Improving the capitalisation structure of the industry

Capital allocation within Lloyd’s and run-off are two key focus areas for Schroder Secquaero as it continues to investigate innovative, alternative capital diversification structures for current and prospective clients.

Speaking to The ReInsurer about the Lloyd’s capital opportunity, Dirk Lohmann, chairman of Schroders, referred to this as a longer-term strategy due to the complexity of Lloyd’s as an entity and the need to educate certain investors of its nuances, but is optimistic there will be some movement in 2021.

“Next year would be a good time, but for some instances it may take longer, simply because Lloyd’s is a somewhat complex animal and there’s a lot of education that needs to be taking place for certain institutional investors,” said Lohmann.

For Mark Gibson, who joined Schroder Secquaero as ILS Solutions Manager in the summer, creating either a form of fund or some form of vehicle which allows investors to participate in Lloyd’s risk is a really exciting and sound proposition.

However, he recognises this is difficult for a “whole host of reasons”.

“It’s not just that Lloyd’s is a complex market, it is the fact that Lloyd’s syndicates themselves are quite diversified in their own structures. They are groupings of providers of capital,” he said.

“Some of those are supplied entirely by corporate capital in a totally aligned manner so in other words they may be owned by large insurance entity types, or they may be funded very substantially by what we might call traditional members of Lloyd’s and there’s a whole range of different combinations from one of those extremes to the other,” explained Gibson.

According to Gibson, for investors looking to go down the Lloyd’s capital allocation route, it’s not simply about getting access to the best performing syndicates.

He said: “It’s not just a question of choosing the syndicates and then saying ‘here we are, we’d like to invest’; it’s a question of whether or not those syndicates have a capacity for new capital, and if they do, what form can they receive it,” he added.

“Lloyd’s is a somewhat complex animal”

But to do this, expert advice and experience is required. When trying to do something new like bring a vehicle for a Lloyd’s participation together, Gibson likens it to pushing two or three rocks up a mountain at the same time.

“This, in itself, is a struggle, but when you put it together, the combination of trying to get everything done and aligned in the timeframe is a mighty challenge,” he said.

However, Schroders are not deterred and believe that despite the task at hand, there are some “really great reasons” why investors – particularly institutional investors – might want to do it.

“It’s just difficult to be sure of when exactly it can come about, but it will,” Gibson added.

Picking up on this point, Lohmann said: “With regards to the development of Schroders Secquaero, our philosophy was always to be looking at structured (re)insurance securitisation as a mechanism to provide the industry with a more efficient capital structure.

“And if you take a look at it, obviously CAT, which is quite capital intensive and is fairly standardised, almost commoditised, it’s a fairly simple solution, but we’ve always believed that there are other areas and other structures that can be developed in order to address improving the capitalisationstructure of the industry,” he concluded.

With regards to the run-off space, this is another area that Lohmann and Gibson think offers promise for investors who have longer investment horizons.

“It’s an area where there’s quite a bit of activity and there’s also quite a bit of significant involvement by private equity investors in that space but private equity always has a sell-by date,” said Lohmann.

“That means that at some point in time, they need to either take the whole vehicle that they’re building public, or they need to find someone to pick up the run-off after their exit is completed.” 

He added: “We also think that we have pension funds and life insurance companies and maybe sovereign wealth investors who have longer horizons that could also fit well with the cash flow and liability profiles of run-off.”