Lloyd’s ILS vehicle London Bridge Risk PCC approved for use

Lloyd’s has this morning announced that it has finally received all necessary approvals from regulators to set up its new multi Insurance Special Purpose Vehicle (mISPV), which is named London Bridge Risk PCC Ltd.

The application for the registration of the UK domiciled mISPV structure, a protected cell company allowing for the transfer and trading of insurance and reinsurance risks on a collateralised basis, has taken some time, as the plans had been approved by Lloyd’s Council back in early September and the application made before the end of that month.

There had been a hope that the Lloyd’s multi-arrangement UK Insurance Special Purpose Vehicle (iSPV) would be ready for use by the end of 2020, which always seemed a little ambitious, but the process with regulators the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) did not move as fast as hoped for, it seems.

The approval has now been received, for what Lloyd’s is calling “a key milestone for the Future at Lloyd’s strategy.”

The Lloyd’s market believes the mISPV will make it simpler for investors to access the returns of insurance and reinsurance businesses operating there, offering a new platform to “improve the ease and transparency of managing capital.”

So Lloyd’s has now successfully sponsored the set-up and launch of an independently owned and managed UK Protected Cell Company (PCC), named London Bridge Risk PCC Limited.

London Bridge Risk PCC is expected to provide an access point for both UK and international investors, ” including insurance-linked securities (ILS) investors,” with a route to deploy funds in a “tax transparent way” into the Lloyd’s marketplace.

That’s an important clarification, the fact this “includes” being relevant to ILS investors, we feel.

All the way through the development of the PCC for Lloyd’s, the market has been talking it up as a pure ILS structure.

But it became clear that this isn’t really the case, rather it is a vehicle for investors to allocate more efficiently to funds at Lloyd’s, so deploying capital through Lloyd’s Members.

Which isn’t quite the same as an ILS structure, as it’s not a pure transfer of risk to capital, rather it’s a route to invest in the performance of specific Lloyd’s business, but not a pure insurance-linked return as it will have some asset exposure as well it seems.

Each cell of London Bridge Risk PCC will therefore provide capital to members at Lloyd’s, replicating what some ILS funds have already achieved through their own Fund’s at Lloyd’s.

London Bridge Risk PCC will be a much simpler way to achieve this, especially alongside the new InvestCloud software platform that will enable investors to manage their allocations to the Lloyd’s market more effectively.

Lloyd’s explained today that:

Lloyd’s Members will be able to use the new vehicle to manage their capital requirements by attracting new classes of investors such as pension funds, and benefitting from reduced set-up times and lower transactional costs. In addition, standardised documentation and processes have been developed, designed to make the process quicker, more tax transparent and to streamline the approach to regulatory approval for investors. Provided new individual proposals utilise the standard documentation and stay within the regulators ‘Scope of Permissions’, it will be a simple notification process for each deal, removing the need for costly, and often lengthy, individual applications.

Lloyd’s also noted that the mISPV, London Bridge Risk PCC Limited, will operate as an independently owned and managed entity, with insurance management services being provided by experienced ILS structure manager and administrator Horseshoe.

Lloyd’s CFO Burkhard Keese, CFO, commented on the launch, “As part of the Future at Lloyd’s strategy, we continue to look at all ways we can make it easier and more efficient to deploy and manage capital at Lloyd’s. We are delighted that Lloyd’s has received regulatory approval to set up a new investment platform that will be available for all of the market to use. Through our sponsorship of the London Bridge Risk PCC we’ll give investors the option of a new tax transparent way to participate in the market with standardised documents and a much simpler repeatable process.

“ILS investment is not new to Lloyd’s, but this is the first time that a UK PCC has been set up as a platform to allow investors to back and provide capital to Members at Lloyd’s. We look forward to working with investors and Lloyd’s Members who wish to use this new PCC to structure their participation at Lloyd’s.”

Lloyd’s explained the ownership details of London Bridge Risk PCC, saying that it acted as the sponsor for the application to form the new PCC, but that the PCC will be owned by an Orphan Charitable Trust.

Lloyd’s said that this will provide “an independently managed Transformer vehicle to the market, directly regulated by the PRA and FCA.”

That’s interesting, as it isn’t really being pitched as a transformer at all.

A transformer, for ILS and collateralised reinsurance, would typically enable risk and capital to transact directly and transform the results, or take a transaction and transform it into securities.

But London Bridge Risk PCC is being pitched as an entry point for capital to back Fund’s at Lloyd’s, at least that is how the market has positioned it to-date.

A true transformer may have been a far more compelling option for ILS funds and their investors, effectively setting free risk from the Lloyd’s market construct and enabling underwriters at Lloyd’s to access diverse capital through a route under the control of the marketplace (something we discussed as potentially a good idea for Lloyd’s back in late 2015).

It is a transformer vehicle though, with the ability to transact directly in collateralised reinsurance and also to issue securities, should it want to (perhaps with some additional approvals required, we can’t be sure).

Which makes another point worth considering. That a UK PCC set up as an mISPV, like London Bridge Risk PCC, can issue catastrophe bond notes to investors, as the recent Brit cat bond transaction achieved.

So that means, should Lloyd’s seek to extend the use of London Bridge Risk PCC in future, it could potentially issue a catastrophe bond on behalf of Lloyd’s Central Fund protection strategy, something that had been discussed and Lloyd’s investigated some years back.

London Bridge Risk PCC Limited will offer independent services to investors and Members of Lloyd’s, while its day-to-day management will be provided by Horseshoe Ltd, while the Board of London Bridge Risk PCC Ltd. will have responsibility for running the PCC.

The London Bridge Risk PCC Ltd Board is made up of three Directors: Mike Baker from Horseshoe as the CFO, Helena Whitaker from Intertrust Ltd as the CEO, and Mark Dyson from Lloyd’s as the Chair.