Significant improvements in trading conditions and a search for yield on investments has triggered a resurgence of interest in investing in Lloyd’s, according to Hampden Agencies CEO Neil Smith.
“There has definitely been a resurgence, particularly by some of the advisors looking after high net worth families and corporate membership has also become an exciting prospect,” an upbeat Smith told The Insurer.
“But the resurgence has really come from the low interest rate, that search for yield on investments and improving market conditions. A torch has been shone into this investment corner and people are able to see the benefit of double usage of assets and the tax benefits so people are thinking that maybe they should look at this as part of the higher risk end of their investment portfolio.”
Unlike other investment opportunities, becoming a Lloyd’s Member is not simply like buying a share. Members are actually trading at Lloyd’s and receiving earned profit and according to Smith, some investor factions are seeing this as an “intriguing” opportunity.
Speaking to The Insurer ahead of communicating to Hampden clients this week, which these days include high net worth private clients, wealth management firms, family offices, investment companies and increasingly corporate clients, on 2021 underwriting opportunities, Smith said that it really does feel like “true change” in the market cycle.
“The market circumstances at the moment are very positive in most classes of business and as such, we are actively encouraging our clients to use some of their firepower to take advantage of these conditions,” he said.
In an August letter to clients, seen by this publication, he explained that, “All underwriters are reporting to us that 2020 is experiencing an acceleration in the improvement in the market that began in 2018, and that 2021 presents some exciting prospects. This is the first time since 2002 that we are able to report that nearly every class of business is experiencing hard or hardening conditions.
Driven up by a combination of high catastrophe losses, underperforming non-cat lines, a decline in reserves’ strength, a retrenchment in capacity driven by remediation measures from major carriers such as Lloyd’s, AIG, Allianz and Swiss Re, low investment returns and the uncertainty over Covid-19 exposures, today’s firming rates reflect a significant change in the approach to underwriting by (re)insurers.
Pre-emptions: Members should be “encouraged”
Their optimism is evident. Over the past few weeks, Lloyd’s pre-emption requests have boomed as syndicates look to capitalise on the 2021 hard market by expanding their approved maximum amount of business they can write next year.
The Insurer has revealed that small-to-mid sized carriers such as Argenta, Victor and Blenheim are targeting significant increases in stamp capacity for the 2021 year of account and this has been backed up by requests from more established managing agents, such as Atrium and Beazley.
The Insurer is aware of at least £1.1bn in additional capacity being requested for 2021 among third-party capital syndicates – see table for more details – with this total potentially rising as more syndicates submit requests.
The near 350-year old market consists of nearly one hundred different syndicates which both compete fiercely in the London subscription market while also part “mutualising” their exposures via a collective contribution to the Central Fund, the final “chain” in the Lloyd’s security which guarantees all valid claims will be paid even if a syndicate ceases trading.
Around a third of them are open to third-party investors and Hampden is the largest of the three Members agents who are licenced to advise capital providers to the market.
In 2020, nearly £3bn of Lloyd’s capacity is represented by Hampden, consisting of both private investors and trade capital providers. In total, Lloyd’s capacity in 2020 is around £36bn.
For the first three hundred years of the Lloyd’s market, all capital was provided by wealthy individuals, or Names, who committed their entire wealth on an unlimited basis. But since the introduction of corporate capital in the nineties, private investors have become a distinct minority and now represent around ten percent of the market’s entire capital (see chart). The vast majority also now underwrite on a limited liability basis although there are still around 150-200 traditionalists who retain the small tax advantages that unlimited liability confers.
Writing to clients, Smith said: “Taking into account all the indicative pre-emptions and increases, we expect the overall average offer of increased potential capacity to be circa 15 percent of a Member’s current premium income limit.”
Speaking to The Insurer, he said: “Third party capital has been a mainstay at Lloyd’s and its flexibility, understanding of the cyclical nature of the business and its long-term nature, makes it a great option for syndicates looking to grow into the hard market,” said Smith. “We are receiving a lot of positive enquiries.”
He added: “Lloyd’s wants to have the assurance that the capital is sticky and capital only sticks around if it’s had a good time. Obviously our clients have had losses, but they are fully capitalised and many are over capitalised in a way that should the market pre-empt they’re going to be able to take those pre-emptions.”
However, selection will be key and quality should be at the top of the criteria list.
“I think people will be selective on preemptions,” said Smith. “Our advice would always be to take the quality pre-emptions of the businesses that you know and that can add to a portfolio. So for clients, that might mean an increase in their underwriting which means they use a little bit more of their capital or indeed that they put forward more capital into the system.”
There are several routes Members can go down. According to Smith, most of Hampden’s clients will be looking at those quality syndicates in their portfolio, which are generally made up of the top 25 percent quartile, and will look to grow those. There might also be the opportunity to increase line sizes in a syndicate that has performed well. There will also be pre-emptions in the market which not everyone will take, leading to opportunities at auctions for Members.
Smith said they should feel “encouraged” to increase their level of underwriting over and above the amount of pre-emptions and that Lloyd’s provides an exciting opportunity for brand new Members as well.
On whether there will be new syndicates established this year with private capital support, Smith confirmed that Hampden’s inhouse research team is currently reviewing two opportunities, but that they were not at the point of providing a recommendation to clients.
“There are SIAB opportunities coming through the platform which our brokers have been talking to us about and indeed some of them are contacting us directly,” said Smith. “It’s interesting because some of them will already have lines of capital, but the plug in play route will be an interesting one for us in terms of how we use our capital for those opportunities.”
Lloyd’s capital solution
As much as Lloyd’s wants the assurance of long-term capital, the Corporation has also realised it needs to review its capital solution and has outlined new measures in the Future At Lloyd’s Blueprint so capital can access new risk opportunities more easily.
The capital solution outlined in the Blueprint is a new end-to-end journey for investing at Lloyd’s with simpler, nimbler rules and processes, and new structured investment opportunities, which will be supported by a new capital platform, thereby improving the experience of existing Members and attracting new alternative capital providers.
“It’s great this sits in a defined strand in the Blueprint and John Neal has been pretty open about it all too, saying, ‘we haven’t got all of the answers so you can bring some to us and get involved in working groups’,” said Smith.
“We’ve been involved with some of the capital working groups and have been reviewing our position. Our footprint within the Lloyd’s market is about £3bn of capacity so we are significant players and we’ve had a lot of experience.”
Pleased with what he’s seen at Lloyd’s and the progress made so far, Smith feels the initiatives could go a bit further.
“On the whole, I’m pleased by what I’ve seen at Lloyd’s. The timing is necessary, even though it might have unfortunately been hijacked by circumstance but these workstreams are still going on. Of course, I’m equally bound to say that they could do more. This work has been a long time coming. The drive for economies is massively important because doing business at Lloyd’s is massively expensive - there’s no doubt about that,” concludes Smith.