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UK insurance-linked securities pioneer Neon set to renew deal

Lloyd's of London insurer Neon Underwriting Ltd., the first company to use the U.K.'s new insurance-linked securities regime, is planning to renew its existing deal and hopes to boost its size.

Neon's ILS vehicle NCM Re completed its first transaction in the U.K.'s new ILS regulatory and tax framework — a $72 million collateralized quota share deal covering a portion of Lloyd's Syndicate 2468's property treaty reinsurance and direct and facultative portfolios — on Jan 1, 2018. Neon Underwriting is the managing agent for Syndicate 2468.

The firm's reinsurance and alternative capital director, Mark Gibson, told S&P Global Market Intelligence that it would likely be back for more.

"With regard to the transaction we have done, I would expect us to do another one for the subsequent annual risk period," he said. "I would expect that to be a repeat of the existing one, so I would expect it to be within the U.K. structure."

'Protected cell companies'

The U.K. ILS regime, which came into effect in December 2017, centers on so-called protected cell companies, or PCCs. These structures are a single company divided into "cells" that are financially segregated from one another, so that if one cell hits trouble it has no effect on the others. They are commonly used in the captive insurance market to allow several unrelated firms to share the same structure and cut down on set-up costs.

In the U.K. ILS framework, the PCCs allow companies to launch new deals without needing to set up and approve a whole new ILS vehicle each time. The vehicle Neon has established allows it to have cells for future transactions, Gibson said.

He said it was too early to say definitively whether the renewed deal would be larger than the existing $72 million one, but it is likely to be substantial.

"We would certainly want to keep it going," he said. "I would expect it to be at least the same size, but it would be nice to grow."

ILS deals transfer insurance risk to capital markets investors rather than traditional insurers or reinsurers. The most common form of ILS is a catastrophe bond, which covers damage from natural disasters such as U.S. hurricanes.

Cat bonds act like catastrophe excess of loss reinsurance, where the policy starts paying out once the ceding insurer's losses from an event reach a certain point. But, as Neon's first transaction shows, capital markets money can also be used to provide quota share reinsurance cover for more business-as-usual losses. Quota share reinsurance pays a set percentage of all losses the ceding company incurs within the parameters of the deal.

Neon's deal allows it to write more business than it would otherwise be able to.

"Quota shares are typically capacity vehicles for entities that are in a growth stage," Gibson said. "In other words, they are a good way of enabling us to write more business than we can absolutely retain, but it enables us to have a bigger footprint in the market. If you have a bigger footprint you can get on to more business."

Deals to come?

Since Neon launched its first U.K. ILS transaction, French reinsurer Scor SE launched the first catastrophe bond under the new U.K. framework in May. There has also been interest from other parties. For example, U.K government-backed terrorism reinsurer Pool Re has hired GC Securities to advise it on tapping the ILS market, a move that was in part prompted by the U.K.'s new ILS regime.