London Bridge PCC will expand the marketplace’s capabilities in line with its strategy
The Prudential Regulation Authority (PRA) and the FCA have approved the set up of a second protected cell company (PCC) by Lloyd’s of London, according to a statement released yesterday (3 August 2022).
Lloyd’s of London’s second PCC will support the marketplace’s intention to offer a broader “range of capabilities” and “enhanced accessibility for investors”, as laid out in its Future at Lloyd’s strategy document.
A number of successful deals through the marketplace’s first PCC – London Bridge Risk PCC (LBR), which was set up in 2021 – has led Lloyd’s to sponsor a second vehicle.
London Bridge PCC (LB2) will offer a number of extensions in the coverages it can write and the way in which these can be funded, together with an “improvement in the execution of these collateralised transactions”.
The new PCC will also provide an access point for qualifying institutional investors to deploy funds into the Lloyd’s market in a tax transparent way, while Lloyd’s members and managing agents will be able to use the new vehicle to manage capital and risk management requirements via new sources of capital and reinsurance protection.
LB2 will be able to:
- For corporate members: Write excess of loss coverages in addition to writing quota share reinsurance.
- For syndicates: Provide collateralised reinsurance on both excess of loss and a quota share basis.
- For all structures: Fund the reinsurance obligation through the offer – through the segregated cells of the PCC – of either preference share or debt securities.
According to Investopedia, a protected cell company ”is a legal entity that consists of a core linked to several cells. Cells in a PCC have separate assets and liabilities and are independent of one another. A PCC is governed by a single board of directors that oversees the entire legal entity”.
Burkhard Keese, chief financial officer at Lloyd’s, 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 to market for institutional investors to support the growth and diversity of risks written in the market.”
Speaking on the announcement, Matt Carter, specialty markets director at Altus, said: “Whilst this comes under the Future at Lloyd’s market modernisation, it is hard to say that this is direct evidence of the market modernising. This is merely a regulatory improvement, providing access to more capital which the market already has £90bn of.
“Providing more options to capital markets could be seen as another pre-emptive move by Lloyd’s to route more capital into it rather than its competition.
”It will threaten existing (re)insurance businesses with more capital and, in turn, push premiums down. Lloyd’s talks about this being ’complementary’ but, in actuality, there is no such a thing in a competitive marketplace.
“This is, however, a positive step for Lloyd’s, given the need to support more complex and diverse risks with reinsurance programmes with much larger exposures and new reinsurance capital to support entrepreneurial underwriting, as long as the new capital providers truly understand the risk model and that collateralised reinsurance through the PCC never becomes equated to sub prime-business that hit the banking industry so hard in 2008.”