Going from strength to strength

Sussex Capital is the Bermuda-domiciled collateralised reinsurance platform of Brit Insurance. It was launched at the start of 2018 with initial funding of $102.5 million.

At the time, Brit said that Sussex Capital would write direct collateralised reinsurance while also providing collateralised reinsurance to Brit’s Syndicate 2987. As well as strengthening Brit’s reinsurance capability, it provides access to a diversified source of capital and further enhances its client and broker proposition.

A year on from the launch how has Sussex Capital progressed and developed? It was a newcomer to the market competing with much more seasoned similar vehicles—all competing in the same pool.

According to Mark Allan, chief financial officer of Brit, the platform continues to perform as planned, with Sussex Capital, through Sussex Re, writing direct collateralised property catastrophe reinsurance and provides collateralised reinsurance to Brit’s Property Treaty portfolio.

“We launched Sussex Capital on January 1, 2018 with $100 million capacity and the ambition to develop Sussex into a leading ILS manager with top quartile performance and significant scale,” says Allan.

“Sussex has an open-ended fund, offering investors a balanced portfolio of reinsurance risks and is expected to grow further in 2019.”

Growing the team

Sussex has grown and diversified: in July 2018 the dedicated Sussex team expanded with some senior appointments. Richard Slater was appointed underwriting director and Adam Champion came in as senior vice president, portfolio manager and operations.

In November last year, Sussex Capital launched Sussex Capital UK, a multi-arrangement Insurance Special Purpose Vehicle (mISPV).

Allan makes it clear that Sussex is part of Brit’s strategy to establish vehicles that attract a variety of capital providers enabling it to offer the most suitable capacity for our clients and their risk management requirements. Brit’s total managed capacity across Sussex Capital, Versutus (another sidecar it renewed in February 2019) and Syndicate 2988 is now approximately $440 million.

Asked what he is especially proud of, Allan points to the launch of Sussex Capital UK as a key milestone for the company and a demonstration of Brit’s commitment to being at the forefront of new developments in the alternative capital (and London ILS) markets.

“We’re proud that it was the first transformer vehicle to be given permission by the Prudential Regulation Authority (PRA) under the UK’s new insurance-linked securities (ILS) regime,” he says.

“This enables it to carry on the activities of a mISPV writing general collateralised reinsurance for multiple cedants via Brit’s distribution network in the London market.”

Challenges

Moving on to what has challenged Sussex Capital, Allan admits that market conditions have been difficult, and that establishing the Sussex platform was challenging in the context of loss events. However, he adds that Sussex Capital is delighted to have been supported in establishing Sussex and he believes that their track record puts them in a great position to build from here.

“In terms of Sussex UK, setting up a multiple cedant vehicle, creating a structure and pro forma agreements that met the regulatory requirements of Solvency II, rather than the specific terms relating to a single transaction, was a particular challenge,” Allan says. “However, the PRA worked closely with us throughout the process, having weekly conference calls and we maintained an ongoing dialogue over a period of several months and we are delighted that they supported our platform.”

ILS trends

Looking at trends Sussex Capital has identified in the ILS market, Allan says that in his view 2018 felt quite different from 2017, with some ILS investors being concerned by deterioration on 2017 losses and the scale of the Californian wildfires. This led to a number of investors reviewing their portfolios carefully and amending their appetites.

Allan adds that Sussex Capital was not surprised by the limited amount of rate increase at January 1 renewals. Early renewals had the benefit of the scale of California wildfire losses not being fully realised and many of the January 1 renewals had been unaffected by losses in 2017 and 2018.

Sussex Capital expects continued rate increases at the mid-year renewals and the market will see the impact coming through from a second year of California wildfires, which are extremely difficult to model and price accurately.

Asked if there been a flight to quality in recent months due to catastrophe losses, Allan is cautiously optimistic.

“We have all seen that the ILS market has grown substantially in recent years,” he points out.

“Undoubtedly, some of the recent losses have been something of a reality check for the market in terms of how modelled results compare to real results—in the same way we see disparities in traditional reinsurance losses, this is now translating over to ILS funds.

“The question is how well the difference in results has been explained before and after the losses to investors. While some are finding this difficult, others will see it as an opportunity to grow.

“At Brit, we have been clear about our ambitions to grow our ILS vehicles and managed capacity. By leveraging our strong existing brand and our track record, our third-party capital vehicles are able to support and broaden the scope of what Brit can offer its clients,” he says.

Allan strikes a positive note for the future. “Brit recently announced total managed capacity across our vehicles—Versutus, Sussex Capital and Syndicate 2988—is approaching $450 million and I would expect this to continue to grow over time,” he concludes.

Alternative cap at heart of Brit’s strategy

In February 2019 Brit reported a healthy upward trend in gross premiums as it headed into the year, Matthew Wilson, group chief executive officer, reported in the company’s 2018 results.

The firm reported an 8 percent increase in gross written premiums to $2.2 billion in 2018, up from $2 billion the year before. Its combined ratio improved to 103.3 percent from 112.4 percent in 2017. In its overview of results, the group reported a loss of $190.3 million on ordinary activities before tax compared with a profit of $5.5 million the year before.

Wilson said that for 2018, Brit’s total managed capacity across Versutus, Sussex Capital and Syndicate 2988 exceeded $400 million and he highlighted the successful launch of Sussex Capital in January 2018 (an open-ended fund which writes through Sussex Re, providing collateralised reinsurance direct to third parties and to Brit).

He also highlighted the fourth annual expansion in 2018 of Versutus, which now has invested capital of $187 million, offering access to Brit’s underwriting franchise, as well as pointing to the major expansion of the company’s Syndicate 2988, launched in 2017, to reach a stamp capacity of £98.5 million (c.$130 million) for 2018.

According to Wilson these initiatives represent excellent progress as Brit continues to develop and enhance its capital markets participation.

Also in February, Brit completed the fifth annual renewal and expansion of Versutus.

Wilson commented: “Brit generated strong premium growth in 2018, against a backdrop of improving rates, while taking decisive action in underperforming areas. Premiums written increased by 8 percent through the expansion of our US operations and growth in classes where we have a strong track record.

“During 2018 insurance and investment market conditions remained challenging, with catastrophe events and unrealised losses on equities and funds heavily impacting our results.

“Despite this, our results reflect our ability to maintain strong underwriting discipline while continuing to deliver selective growth, particularly through our Brit Global Specialty USA (BGSU) and third-party capital platforms. We therefore enter 2019 with premium rates trending upwards and believe we are well positioned to benefit from this improving environment.

“2018 again demonstrated the value of our products particularly in response to catastrophe losses. 2018 was the fourth most costly natural catastrophe year on record and, with 2017, the most costly back-to-back years ever. While we achieved overall risk-adjusted rate increases of 3.7 percent, those increases were lower than initially anticipated, as available capacity has continued to exceed demand.

“Against this backdrop, our business proved resilient with a combined ratio of 103.3 percent, including 12.0 percentage points in respect of major losses. Our attritional ratio was a solid 57.2 percent and we continued to demonstrate our conservative reserving approach with a reserve release benefitting the combined ratio by 6.1pps.

“In 2018 we again saw increased demand for our products. Our premium written grew to $2.2 billion reflecting the favourable development of prior year premiums, the impact of rate increases, our investments in Syndicate 2988 and Sussex Capital, partly offset by reductions in certain classes following the actions outlined below.

“It was again pleasing to see an increased contribution from our initiatives of recent years as we continue to expand our international presence.

“For 2018, Brit’s total managed capacity across Versutus, Sussex Capital and Syndicate 2988 exceeded $400 million. We successfully launched Sussex Capital in January 2018, the open-ended fund which writes through Sussex Re, providing collateralised reinsurance direct to third parties and to Brit.

“In February, we announced the fourth annual expansion of Versutus, which now has invested capital of $187 million, offering access to Brit’s strong underwriting franchise. In addition, Syndicate 2988, which was launched in 2017, was expanded by 79 percent to a stamp capacity of £98.5 million (c.$130 million) for 2018 and now offers broad access to Brit’s extensive underwriting capabilities.

“These initiatives represent excellent progress as we continue to develop and enhance our capital markets participation.”