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New Lloyd's syndicates unlikely to signal trend

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New Lloyd's syndicates unlikely to signal trend

LONDON—Despite a French reinsurer and a Norwegian protection and indemnity club recently setting up turnkey syndicates, ample competition and capacity mean Lloyd's of London is unlikely to approve a large number of new syndicates before the end of the year, experts say.

Turnkey syndicates, which are managed by third parties on behalf of capacity providers, are a useful tool for investors looking to gain a presence at Lloyd's, experts say.

Managing agents have little or no financial stake in the syndicate but provide specific expertise, such as dealing with Lloyd's reporting requirements, that an outside investor may lack. Companies that set up a turnkey syndicate do not incur the costs of running a stand-alone managing agency, but they can take over that role at a later date.

SCOR S.E.'s syndicate 2015 will have capacity of �75 million ($121.4 million) for 2011 with an initial focus on short-tail lines in markets outside the United States. The syndicate will not underwrite reinsurance treaty business.

London-based Whittington Capital Management Ltd. is the managing agency for syndicate 2015.

In a statement, Paris-based SCOR said forming the syndicate, the first time it has been the exclusive capital provider for a Lloyd's syndicate, reflected its intent to “further develop an insurance platform.”

Victor Peignet, CEO of SCOR's global property/casualty operations, said in the statement that Lloyd's is an efficient underwriting platform and the syndicate “represents a complementary route for SCOR by which to optimize the group's access to business that is not currently being underwritten.”

The other turnkey syndicate set up recently—Assuranceforeningen Skuld's syndicate 1897, which is named for the year Oslo-based Skuld was established—will underwrite marine and offshore energy risks.

The syndicate has capacity of �60 million ($97.1 million) for 2011 and will begin underwriting this month with risks attaching from Jan. 1, 2011.

London-based R&Q Managing Agency Ltd. is managing syndicate 1897 on a turnkey basis with capacity provided by Skuld, Randall & Quilter Investment Holdings P.L.C. and SCOR Underwriting Ltd., a unit of SCOR.

The syndicate plans to derive about 90% of its income from business not currently written at Lloyd's, R&Q CEO Robin McCoy said in a statement.

“This is a key strategic development for Skuld, enabling us to offer a wider range of covers to our P&I club members and also to new clients,” Skuld CEO Douglas Jacobson said in a statement.

“For global insurance businesses, a syndicate on the Lloyd's platform is becoming de rigueur, offering as it does the licensing and rating that take time to build independently,” said Andrew Holderness, global head of corporate insurance at London law firm Clyde & Co., which advised Skuld on its deal.

But it is vital that turnkey syndicates demonstrate in their business plans to the Lloyd's Performance Management Directorate that they are bringing in business that otherwise would not come to the Lloyd's market, he said.

In the wake of the financial crisis of 2008 and 2009, Lloyd's was very attractive to capital providers and there was a large degree of interest from companies in setting up Lloyd's operations, said Catherine Thomas, a managing senior financial analyst at A.M. Best Co. Inc. in London.

The Lloyd's platform remains attractive for companies offering access to global licenses, strong financial-strength ratings and a sound capital structure, Ms. Thomas said.

The turnkey route is one that Lloyd's has encouraged outside investors to use, with strong interest in the mechanism from corporate capital providers.

More managing agencies—three or four in the past two years—have set up turnkey management operations, she added.

But the competitive insurance market means Lloyd's Performance Management Directorate's entrance requirements are very stringent, Ms. Thomas said.

“Any new entrants would have to demonstrate that they have something different to add to the market” as there is no shortage of capacity, she said.

The turnkey route of entry into Lloyd's ensures that entrants are up to speed with U.K. Financial Services Authority regulation and prepared for Solvency II, said Mark Coleman, a director in Standard & Poor's Corp.'s insurance practice in London.

There likely are sound strategic reasons behind SCOR's and Skuld's decisions to set up turnkey syndicates, said Robert Smith, a director at Moody's Analytics in London.

For SCOR, the stamp capacity of the syndicate represents a relatively small percentage—about 1.4%—of its gross written premiums, but the syndicate gives SCOR the option to grow its Lloyd's presence in future, he said.

For Skuld, the syndicate will enable the P&I club to offer additional coverage to existing clients and likely would bring new business into Lloyd's.

Turnkey syndicates offer capacity providers access to Lloyd's licenses and financial-strength ratings and a “ready-made” managing agent, Mr. Smith said. Often, after two or three years of operating under the turnkey structure, capacity providers set up their own managing agencies, he said.

The move into Lloyd's could offer some benefits to Skuld under Solvency II, the forthcoming E.U. risk-based capital regulatory regime, said Martyn Street, an associate director in the insurance team at Fitch Ratings Ltd. in London.

Under Solvency II, which is slated for introduction in December 2012, companies will be rewarded for diversifying by having lower regulatory capital requirements.

Specialist insurers, such as P&I clubs, therefore might see diversification into Lloyd's as a good option, Mr. Street said.

While there was talk of one or two more turnkey syndicates in the pipeline, experts said it is unlikely a raft of syndicates would be set up before year-end.

Market conditions mean there is unlikely to be a “minitrend” for companies setting up via the turnkey route, said Fitch's Mr. Street.

There always is a “strong pipeline” of entrants keen to set up operations at Lloyd's, but Lloyd's oversight of applicants is very stringent, Mr. Coleman said. Once applications are accepted, newcomers are subject to tight application of regulations, and strict capital requirements for their first three years of operation, he added.