in discussions with ILS or alternative sources of reinsurance capital on a number of its facilities in preparation for the year ahead and is likely to leverage more institutional money from ILS investors or funds in 2020 and beyond.

In order to double-down on its focus on matching risk with capital in the most effective and efficient way stepping away from Lloyd’s is perhaps a natural move, to deliver the best returns to its capital backers and make the best profits for itself.

If running a Lloyd’s syndicate no longer fits in these plans for Pioneer, as it just isn’t as cost-effective as other structures, then running off 1980 is exactly the right thing to do.

There comes a point where many underwriting operations at Lloyd’s may need to look closely at the cost of doing business there and whether it fits with their strategies and mandates, delivering on what their capital providers need in the best possible way.

Lloyd’s can be an expensive place to operate and do business. While there are clear benefits to being part of that market, it isn’t going to be suitable for everyone.

Pioneer’s move shows that there are other options that can work just as, or more, effectively and efficiently for the capital providers and underwriters and the company is making the right move by recognising that it can match risk and capital more efficiently outside of the marketplace.

Andrew McMellin, group chief executive at Pioneer, commented, “As a result of this work, Pioneer is leaner and focused on providing the value to capital necessary to generate superior returns through the core underwriting services platform (MGA). In our view, customers, employees and shareholders are better served by Pioneer as a focused underwriting services organisation and we look forward to a successful 2020.”

In 2019 Pioneer hired Andrew Souter to manage the capital and reinsurance purchasing functions within the company and to develop and implement a capital strategy for the group. It will be interesting to see how the underwriting services company increases its activities with ILS capital and what this means for Pioneer going forwards.