Rear & Allen SPAC plans £1bn listed Lloyd’s vehicle, using London Bridge 2 PCC

Financials Acquisition Corp, a special purpose acquisition company launched in 2022 by sector executives William Allen and Andrew Rear, is in talks on a deal to launch a £1 billion capacity listed Lloyd’s underwriting investment vehicle, that will use ILS structure London Bridge 2 PCC Ltd. to channel institutional capital into the market.

Financial Acquisition Corp was sponsored by FINSAC LLC and had plans to raise £150 million through a listing on the London Stock Exchange (LSE).

FINSAC is a limited liability partnership founded by Will Allen, formerly of investment bank KBW and Andy Rear, a former Munich Re executive who had a significant hand in the development of the firms Digital Partners insurtech unit.

The venture is supported by institutional and strategic investors, and also industry experts, including insurance-linked securities (ILS) specialist Aditya Dutt of Aeolus Capital Management and Dominic Christian, Global Chairman of Reinsurance Solutions at Aon, while Paul Jardine is also involved as a Senior Independent Non-Executive Director

Expected to have an insurtech focus, it now appears the SPAC is looking at an opportunity to get into Lloyd’s in a more meaningful way, as a tech-focused underwriting vehicle backed by institutional capital crowded into the market using the Lloyd’s ILS structure London Bridge 2 PCC.

The SPAC entity reported today that it has recently identified a business combination opportunity that it proposes to pursue.

This could involve “raising additional capital and becoming a listed operating company deploying funds into the Lloyds of London insurance market for reinsurance purposes,” it explained.

Negotiations are at an early stage and it noted no guarantee anything goes ahead, but has asked for an extension to its deadline by which time it needs to effect a combination to allow for them to continue.

The timing is of course very good for a new market launch and it’s clear the SPAC and its founders are aware of the opportunity.

“During the Company’s search process it became clear that the global specialty insurance market and specifically risk underwritten in the Lloyd’s market offered some of most attractive risk adjusted returns globally. The Company notes that since 2017 rates have been hardening in this market rising on average by over 70% adjusted for inflation. The Company notes that this hardening market has been driven by core claims inflation, large losses from Covid-19, natural catastrophes, Ukrainian war and capital markets uncertainty. The Company notes that the market as a whole has also been benefitting from improved efficiency driven by both technology and the work of the Lloyd’s management team,” they explained.

In addition, they highlight that, “Over the last year Lloyd’s has created a new structure, London Bridge 2 PCC Ltd, which allows easier access for institutional capital into the market.”

Saying, “This, combined with the Company’s management team, board of director and advisor relationships within the market leads the Company to believe that it can create an efficient vehicle for investors to access attractive returns without paying significant goodwill or adding further fee structures. Upon completion of the Proposed Transaction, the Company’s core strategy will be to focus on the Lloyd’s market, and understands that it will be one of the only Main Market listed companies in London with such a core focus.”

The goal is to curate a portfolio of insurance risk “to provide optimum diversification and hence capital leverage,” saying that the management team has “selected a group of core and seed syndicates to work with.”

“Combined with treaty reinsurance programs written with select participants in the market the Company expects to have access to up to £1bn of capacity into the 2024 underwriting year of account and the Company notes that this portfolio is forecast to have a lower level of natural catastrophe exposure (particularly in the US),” they further explain.

The firm will target an average return on equity of 20%, helped by higher insurance and reinsurance rates, an expected capital requirement that is forecast to be below 50%, plus higher risk-free rates.

As a result of the business combination opportunity it is pursuing, the firm says it is “seeking plans to raise substantial funds beyond its existing amounts held in escrow.”

It sounds as if the plan will be to back multiple syndicates and underwriters, or write alongside them, to cherry pick a portfolio of the best of Lloyd’s of London, while using as much efficient capital channelled through London Bridge 2 PCC as it can to lower the cost-of-capital, while technology will undoubtedly play a critical role in adding efficiency as well, knowing co-founder Rear’s background.

Sky News has reported this morning that the entity will be called London Innovation Underwriters and will be a pure-play Lloyd’s vehicle.

With a £1 billion of underwriting capacity target, but a 50% capital requirement, the company could potentially achieve this while remaining relatively capital-light, compared to some, and bringing third-party investor funds in through the ILS structure London Bridge 2 PCC could make this a more efficient way to upscale the capacity pool without needing to raise too much more equity as well.

Sky says that London Innovation Underwriters will be positioned as a vehicle to bring investors into Lloyd’s to back a £1 billion portfolio of specialty insurance premiums.

As such, it seems more investment vehicle than underwriting venture, at least to begin.

The equity raise, seen as needed to be £500 million, could be critical, but that may also be helped if the venture can get commitments from investors for the London Bridge 2 PCC route for capital as well, given this will enhance the leverage of the overall structure, allowing London Innovation Underwriters (or whatever it ends up being called) to write (or invest in) more business efficiently.

With insurance and reinsurance market conditions so attractive right now, the timing could not be better, so it will be interesting to see if Rear and Allen can get this venture funded and up and running, as it could provide another glimpse of the future for how one can merge the strategies of a listed corporate vehicle with efficient investor backing, to deploy capacity more efficiently into the Lloyd’s market.