... that lacked differentiated value propositions and never succeeded in gaining critical mass.
Syndicate 5678 will enter run-off on 31 December after management failed to either find a buyer for the Vibe business or source enough capital to continue trading forward.
The decision to call time on Vibe, which is owned by financial investors Soros Fund Management and Pine Brook Partners, followed a long process to rectify the performance of the syndicate. This included a change in leadership in 2018 in the form of CEO Joe England and chairman Jack Gressier.
As this publication previously noted, there are close parallels between the story of Vibe and those of Standard Syndicate 1884 and Skuld Syndicate 1897, both of which went into run-off earlier this year.
All three syndicates started building books of business as Lloyd’s sank into a deep soft market, and none were able to reach the scale needed to outweigh expenses, or bring either the capabilities or line size required to be relevant to distribution partners in an over-capitalised market.
As Lloyd’s became tougher on performance and top line, none of the three underperforming businesses were able to grow to the extent they believed they needed, and all ultimately took the decision to close.
When also accounting for ProSight Syndicate 1110 – which entered run-off in 2017 – the total of shuttered Lloyd’s businesses comes to four in the past two years. All four of these full syndicates were approved to start writing between 2010 and 2015.
The Insurance Insider has three main takeaways from the Vibe run-off announcement:
The 2010-2015 cohort
Four of the full syndicates launched between 2010 and 2015 have chosen to enter run-off, but the challenges of the cohort do not stop there.
The majority of the other 14 businesses in the peer group are either conducting portfolio or restructuring reviews, seeking additional capital or have been the subject of takeovers.
For many of these syndicates, the timing of their launch coincided with the downturn of the market.
The class of 2014, which comprised Vibe Syndicate 5678, Axis Syndicate 1686, Dale Syndicate 1729 and Acappella 2014, all started life in a market which was about to lose almost 10 points of risk-adjusted rate in three years. Standard Club 1884, which launched in 2015, faced a similar challenge.
However, even those that launched before 2013 experienced an average rating uplift of just 3 percent at most before the downturn and, even without the rating headwind, had to face the challenge of substantial upfront costs and access-to-business issues in a competitive marketplace.
The two remaining run-off candidates – Skuld and ProSight – sit in this peer group, as do Channel Syndicate 2015 and Sirius Syndicate 2011, which both have undergone extensive portfolio restructuring to remedy performance.
Notably, Channel also announced this week that it had completed a reinsurance-to-close (RITC) transaction for the 2017 and prior years of account, as it seeks to draw a line under its earlier underperformance.
Meanwhile, Nephila Syndicate 2357 is one of the more stable syndicates of the 2010-2015 start-up cohort. However, its property catastrophe focus meant that it benefitted from a run of benign loss years in the first three years of trading – deemed critical for a syndicate to survive.
Trade capital crunch
Unique to the Vibe story is that it faced the additional challenge of finding new capital backing at a time when trade capital has contracted at Lloyd’s.
Around £2bn ($2.6bn) of Lloyd’s capacity – or roughly 6-7 percent of the market – is supported by a diverse range of trade capital providers.
Broking sources have previously speculated that as much as 20 percent of that capacity could be withdrawn from the market in the forthcoming renewal, with limited interest from new carriers and very little appetite from existing players to grow.
Trade capital providers that have already scaled back their participation include Scor, PartnerRe and Aioi Nissay Dowa, with Arig and Labuan Re also expected to pare back or exit.
There is said to be only very limited additional capital waiting on the sidelines to enter the market for 2020 despite improving market conditions and positive sentiment about the Future at Lloyd’s strategy.
Vibe relied in part on this trade capital and, as a weaker performing syndicate, was likely to see some of its backers exit for 2020.
Syndicate 5678 never managed to grow its annual gross written premium past £130mn, which meant it never managed to gain the market relevance it needed in order to secure access to good business.
As a result, its expense base weighed on its profitability, and the syndicate only once managed to turn an underwriting profit in its entire lifetime – and that was only £1mn in 2015, its first full year of live underwriting.
At its best, Vibe ran a 99.2 percent combined ratio – but at its worst, in loss-struck 2017, the combined ratio was 152.4 percent.
It has not been confirmed that Vibe was losing third-party capital for 2020 but if, as suspected, capital was set to drop for 2020, its owners would have faced the option of either injecting additional capital or scaling back underwriting still further due to the capital constraint.
If neither of these options were deemed viable, the final route to take would have been putting the business into run-off.
Syndicates do not publicise their use of trade capital and the relationships are opaque.
However, The Insurance Insider understands that some of the syndicates that utilise trade capital are among those which have launched since 2010, including Acappella, Agora and Dale Underwriting Partners.
Dale Syndicate 1729 is searching for new capital providers after its owner ProAssurance signalled it would halve its capital commitment to the syndicate going forward, following underperformance.
Pioneer also relies on a capacity deal from Liberty for 100 percent of its capital – albeit roughly 50 percent supported on the back end by reinsurance capacity – with Liberty signalling it is not minded to continue.
The squeeze on syndicates levered to trade capital will at minimum worsen economics and at worst make it difficult for them to trade forward. This situation is particularly acute for those which have not been able to reach critical mass since their inception.
Negative M&A implications
Vibe’s failure to find a buyer dampens any previous optimism that positive M&A sentiment in Lloyd’s was growing following the publication of the Future at Lloyd’s initiatives and rising rating momentum. It confirms what this publication has previously called the Lloyd’s M&A funk.
A number of Lloyd’s auctions over the past year have ultimately been pulled without a sale – including Neon, ERS, StarStone and Atrium – and Vibe marked the next test of the appetite for Lloyd’s assets.
Vibe’s first port of call was to find a trade acquirer or a private equity buyer to take the carrier forward as a live business.
There have been two recent instances of syndicates “doubling down” with a Lloyd’s acquisition – Arch-Barbican and Hamilton-Pembroke – to scale up and outgrow expense challenges, but in this instance there was no in-market consolidator.
Meanwhile, the Corporation’s tougher line on top-line expansion does not sit well with a private equity firm’s desire to control the fate of the business, and in particular its approach to growth.
Sources said that Vibe tried to sell itself with massive projected growth over the next two or three years – and that was never something Lloyd’s was going to allow given past underperformance.
It is understood that Vibe also had discussions with legacy carriers, positioning the syndicate as an entry to the RITC market – similar to the deal stuck between Charles Taylor and Premia for the Standard Club syndicate.
With the RITC market at Lloyd’s starting to gain momentum following the performance gap process, a Lloyd’s platform has become highly desirable among run-off players – but the fact that Vibe still was unable to find a suitor here further underlines that M&A sentiment in Lloyd’s is at a low ebb.
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