This publication has followed the story closely since early plans to fundraise began, and last week we revealed that the two parties were in exclusive negotiations.
Now that the deal is inked, kudos should be bestowed where it is due.
This marks the most ambitious fundraise seen to date in the market since the advent of Covid-19, and will reward the management team for successfully building a Lloyd’s franchise to this stage, despite several years of soft market grind when the business was still relatively young.
Credit should also be given to CEO Ian Beaton and CUO Nick Bonnar – as well as to the now-retired David Foreman – for biding their time when market conditions were poor, and then moving to decisively increase the size of the business.
This is the second bold move from the leadership team, following a leveraged buyout from founding PE investor Aquiline, which included a structure that the market perceived with significant scepticism.
However, by paying down the debt with earnings from the business, the management team was able to gain control of a medium-sized Lloyd’s business which has just been valued at $300mn.
Coming on the back of David Howden’s deal with Hg, it has been a good week for the London market’s entrepreneurs.
Here are some other key takeaways we have from the deal:
1. This is timely but also shrewd use of capital from Ark
Ark’s main Syndicate 4020 has been one of the lowest growth syndicates at Lloyd’s in recent years, as it sought to avoid damage during the soft market. Following the Aquiline buyout, it has also pivoted towards a third-party capital focused model, with around ~60% of its Funds at Lloyd’s coming from trade capital.
But with rates moving, it is now dropping its prior growth aversion and shifting away from the hybrid or agency model to expose more of its own capital to the improving pricing environment – flipping the model/approach from soft- to hard-market mode.
The fresh capital from White Mountains gives Ark the firepower to scale up its business and move to a fully aligned capital model.
The creation of a Bermuda vehicle will allow for unrestricted growth outside of the constraints of Lloyd’s where requests for major 2021 pre-emption are largely being met with brick walls from the Corporation.
Ark has been a consistent performer at Lloyd’s, with Syndicate 4020 rarely posting combined ratios above the Lloyd’s market average, and is among the better performing businesses within the market, particularly when it comes to limiting volatility.
However even if the Corporation will allow budget flexibility for growth next year, it is unlikely it would be amenable to significantly more cat risk, where the best returns are likely available at this point in the cycle.
The Ark leadership team is a big believer in true cycle management – drawing back when conditions are poor, then going full out when the cycle turns – and the optionality of an additional growth vehicle without tough oversight plays into that philosophy.
But there is another canny play from Ark here. The White Mountains investment comes in two tranches – with $600mn to go in post-closing and $200mn to be drawn on later – meaning Ark can fully leverage the advantages of this fresh capital without depressing its ROE.
A similar strategy has been deployed by Fidelis, which is now on its third fundraise in just over six months to accumulate around $1.5bn of capital.
2. The post-Covid fundraising is more than just a PE story
The interest from private equity since (and even prior to) the pandemic in (re)insurance has been well documented, and this publication has brought you several headlines on executives and companies looking to tap that interest during the second and third quarters.
However, this deal – alongside the news that Martin Reith was also looking to partner with Cantor Fitzgerald for Ariel, before talks fell through – shows that this is not just a PE-only phenomenon. Smart money in all its guises is now looking to expose its capital to the (re)insurance market, and crucially also to Lloyd’s.
The Ark deal marks a return to balance-sheet investments for White Mountains, after having largely sat on its capital during the depths of the soft cycle.
Past investments for the firm include Sirius, OneBeacon, Montpelier Re and Esurance. It sold Sirius in 2015 and OneBeacon in 2017, choosing to shift focus towards fee businesses and InsurTechs.
That White Mountains has chosen to re-enter the market at this point in the cycle is a clear sign that capital outside of typical PE has bought into the story of rising rates and a best-in-years market opportunity.
It is likely that serious talks – and even consummated deals – between (re)insurers and non-PE capital will follow in the coming months.
3. This is further vindication of the market opportunity – and also of Lloyd’s
Investor interest in (re)insurance has indeed swelled since the beginning of the year, however in recent weeks there have been anecdotal suggestions that the previous fervour of interest from PE had waned, as wider financial markets recover and the ultimate Covid-19 pain inflicted on the market appears less severe than first feared.
This most recent deal between Ark and White Mountains will give those executives and businesses still searching for capital some confidence that interested capital is still out there for strong management teams, even if the fundraising conditions are less favourable than before.
Ark is the sixth Lloyd’s business to bring in new equity capital since the pandemic, and this deal will work to further quieten sceptics who said that Lloyd’s and London would miss out on the flood of capital expected to come into the market ready for 2021.
However, at this juncture it seems increasingly clear – with the Ark fundraise another data point – that only the better plans and teams will be able to get deals to the line.
The flight to quality in fundraising is still very much in play.
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