More than a year after its initial public offering (IPO), special purpose acquisition company (SPAC), Financials Acquisition Corp, has asked for approval to extend its business combination deadline to the end of 2023, as it lays out plans to establish a £1 billion listed Lloyd’s vehicle.
Financial Acquisition Corp is sponsored by FINSAC LLP, a limited liability partnership founded by Allen, previously of investment bank KBW and Rear, a former executive at Munich Re.
The company was established for the purpose of entering into a business combination with a tech enabled company or business mainly operating in the insurance or broader financial services industry.
Just weeks before the deadline for the SPAC to strike a merger deal, the company has asked shareholders to approve an extension to December 31st, 2023, noting that it has now identified a business combination opportunity that it intends to pursue.
According to this morning’s proposed transaction update on the London Stock Exchange (LSE), this opportunity could include the raising of additional capital and the firm becoming a listed operating company deploying funds into the specialist Lloyd’s insurance market for reinsurance purposes.
Sky News, citing sources, reported yesterday that the company was looking to raise as much as £500 million for a new, pure-play Lloyd’s listed vehicle called London Innovation Underwriters.
This information isn’t included in today’s LSE update, although it does provide some insight into the rationale behind the proposal.
It explains that during the search process it become clear that global speciality insurance business, notably risk underwritten in the Lloyd’s marketplace, offered some of the “most attractive risk adjusted returns” in the world.
The reinsurance market is currently in a hard market cycle, and the company also plans to take advantage of the fact rates in the Lloyd’s specialty market have been on the rise since 2017, rising by an average of more than 70% when adjusted for inflation.
“The Company notes that this hardening market has been driven by core claims inflation, large losses from Covid-19, natural catastrophes, Ukrainian war and capital markets uncertainty. The Company notes that the market as a whole has also been benefitting from improved efficiency driven by both technology and the work of the Lloyd’s management team,” reads the update.
The pair also plan to utilise London Bridge 2 PCC, the second protected cell company launched by the re/insurance marketplace last year, which will enable it to have easier access to institutional capital.
“This, combined with the Company’s management team, board of director and advisor relationships within the market leads the Company to believe that it can create an efficient vehicle for investors to access attractive returns without paying significant goodwill or adding further fee structures,” continues the proposal.
The core strategy of the company will be to focus on the Lloyd’s marketplace, meaning it will be one of the only pure-play Lloyd’s listed companies in London.
Allen and Rear intend for the company’s portfolio of insurance risk to be curated to provide optimum diversification, highlighting their relationships with underwriters and that they have identified a group of core and seed syndicates to work with.
Together with treaty reinsurance programmes written with select market participants, the new Lloyd’s start-up plans to have access to up to £1 billion of capacity into the 2024 underwriting year of account. The proposal also reveals that the portfolio is expected to have a lower volume of natural catastrophe exposure, notably in the U.S.
Of course, the nat cat space has experienced some of the highest rate rises during the ongoing hard market, but elevated losses in recent years have also dampened returns, so it’s not too surprising the new company intends to start small in this area.
Over the next five years, the company will be targeting an average return on equity of more than 20%.
