Lloyd’s announces London Bridge 2.0

Lloyd’s announces London Bridge 2.0

Lloyd’s has today announced that it has received regulatory approval from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to set up a second Protected Cell Company (PCC), based upon the original London Bridge Risk PCC (LBR).  The second vehicle will be called London Bridge PCC (LB2) and is intended to provide a broadened range of capabilities alongside enhanced investor accessibility.

LB2 will offer a number of extensions in the coverages it can write and the way in which those obligations can be funded, together with improvements in the execution of these collateralised transactions. It will allow qualifying institutional investors to deploy funds, in a tax transparent way, into the Lloyd’s market.

LB2 is authorised to undertake three additional capabilities:

• For a Corporate Member, in addition to writing quota share reinsurance, it will also be able to write excess of loss coverages.
• For a syndicate, it will be able to provide collateralised reinsurance, on both an excess of loss and quota share basis.
• For all structures it will be able to fund the reinsurance obligation through the offer, by the segregated cells of the PCC, of either preference share or debt securities.

The insurance management services for LB2 will be provided by Artex ILS Services UK Limited.

Burkhard Keese, CFO of Lloyd’s, has said “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.”

Alpha comment

We are still awaiting details for LB2, with a presentation from Artex expected in the next couple of weeks. However, it is clear that LB2 is targeting institutional capital, as was its predecessor LBR. The primary intention was not for LBR to focus solely upon catastrophe exposure, but to aid the creation of UK ILS (insurance-linked securities) products in response to the success of other insurance markets such as Bermuda. Thus far there have only been about 11 ILS issues in the UK market. LB2 will enable the creation of excess-of-loss products, rather than just the quota share arrangements available under LBR. LBR has been used twice; firstly by Ontario Teachers’ Pension Plan to support Lloyd’s syndicates and secondly by four pension funds to Nephila’s new Syndicate 2358. LBR is not suitable for the creation of spread underwriting portfolios and therefore generally not attractive for private capital. We await the details on LB2 as to whether this will still be the case. As we understand it the basic mechanism for how the PCC operates will remain the same. We will report further once we have more details.