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Acappella: An ignominious end for early Willis underwriting play

Acappella’s closure fits into the broader pattern of a rational shake-out of smaller, underperforming Lloyd’s businesses.

But it also represents an ignominious end for what was a highly ambitious start-up when it launched in 2012, as Willis made an early underwriting play following the Corporation’s removal of the ban on brokers owning Lloyd’s businesses.

The business was launched as a joint venture between Willis and Pembroke, sponsored by Willis Re CEO John Cavanagh and Pembroke CEO Mark Wheeler, working with Hiscox veteran David Bruce as active underwriter.

Throughout its history, though, it struggled with not only the structural issues that afflicted its peer group, but also the self-inflicted wounds of senior management turnover and a complex corporate structure.

Lead underwriter Bruce departed in 2014 and the head of Willis’ Faber unit, Jason Howard, was subsequently parachuted in as CEO of the business as Cavanagh’s involvement was scaled back.

Howard – currently Beach CEO – spent less than a year and a half in the job before leaving in October 2015, with Willis executive David Thomas subsequently taking over, alongside a portfolio of other responsibilities at Willis.

David Indge, another Willis secondee, was made active underwriter and CUO in 2014, but departed in 2017, handing the underwriting leadership to David Jones.

There was also substantial turnover in the underwriting ranks below active underwriter level.

Challenges were effectively baked into the structure of Acappella. Willis had a two-thirds share of the holding company, which sat over Syndicate 2014 and a sister MGA business.

However, Pembroke – which had only a one-third stake in the holding company – owned the tenancy rights to the syndicate, which is where most of the value in the business would have sat if it could have achieved underwriting profitability.

In addition, Pembroke provided third-party managing agent services to Acappella, supplying the then Ironshore subsidiary with a steady stream of profitable fees.

Pembroke had also negotiated a cap on the on the costs it had to bear related to its ownership share of the holding company.

The project to launch an in-house managing agent, which would have effectively transferred value from Pembroke to Willis, was permanently shelved.

The structure represented a major blocker to success and was ultimately unwound at the start of 2018, with the business effectively broken up in a restructure that gave Pembroke full ownership and control of the syndicate while Willis assumed control of the MGA.

By this point, Liberty Mutual had acquired Ironshore – largely for its US capabilities – but it also picked up two Lloyd’s businesses in Pembroke that were not strategic for it.

To make matters worse, Acappella’s underwriting performance continued to deteriorate as it ran up three consecutive calendar-year underwriting results in the 110-120 percent range.

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The business also remained sub-scale, and reached a top line of only £200mn ($258.9mn) in 2018.

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As Liberty prepared to offload Pembroke, Acappella was a fee-generating entity for its owner which increasingly required parent company underwriting capital due to struggles to source the third-party underwriting capital on which it had previously relied.

After Hamilton Insurance Group struck a deal to acquire Pembroke in March, the last tie was broken between Acappella and the executives that had set up and had a reputational stake in the business.

Hamilton indicated that it would keep the business open as it wanted to continue to build Pembroke’s fee income, but this would have depended on the ability to find other capital partners to back the syndicate given that Liberty no longer had any incentive to provide Funds at Lloyd’s.

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Given its statement, it looks as if Hamilton baulked at the idea of putting up additional risk capital to keep the business underwriting after existing capital partners withdrew.

“As we completed the capital raising process at Lloyd’s, we concluded that Acappella was unlikely to produce an adequate return on capital,” Hamilton CEO Pina Albo said.

Like Vibe and Pioneer Syndicate 1980, the other two syndicates that have been put into run-off, Acappella consistently failed to generate a return for its capital providers and was ultimately unable to defy gravity.

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