Lloyd s Update. July Empower ResultsTM

Transcription

1 Lloyd s Update July 2014 Empower ResultsTM

2 Contents Executive Summary Market Capacity 4 Top 10 Syndicates 4 New Entrants 5 Mergers & Acquisitions 5 Lloyd s Strategy 6 Management Changes 6 Regulatory Background 6 Vision Strategic Plan Results 9 Premium Income 9 Underwriting Performance 12 Investment Return 14 Pre-Tax Results 15 Balance Sheet 16 Investments 16 Technical Reserves 17 Capital 17 Ratings 19 Lloyd s Market Ratings 19 Standalone Syndicate Ratings/Rankings 19 Appendix 1 Top 40 Reinsurers at Lloyd s 21 Appendix 2 Active Syndicate Listing 24 Appendix 3 Lloyd s Ten Year Segmental Results 26 About Aon Benfield Aon Benfield, a division of Aon plc, is the world s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com.

3 Aon Benfield Executive Summary The Lloyd s market began 2014 with 93 active syndicates (including six new entrants) and record underwriting capacity of GBP26.4 billion, up 6% on the prior year. One mid-year syndicate launch and three M&A transactions completed so far in 2014, demonstrate the continued attractiveness of the Lloyd s platform. New leadership has brought a fresh approach to the delivery of the Vision 2025 agenda, which aims to increase Lloyd s premium income in high-growth economies. A three year strategic plan released in April 2014 placed increased emphasis on growing insurance business, through the establishment of a local presence where required. Lloyd s has acknowledged the impact alternative capital is having on the reinsurance market and is looking at how best to access it in support of indemnity-based products. Operating performance remains strong: pre-tax profit rose by 16% to GBP3.2 billion in 2013, representing a return on capital employed of 16.2%. The combined ratio improved by 4.3 percentage points to 86.8%, driven by reduced major losses and more favourable development of prior year reserves. Lloyd s balance sheet is strong: overall investment allocation remains relatively conservative, capital resources are at an all-time high and legacy issues appear contained. Fitch upgraded its rating of Lloyd s by one notch to AA- in June 2014 and A.M. Best and Standard & Poor s both maintain positive outlooks on their ratings of the market. 3

4 Lloyd s Update July Market Capacity Lloyd s began 2014 with 93 active syndicates and record underwriting capacity of GBP26.4 billion, up 6% on the prior year. This included GBP608 million of sidecar quota share capacity supplied by 13 special purpose syndicates (SPSs). Exhibit 1: Lloyd s Underwriting Capacity GBP (billions) E Source: Company reports, Lloyd s, Aon Benfield Market Analysis Top 10 Syndicates The capacity of the ten largest syndicates aggregates to GBP10.8 billion in 2014 (41% of the market). Excluding life syndicates and SPSs, average syndicate capacity now stands at GBP339 million. A full active syndicate list can be found in Appendix 2. Exhibit 2: Top 10 Syndicates by 2014 Capacity 1,500 1,400 1, GBP (millions) 1, ,175 1,107 1,064 1,060 1,000 1, (Amlin) 2003 (Catlin) 4472 (Liberty) 2623 (Beazley) 0510 (R J Kiln) 2999 (QBE) 0033 (Hiscox) 2987 (Brit) (Chaucer) (Canopius) Source: Company reports, Lloyd s, Aon Benfield Market Analysis Lloyd s expects the number of large managing agents to increase over time, but aims to maintain the conditions that will allow smaller operations to flourish. There will be no minimum size threshold for managing agents, but the maximum size will remain at 15% of premium. New entrants (particularly overseas trade capital providers with a franchise) will be encouraged. Any broker-owned managing agents will be subject to the existing 20% related party business restriction. 4

5 Aon Benfield New Entrants Former SPS Acappella 6110 (managed by Pembroke) re-launched as standalone Syndicate 2014 effective January 1, 2014, alongside five other newly-authorized syndicates. Combined underwriting capacity of these new entrants totaled GBP366 million. Vibe Syndicate 5678 was authorized as a mid-year start-up, effective July 1, 2014, having previously operated exclusively in the run-off sector. Exhibit 3: New Entrants in 2014 Syndicate Number Managing Agent Active Underwriter 1686 Asta Alistair Robson 1729 Asta Duncan Dale 2014 Pembroke David Bruce 6117 Asta Darren Lednor 6118 Barbican David Booth 6119 Catlin Nicolas Burkinshaw Comments Backed 100% by Axis Capital. Commenced underwriting on January 1, 2014 with capacity of GBP119 million. Business consists of full or partial transfer of selected classes of business from Axis company platforms in London, Bermuda and Dublin. Backed 51% by ProAssurance Corporation and 49% by third parties, including private Names. Commenced underwriting on January 1, 2014 with capacity of GBP75 million. Formerly SPS 6110 supporting Pembroke Syndicate 4000, Acappella launched as a standalone syndicate on January 1, Capacity stands at GBP75 million, provided by private Names. SPS providing whole account quota share support to Ariel Syndicate 1910 from January 1, Capacity stands at GBP58 million, provided by private Names. SPS providing whole account quota share support to Barbican Syndicate 1955 from January 1, Capacity stands at GBP25 million, provided 50:50 by ARIG and Labuan Re. SPS providing whole account quota share support to Catlin Syndicate 2003 from January 1, Capacity stands at GBP14 million, provided by GIC Re, India Vibe Bradley Knight Source: Company announcements, Lloyd s, Aon Benfield Market Analysis Former RITC Syndicate Commenced underwriting on July 1, 2014 with capacity of GBP6 million, provided by Soros and Pine Brook. Three new managing agents have been established so far in Turnkey managing agent Capita relinquished control of Allied World Syndicate 2232 to Allied World Managing Agency Ltd, effective April 1, Similarly, Asta relinquished control of SCOR Syndicate 2015 to The Channel Managing Agency Ltd and Sirius Syndicate 1945 to Sirius International Managing Agency Ltd, effective April 1 and July 1, respectively. Asta s turnkey portfolio was partially replenished when it took over management of Skuld Syndicate 1897 from R&Q from April 3, In addition, RITC Syndicate Management Ltd was relaunched as Vibe Syndicate Management Ltd. At July 1, 2014, there were 94 active syndicates, overseen by 56 managing agents. Mergers & Acquisitions Lloyd s businesses continue to be attractive acquisition targets and a popular route for gaining a presence in the market, although the number of available businesses is now limited. Three transactions have completed so far in 2014 and one recently announced deal is pending regulatory approval. Exhibit 4: Corporate Activity in 2013/2014 Date Acquirer Target Comments Apr 2013 Aquiline Equity Manager of Motor Syndicate 0218 May 2013 Markel Alterra Alterra Syndicate 1400 merged into Markel Syndicate 3000 effective January 1, 2014 Nov 2013 Enstar/Stone Point Atrium Manager of Syndicate 0609 Nov 2013 Lancashire Cathedral Manager of Syndicates 2010 and 3010 Dec 2013 AmTrust Sagicor Europe Manager of Syndicates 0044 and 1206 Dec 2013 ANV Jubilee Group Manager of Syndicates 0779 and 5820 Apr 2014 Enstar/Stone Point Torus Manager of Syndicate 1301 May 2014 NKSJ Canopius Manager of Syndicates 0260, 0958 and 4444 Jun 2014 QIC Antares Manager of Syndicate H 2014* BTG Pactual Ariel Capital provider to Syndicate 1910 Source: Company announcements, Lloyd s, Aon Benfield Market Analysis *Subject to Lloyd s/regulatory approval (estimated completion date) 5

6 Lloyd s Update July 2014 Lloyd s Strategy New leadership has brought a fresh approach to the delivery of the Vision 2025 agenda, which focuses, among other things, on driving growth in developing markets. A three year strategic plan released in April 2014 placed increased emphasis on growing insurance business, through the establishment of a local presence where required. Management Changes Inga Beale, previously Chief Executive Officer of Canopius, replaced Richard Ward as Chief Executive Officer of Lloyd s effective January 1, Long-standing Finance Director Luke Savage resigned in May His role has been split in two, with Shirine Khoury-Haq joining from Catlin as Director of Operations and John Parry stepping up as Acting Director of Finance. Regulatory Background In the United Kingdom (UK), the precise impact of the new regime introduced in April 2013 continues to evolve. In response to increased scrutiny of the insurance industry s behaviour by the Financial Conduct Authority (FCA), Lloyd s has opened consultation on proposed minimum conduct standards for managing agents and published a new code of practice covering delegated underwriting. The latter area is of particular concern, given that the cover-holder model is an efficient way for the London market to access international business and generated 28% of total premium income in Lloyd s is on track to meet the revised Solvency II implementation date of January 1, 2016 and capital-setting is already in-line with the requirements of the new regime. However, the prospect of a referendum on the UK s membership of the European Union (EU) by the end of 2017 has created new uncertainty. Lloyd s has warned that withdrawal would be damaging, for the following reasons: Lloyd s might lose the passporting rights that allow it to sell insurance and reinsurance business crossborder into other EU countries (and open offices there) without having to comply with additional local prudential regulations. Excluding the UK, Lloyd s generates 11% of its premium income from the EU. Lloyd s might lose the ability to influence the regulations to which it will be subject. Over the years and as a result of intensive lobbying, EU rules have taken legislative account of Lloyd s unique legal and economic structure and business model, to the market s clear benefit. Lloyd s would no longer be able to shape trade liberalization and insurance regulatory discussions conducted by the European Commission with non-eu countries on behalf of all Member States. At the global level, the International Association of Insurance Supervisors (IAIS) will shortly be publishing a list of systemically important reinsurers. Work is continuing on the development of a Common Framework (ComFrame) for regulating internationally active insurance groups and the IAIS is also engaged in developing global capital standards. Lloyd s is monitoring these developments closely. Vision 2025 In May 2012, Lloyd s published Vision 2025, a long-term strategic plan aimed at ensuring that the market grows beyond the English-speaking world to become the true global hub for specialist insurance and reinsurance business. Inga Beale has reiterated that Lloyd s intends to expand in underinsured, high-growth economies, with the aim of increasing premium income in the largest ten high-growth economies at a rate of which tracks or exceeds non-life premium growth. Progress has already been made. The Lloyd s Asia platform in Singapore now has 17 participating syndicates, 250 staff and revenues of USD600 million. Lloyd s Chinese premiums grew by over 20% to USD370 million in The number of participating syndicates in Shanghai has increased to 10 and Lloyd s has now applied to open a branch in Beijing. In Brazil, Lloyd s is the second largest foreign player in the reinsurance market. 6

7 Aon Benfield Strategic Plan In April 2014, Lloyd s published its strategic plan for the next three years, which seeks to promote a mindset based around more actively seeking business. As far as the developing markets are concerned, the main changes of emphasis relate to increasing the focus on insurance (in addition to reinsurance), establishing a local presence where this is a commercial or regulatory requirement for business access and ensuring that brokers and coverholders find it as easy to access Lloyd s as they would local market carriers. The main priorities are laid out below. Market Oversight With no end in sight to the low interest rate environment, an emphasis on underwriting discipline continues to be Lloyd s top priority. At the same time, the market oversight regime is required to operate in such a way that it supports Lloyd s reputation for innovation and increases the market s geographic footprint. During 2014, the Corporation of Lloyd s will: Develop a framework that provides transparency around Lloyd s supervisory approach and priorities to regulators and managing agents. Implement a plan to comply with the Solvency II regime that will enable Lloyd s to obtain approval of its Internal Model in Complete a review and publish a suite of minimum standards for managing agents. Diversity of Capital The Lloyd s model was built around the management of third party capital and this remains a core competency of the market. The capital base already encompasses private, trade and institutional investment and this diversity is viewed as a strength. However, the increasing portability of capital and the growing relevance of capital markets and hedge funds in providing reinsurance solutions present competitive challenges. Management s main goals are to maintain Lloyd s attractiveness to a range of capital providers, while increasing the weighting towards developing markets. During 2013, Lloyd s facilitated members agents efforts to increase the supply of private Names capital into the market through the authorisation of Syndicates 1729 and 2014 and Special Purpose Syndicate Investment from trade investors in developing markets was increased through the authorisation of Special Purpose Syndicates 6118 and 6119 (backed respectively by ARIG/Labuan Re and GIC Re). Finally, new relationships with institutional investors have been established through the authorisation of Syndicates 2357 (backed by Nephila) and the development of Syndicate5678 (backed Soros/Pine Brook). Lloyd s has acknowledged the impact alternative capital is having on the reinsurance market and is looking at how best to access it in support of the underwriting of indemnity-based products. The aim is to be a risk selector, rather than a capital provider to a commoditised market. The use of parametric products as a means to access some of the under-insured high growth markets Lloyd s is targeting as part of Vision 2025 has not been ruled out in the longer term. International Growth Lloyd s now believes that accessing cross-border reinsurance from London will not be sufficient to meet the aims of Vision 2025 and that increasing the market s share of insurance business in developing markets is also required. In some cases, this will necessitate a shift away from Lloyd s historic preferred models. Trading rights must be obtained and consideration of offices, local establishment and other access options in selected territories will be required. Business development activity will focus on forecast insurance market development and managing agent appetite. During 2014, the Corporation of Lloyd s will: Work with the Turkish Government to secure necessary legislative changes to enable a trading licence to be granted. Conduct a feasibility study for insurance licence opportunities in Brazil. Conduct feasibility studies for a Lloyd s presence in Indonesia, Malaysia and South Korea. Open a reinsurance-focused branch office in Beijing. 7

8 Lloyd s Update July 2014 Investigate options for a regional reinsurance office in Latin America. Subject to regulatory position, investigate options in Colombia and Mexico. Work towards establishing a representative office in Dubai. Continue the pursuit of an onshore reinsurance presence in India. Given current market conditions, short-term growth opportunities are said to lie in more traditional markets like North America, France and Germany, where premium rates have been more stable. Distribution Lloyd s is looking for growth in all existing distribution channels (brokers, cover-holders, service companies and local underwriting offices) in order to maximize the market s access to business. Lloyd s has also indicated that managing agents should consider new options, such as joint ventures with local (re)insurers. Lloyd s recognizes the key role that London and international brokers must play in accessing new business in developing markets. It is also acknowledged that larger brokers are making significant investments in their own networks and reviewing their business models. Lloyd s views recently introduced broker facilities as both an opportunity and a threat, but it is accepted that they can add value where there are appropriate checks and balances on any delegation of underwriting and claims authority. Many of the initiatives being pursued reflect a desire to increase efficiency and deal with a smaller number of carriers. Lloyd s is responding by encouraging the use of consortia underwriting, which enables leading Lloyd s specialists to offer significantly enlarged capacity by accepting risk on behalf of other syndicates. This is particularly relevant in the case of challenging risks such as cyber, where a coordinated approach is needed to muster the capacity necessary to compete with global peers. During 2014, the Corporation of Lloyd s will: Develop and execute mutually agreed action plans with at least ten of Lloyd s largest producing brokers to drive market development activity. Work with interested managing agents to develop consortia arrangements, where market and client demand exists. Launch Lloyd s Global Development Centre offering coordinated promotion of Lloyd s to international brokers and clients. Market Operations The advantages of the subscription market will be negated if the complexity and additional cost of the associated processes cannot be addressed. The first components of the Central Services Refresh Programme will be delivered in The Exchange will be further embedded as the way of moving ACORD standard data messages and documents across the market, resulting in increased use of structured data by brokers and managing agents. Work is also underway on Project Genesis, which aims to develop a shared service which will take placement information and turn it into rich structured ACORD standard data and make this data available to the back office systems of all subscribing insurers. Finally the Claims Transformation Programme continues to strengthen the market s claims-handling capabilities. In 2013, Lloyd s launched a new central processing facility for service companies operating on its Singapore platform called Insurance Services for Lloyd s Asia. This will provide a single point of contact for back-office functions, easier payment processing and cost reductions. 8

9 Aon Benfield 2013 Results Lloyd s reported a 16% increase in pre-tax profit to GBP3.2 billion for Premium growth, lower major losses and higher prior year reserve releases were partly offset by a weaker investment result. The return on capital employed stood at 16.2%, taking the five year average to 12.8%. Exhibit 5: Lloyd s Results Income Statement GBP (millions) Full Year 2009 Full Year 2010 Full Year 2011 Full Year 2012 Full Year 2013 Year-on-Year Change Gross premiums written 21,973 22,592 23,477 25,500 26,106 2% Net premiums written 17,218 17,656 18,472 19,435 20,231 4% Net premiums earned 16,725 17,111 18,100 18,685 19,725 6% Underwriting result 2,320 1,143-1,237 1,661 2,605 57% Investment result 1,769 1, , % Pre-tax result 3,868 2, ,771 3,205 16% Key Ratios Full Year 2009 Full Year 2010 Full Year 2011 Full Year 2012 Full Year 2013 Year-on-Year Change Combined ratio 86.1% 93.3% 106.8% 91.1% 86.8% -4.3pp Investment yield 3.9% 2.6% 1.9% 2.6% 1.6% -1.0pp Return on capital* 23.9% 12.1% -2.8% 14.8% 16.2% 1.4pp *Capital, reserves, subordinated loan notes and securities Premium Income Gross premiums written totaled GBP26.1 billion in 2013, up 2.4% on a reported basis and 1.5% at constant exchange rates. In the aggregate, risk-adjusted rates fell by 0.3%. Outwards reinsurance premiums fell by 3.1% to GBP5.9 billion, representing a cession rate of 22.5% (2012: 23.8%). Net premiums written rose by 4.1% to GBP20.2 billion, while net premiums earned rose by 5.6% to GBP19.7 billion. Exhibit 6: Gross Premiums Written GBP (billions) Gross Premiums Written Net Premiums Written In the Reinsurance segment, gross premiums written fell by 3.0% to GBP9.5 billion in 2013, representing 37% of the total portfolio (2012: 38%). The 5% reduction in property treaty volumes exceeded the internally monitored rate change, indicating that some business was actively declined due to unsatisfactory terms. 9

10 Lloyd s Update July 2014 Direct classes generated gross premiums written of GBP16.6 billion in 2013, up 5.7% on the prior year. Growth in Property (+11.4%, driven by the US market), Casualty (+6.8%, partly due to increased demand for cyber liability cover), Marine (+5.0%) and Motor (+2.5%) was partially offset by reductions in Energy (-3.4%) and Aviation (-16.0%). Exhibit 7: Gross Premiums Written by Segment GBP (billions) Life & adj Aviation Motor Energy Marine Casualty 5 Property Reinsurance The geographic spread of the portfolio was North America 43% (2012: 41%), United Kingdom 18% (18%), Europe 15% (15%), Asia Pacific 12% (13%), Other Americas 8% (8%) and Rest of the World 4% (5%). Exhibit 8: Gross Premiums Written by Region GBP (billions) Rest of World Other Americas Asia Pacific Europe UK 5 US & Canada* *prior to 2007 Canada was included in Other Americas 10

11 Aon Benfield Exhibit 9 shows the distribution of 2013 gross premiums written by region across the seven high-level business segments used by Lloyd s for reporting purposes. Exhibit 9: Lloyd s Segment Breakdown by Region 2013 US & Canada Other Americas UK Europe Asia Pacific Rest of World Total Reinsurance 27% 75% 29% 37% 46% 61% 37% Property 34% 7% 21% 15% 16% 8% 23% Casualty 20% 7% 19% 18% 25% 10% 19% Marine 7% 5% 6% 18% 7% 9% 8% Energy 9% 4% 3% 7% 3% 5% 6% Motor 1% 1% 20% 1% 1% 2% 5% Aviation 2% 1% 2% 4% 2% 5% 2% Total (GBP millions) 11,226 2,088 4,699 3,916 3,133 1,044 26,106 Source: Lloyd s Growth in net premium earned by segment in 2014 was as follows: Reinsurance +0.7%, Property +14.8%, Casualty +10.3%, Marine +5.7%, Energy +3.0%, Motor -4.5%, Aviation -7.8% and Life +5.8%. Exhibit 10: Net Premiums Earned by Segment Life & adj Aviation GBP (billions) Motor Energy Marine Casualty 5 Property Reinsurance 11

12 Lloyd s Update July 2014 Underwriting Performance Lloyd s combined ratio improved by 4.3 percentage points to 86.8% in 2013, driven by reduced major losses and more favourable development of prior year reserves. The five-year average stands at 92.8%. Exhibit 11: Lloyd s Combined Ratio History 130% 110% 90% 70% 50% 30% 10% -10% 111.8% 106.8% 96.6% 83.1% 84.0% 91.3% 86.1% 93.3% 91.1% 86.8% Attritional Loss Ratio Expense Ratio Major Losses Prior Year Reserve Development Underwriting profit stood at GBP2.6 billion (2012: GBP1.7 billion), the accident year contributing GBP1.0 billion (GBP0.3 billion) and prior year reserve releases GBP1.6 billion (GBP1.4 billion). Excluding major claims, the accident year combined ratio rose by 1.8 percentage points to 90.4%, the weakest result since This was attributed to increasingly competitive market conditions, combined with foreign exchange losses. Exhibit 12: Composition of Lloyd s Combined Ratio 100% 80% 60% 40% 20% 9.7% -7.2% 88.6% 91.1% Expense Ratio 37.1% Attritional Loss Ratio 51.5% % Expense Ratio 38.2% Attritional Loss Ratio 52.2% 4.4% -8.0% % 0% Accident year* Major losses Reserve releases Calendar year Accident year* Major losses Reserve releases Calendar year *Excluding major losses Lloyd s reported reserve releases for the ninth successive year, supported by underlying claims experience being more favourable than expected across most classes and years of account. The development of business written in the soft market conditions of continues to be within expectations and initial claims estimates for the major catastrophe events of 2011 have in aggregate proved to be adequate. Limited deterioration has been seen on financial institutions and general liability business written in more recent years and on the Costa Concordia and Deepwater Horizon events. Only in the Motor segment was overall reserve strengthening required, with Lloyd s warning that any possible alteration to the discount rate used to determine large awards in bodily injury claims, in addition to high claims inflation levels, could affect current claims reserves in the future. Major losses halved to GBP873 million in 2013, split GBP531 million to natural catastrophes (the largest being the Alberta floods at GBP120 million) and GBP342 million to man-made losses. These added 4.4 percentage points to the combined ratio, well below the five and ten year averages of 10.9% and 11.3%, respectively. 12

13 Aon Benfield Exhibit 13: Lloyd s Major Loss History 6 60% GBP (billions) % 40% 30% 20% Lloyd's Major Claims* Major Claims as % of NPE % 0% Major Claims as % of Capital *Indexed to 2013 Segmental Results Underwriting profits were reported in all segments except Motor in The largest contribution came from Reinsurance at GBP1.3 billion, representing 51% of the total for the market as a whole. Exhibit 14: Combined Ratios by Segment 120% 100% 108.6% 98.8% 95.4% % 83.0% 81.4% 80.5% 80% 60% 40% 20% 0% Motor Casualty Marine Property Energy Aviation Reinsurance Stripping out prior year reserve adjustments, four of the segments reported underwriting losses in The accident year combined ratios were: Aviation 105.1%, Motor 104.4%, Marine 102.8%, Casualty 101.2%, Energy 94.3%, Property 93.4% and Reinsurance 91.7%. Exhibit 15: Segmental Reserve Releases as a % of Net Premium Earned 25% 20% 23.7% % 10% 11.3% 11.2% 8.4% 7.4% 5% 2.4% 0% -5% Aviation Energy Reinsurance Property Marine Casualty Motor -4.2% A ten year summary of Lloyd s results by segment is included in Appendix 3. 13

14 Lloyd s Update July 2014 Investment Return Lloyd s investments produced a total return of just GBP839 million or 1.6% in 2013, down from GBP1.3 billion or 2.6% in 2012, driven by the low interest rate environment and mark-to-market losses on bonds caused by rising yields in May and June. The three components of the result are shown in Exhibit 16. Exhibit 16: Investment Return GBP (billions) % 4.3% 4.7% 5.6% 2.5% 3.9% 2.6% 2.6% 6% 5% 4% 3% Investment return on Society assets (GBP) Notional return on Funds at Lloyd's (GBP) % 1.6% % 1% 0% Syndicate investment return (GBP) Investment return (%) The syndicate investment return fell by 62% to GBP379 million in 2013, a yield of just 1.1% (2012: 3.0%). This included GBP255 million of realized and unrealized investment losses (versus gains of GBP310 million in 2012). Only a third of the 72 non-life syndicates achieved a total yield of more than 1.0%. Very liquid and shortduration asset classes continue to dominate portfolios, although investment risk has increased in some cases. The average duration of syndicate fixed income securities was 2.3 years (2012: 2.4 years), compared with an average duration for claims provisions of approximately 3 years. Members capital is generally held centrally at Lloyd s, but a proportion is maintained in investment assets and managed at members discretion. A notional return on Funds at Lloyd s (FAL) is included in the financial statements, based on the investment disposition of the relevant assets and market index returns. This doubled to GBP400 million in 2013, equating to a yield of 2.5% (2012: 1.3%), driven by a 14% allocation to equities. The return generated by mutually-held central assets almost halved to GBP60 million in 2013, a yield of 2.3% (2012: 4.5%). Most of these investments are held within the Central Fund, the majority being fixed interest securities of high credit quality. Developed market equities achieved strong returns, driving the overall positive result. However emerging market equities, high yield bonds and commodities performed poorly. 14

15 Aon Benfield Pre-Tax Results Lloyd s reported a 16% increase in pre-tax profit to GBP3.2 billion in Prior year reserve releases have contributed strongly to overall results in the past several years, as can clearly be seen in Exhibit 17. In 2013, these represented 49% of Lloyd s total pre-tax profit. Exhibit 17: Pre-Tax Result Composition GBP (billions) Accident year underwriting result Prior year reserve releases Investment result -1 Other Pre-tax result The pre-tax return on net resources (capital, reserves, subordinated loan notes and securities) was 16.2% in 2013, taking the five year average to 12.8%. Exhibit 18: Pre-Tax Return on Average Net Resources 40% 30% 20% 10% 12.3% 31.4% 29.3% 13.7% 23.9% 12.1% 14.8% 16.2% 0% -10% -0.9% -2.8%

16 Lloyd s Update July 2014 Balance Sheet Lloyd s balance sheet strength has been recognized by the leading rating agencies. Overall investment allocation remains relatively conservative, capital resources are at an all-time high and legacy issues appear contained. Exhibit 19: Year-End Balance Sheet Summary Balance Sheet GBP (millions) Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Year-on-Year Change Cash and investments 46,254 48,483 51,415 51,767 51,494-1% Gross technical provisions 43,544 46,428 51,918 51,517 49,821-3% Reinsurers share 9,931 10,237 12,153 12,439 11,466-8% Net technical provisions 33,613 36,191 39,765 39,078 38,355-2% Net resources* 19,121 19,121 19,114 20,193 21,107 5% *Capital, reserves, subordinated loan notes and securities Investments Cash and investments totaled GBP51.5 billion at December 31, 2013, a reduction of 0.5% from the end of Allocations to corporate bonds and equities were increased at the expense of government bonds. Exhibit 20: Investment Allocation at December 31, 2013 Total Invested Assets: GBP51.5 billion 6% 1% 26% 40% Central Assets: GBP2.4 billion 5% 4% <2%> 5% 41% 13% 27% Corporate bonds Government bonds* Cash and LOCs Equities Alternative investments 26% Fixed income - corporate Fixed income - government* Global equity Emerging markets & high yield bonds Hedge funds Emerging equity Property equity Cash Commodities *Includes supra nationals and government agencies Increased risk appetite was evident within the Central Fund, which accounts for 5% of Lloyd s total cash and investments. The allocation to government bonds fell from 42% to 26%, with part of the portfolio liquidated to fund a GBP180 million subordinated debt repurchase in May The allocation to global equities was increased from 5% to 13%. 16

17 Aon Benfield Technical Reserves Gross provisions for outstanding claims fell by 6% to GBP38.0 billion at the end of 2013, while reinsurers share declined by 11% to GBP9.6 billion. The ratio of claims reserves to overall net resources stood at 180% on a gross basis and 135% net of reinsurance. The number of orphan years of account in run-off reduced from 8 to 6 over the course of the year. Exhibit 21: Claims Reserve Leverage 50 GBP (billions) Reinsurers' share of claims provision Net claims provision % 343% 228% 200% 252% 178% 190% 216% 199% 180% Net resources Capital Lloyd s is a partially mutualized market and does not hold conventional equity. The components of the capital base are shown in Exhibit 22. Both Funds at Lloyd s (FAL) and members balances operate on a several liability basis. Overall net resources rose by 5% to a record level of GBP21.1 billion at December 31, Solvency deficits fell to GBP34 million at the end of 2013, from GBP94 million at the end of 2012, with no new exposures to the Central Fund. Assets admissible for solvency purposes stood at almost GBP3.2 billion. Exhibit 22: Lloyd s Capital Base GBP (billions) Subordinated liabilities Central assets Members' balances Funds at Lloyd's Solvency surplus FAL represents capital lodged and held in trust to support members underwriting commitments. The total fell by 4% to GBP15.1 billion at December 31, 2013, of which 49% was held in the form of letters of credit (LOCs) and bank guarantees. Many members seek to match their capital disposition by currency against their peak exposures. At the end of 2013, approximately half of all capital deployed at Lloyd s was provided in US dollars. Amounts reported under members balances almost doubled to GBP3.6 billion, including GBP2.5 billion of underwriting capital (members that participate on only one syndicate have the option of holding supporting capital in their syndicate s premium trust funds, potentially enhancing investment returns). The remainder represented the net profit/(loss) to be distributed/(collected) by syndicates to/(from) capital providers. Central assets fell by 4% to GBP2.4 billion, including GBP0.7 billion of subordinated loan notes and perpetual capital securities. Mutual assets stood at GBP1.7 billion, including the Central Fund at just over GBP1.5 billion. 17

18 Lloyd s Update July 2014 The Chain of Security The resources available to pay claims at Lloyd s are linked together in a Chain of Security as follows: 1. Syndicate assets: Premium Trust Funds (PTFs) of GBP42.0 billion. All premiums received by syndicates are held in trust as the first resource for paying policyholders claims. Until all liabilities have been provided for, no profits can be released. Every year, each syndicate s reserves for future liabilities are independently audited and receive an actuarial review. 2. Members assets: FAL of GBP15.1 billion. Each member, whether corporate or individual, must provide sufficient capital to support their underwriting at Lloyd s. The capital is held in trust for the benefit of policyholders, but is not available to support the liabilities of other members. Assets supporting FAL requirements must be liquid but may include LOCs and bank guarantees. 3. Central resources: Society of Lloyd s net assets of GBP1.7 billion, plus subordinated debt of GBP0.7 billion. Should the first link need additional funds, the second link ensures members have resources available. In the rare event that these two links are insufficient, central resources can be made available at the discretion of the Council of Lloyd s to ensure valid claims are paid. Exhibit 23: Lloyd s Chain of Security at December 31, 2013 Central Assets Subordinated Debt GBP721 million Central Fund GBP1,513 million Corporation Assets GBP150 million Callable Layer (=3%) GBP788 million Members' Assets Funds at Lloyd's (underlying capital set by Lloyd's) GBP15,088 million Syndicate Assets Premium Trust Funds GBP41,990 million Several assets Mutual assets Contingent Capital Setting at Lloyd s From January 2013, managing agents are required to use Solvency II internal models to determine each syndicate s Individual Capital Assessment (ICA). This is the level of capital required to cover underlying business risks at a 99.5% confidence level. Lloyd s reviews all ICAs to assess the adequacy of the proposed capital level. When agreed, each ICA is then uplifted by 35% to ensure there is sufficient capital to support the market s ratings and financial strength. This uplifted ICA is known as the syndicate s Economic Capital Assessment (ECA) and drives members capital levels. Central assets are currently managed to a minimum of 250% of the ICA prepared centrally for the market as a whole. The Corporation regularly runs detailed analyses aiming to balance the need for financial security with the need for cost-effective mutuality of capital. Members contributions to the Central Fund remain at 0.5% of gross premiums written for

19 Aon Benfield Ratings After a long period of rating stability, Lloyd s looks likely to be rewarded for its improved operating performance and strengthened balance sheet. Exhibit 24: Lloyd s Market Ratings Rating Outlook Action A.M. Best A+ (Excellent) Positive Positive outlook assigned July 19, 2013 Fitch AA- (Very Strong) Stable Upgraded June 10, 2014 Standard & Poor's A+ (Strong) Positive Positive outlook assigned August 28, 2012 Source: Rating agencies Lloyd s Market Ratings On June 10, 2014, Fitch upgraded their financial strength rating by one notch to AA- (Very Strong), reflecting expectations of improved cross-cycle underwriting performance, a level of risk-adjusted capitalization that is in line with the new rating level, low financial leverage and Lloyd s significant market position in both insurance and reinsurance classes. A.M. Best and Standard & Poor s (S&P) ratings of the Lloyd s market were affirmed with positive outlooks on July 24, 2014 and November 27, 2013 respectively. Standalone Syndicate Ratings/Rankings Three of the leading rating agencies assign ratings or rankings to individual syndicates, all of which are captured in Exhibit 25. The methodologies differ widely and none of them is endorsed by Lloyd s. A.M. Best Syndicate financial strength ratings are assigned through the application of A.M. Best s interactive rating process. They are a complementary analytical service to A.M. Best s rating on the overall Lloyd s market and should be considered only in this context. Syndicate ratings include the modifier s, and the rating scale follows that used in the company market. Moody s Syndicate Continuity Opinions are based on an assessment of both quantitative and qualitative information and indicate the rating agency s view of a syndicate s relative long-run potential future performance and continuity characteristics based on currently known factors. Some are based solely on public information. The rating scale ranges from Excellent ( A+ ) to Below Average (anything below B ). Standard & Poor's Lloyd s Syndicate Assessments (LSAs) rely on both qualitative and quantitative analysis to evaluate the relative dependence of a syndicate on Lloyd's infrastructure and the Central Fund. The assessment reflects the syndicate's ability to offer business continuity to policyholders, ranked on a scale of 1 to 5 (where 5 denotes the highest levels of continuity). LSAs carry a pi subscript where they are based solely on public information. 19

20 Lloyd s Update July 2014 Exhibit 25: Lloyd s Syndicate Ratings/Rankings Syndicate Number Managing Agent A.M. Best Financial Strength Rating Moody s Continuity Opinion S&P Lloyd s Syndicate Assessment 0033 Hiscox Syndicates Ltd A s A Equity Syndicate Management Ltd - B Canopius Managing Agents Ltd - B R J Kiln and Co Ltd - B 2pi 0318 Beaufort Underwriting Agency Ltd - B+ 3pi 0382 Hardy (Underwriting Agencies) Ltd - B* 3pi 0386 QBE Underwriting Ltd - A 5/Stable 0435 Faraday Underwriting Ltd - A-* 4pi 0457 Munich Re Underwriting Ltd - B+ 3pi 0510 R J Kiln and Co Ltd A s A- 4pi 0557 R J Kiln and Co Ltd - B+ 2pi 0609 Atrium Underwriters Ltd - A Beazley Furlonge Ltd A s A S A Meacock & Co Ltd - B 2pi 0779 ANV Syndicates Ltd - B 2pi 0780 Advent Underwriting Ltd - B Canopius Managing Agents Ltd - B Chaucer Syndicates Ltd - B+ 3pi 1176 Chaucer Syndicates Ltd - B+ 3pi 1183 Talbot Underwriting Ltd A s B Argo Managing Agency AmTrust at Lloyd's Ltd - C+* 1pi 1209 XL London Market Ltd - B+* Newline Underwriting Management Ltd - B* 2pi 1221 Navigators Underwriting Agency Ltd - B AEGIS Managing Agency Ltd A s - 3pi 1301 Torus Underwriting Management Ltd - - 2pi 1414 Ascot Underwriting Ltd - - 3pi 1919 Starr Managing Agents Ltd - - 2pi 2001 Amlin Underwriting Ltd A+ s A 4+/Stable 2003 Catlin Underwriting Agencies Ltd A s A-* 4+/Stable 2007 Novae Syndicates Ltd - B+ 3-/Stable 2010 Cathedral Underwriting Agencies Ltd A s - 4pi 2121 Argenta Syndicate Management Ltd - - 2pi 2468 Marketform Managing Agency Ltd - - 1pi 2488 ACE Underwriting Agencies Ltd - A Beazley Furlonge Ltd A s A Managing Agency Partners Ltd - A- 3pi 2987 Brit Syndicates Ltd - B+ 3pi 2999 QBE Underwriting Ltd - A- 5/Stable 3000 Markel Syndicate Management Ltd A s A- 3pi 3210 Mitsui Sumitomo Insurance Underwriting at Lloyd's Ltd - B Sportscover Underwriting Ltd - - 1pi 3622 Beazley Furlonge Ltd A s Beazley Furlonge Ltd A s Ark Syndicate Management Ltd - - 3pi 4242 Asta Managing Agency Ltd - - 2pi 4444 Canopius Managing Agents Ltd - B+ 3+/Stable 4472 Liberty Syndicate Management Ltd - B+* - Source: Rating Agencies *Continuity Opinion based solely on public information or limited non-public information Ratings/rankings as at July 22,

21 Aon Benfield Appendix 1 Top 40 Reinsurers at Lloyd s The Reinsurance segment represented 37% of gross premiums written at Lloyd s in This section focuses on the performance of the 40 syndicates with the largest inwards reinsurance books, based on disclosure in the 2013 syndicate accounts. Exhibit 26: 2013 Gross Premiums Written 2,000 1,800 1,600 Insurance (Direct) Reinsurance (Facultative and Treaty) 1,400 GBP (millions) 1,200 1, Source: Syndicate annual reports, Aon Benfield Market Analysis Exhibit 27: 2013 Reinsurance Gross Premiums Written, % Change 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Source: Syndicate annual reports, Aon Benfield Market Analysis 21

22 Lloyd s Update July 2014 Exhibit 28: 2013 Combined Ratios 120% 100% Loss Ratio Expense Ratio 80% 60% 40% 20% 0% Source: Syndicate annual reports, Aon Benfield Market Analysis Exhibit 29: Five Year Average Combined Ratios ( ) 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% *Four year average Source: Syndicate annual reports, Aon Benfield Market Analysis 22

23 Aon Benfield Exhibit 30: 2013 Pre-Tax Results as % of Net Premiums Earned 60% 50% 40% 30% 20% 10% 0% -10% -20% Source: Syndicate annual reports, Aon Benfield Market Analysis Exhibit 31: Five Year Average Pre-Tax Results as % of Net Premiums Earned ( ) 60% 40% 20% 0% -20% -40% -60% -80% -100% *Four year average Source: Syndicate annual reports, Aon Benfield Market Analysis 23

24 Lloyd s Update July 2014 Appendix 2 Active Syndicate Listing Syn. No. Managing Agent Agency Owner* Largest Capital Provider in 2014* 2013 Gross Premiums Written GBP million 2013 Combined Ratio 2013 Pre- Tax Result as % of NPE 2014 Capacity GBP million** 0033 Hiscox Hiscox Hiscox (72.5%) % 26.6% 1, AmTrust AmTrust AmTrust % -3.6% ERS Aquiline Aquiline (66.7%) % -5.0% Canopius NKSJ NKSJ (92.8%) % -3.5% Kiln Tokio Marine Tokio Marine (50.4%) % 6.6% Beaufort Munich Re Munich Re (91.2%) % 22.1% Hardy CNA CNA % 9.8% QBE QBE QBE (69.6%) % 10.3% Faraday Berkshire Berkshire % 59.3% Munich Re Munich Re Munich Re % 12.4% Kiln Tokio Marine Tokio Marine (55.2%) 1, % 13.3% 1, Kiln Tokio Marine Hampden (52.6%) % 44.1% QBE Operates as a trading division of Syndicate Atrium Enstar/Stone Point Hampden (36.5%) % 17.9% Beazley Beazley Hampden (53.6%) % 20.4% Hiscox Operates as a trading division of Syndicate Meacock Family-owned Hampden (43.2%) % 16.7% ANV ANV Hampden (40.0%) % 12.9% Advent Fairfax Fairfax % 2.6% Amlin Operates as a trading division of Syndicate Canopius NKSJ NKSJ (69.0%) % 4.0% QBE Operates as a trading division of Syndicate Chaucer Hanover Ins Hanover Ins % 11.9% Argenta Argenta ProSight Specialty % -16.7% Chaucer Hanover Ins Hanover Ins (57.0%) % 56.4% Talbot Validus Validus % 19.8% Argo Argo Argo (68.9%) % 7.7% AmTrust AmTrust AmTrust % -13.8% XL XL XL % 6.2% Newline Fairfax Fairfax % 20.2% Navigators Navigators Navigators % 11.9% AEGIS AEGIS AEGIS (93.0%) % 15.8% Antares Qatar Ins Qatar Ins (75.6%) % 12.7% Torus Enstar/Stone Point Torus (64.0%) % -3.8% Ascot AIG (20%) AIG (97.8%) % 20.5% RenRe RenRe RenRe % 4.3% Asta Tawa/Paraline/Skuld Axis Commenced trading January 1, Asta Tawa/Paraline/Skuld ProAssurance (57.6%) Commenced trading January 1, ANV ANV ANV % -4.8% Kiln Tokio Marine Tokio Marine % 52.6% Chubb Chubb Chubb % -19.7% QBE Operates as a trading division of Syndicate Asta Tawa/Paraline/Skuld Skuld (66.7%) % -10.6% Asta Tawa/Paraline/Skuld BTG Pactual % 43.3% Starr Starr International Starr International % 15.5% Sirius White Mountains White Mountains % -7.4% Barbican Barbican Barbican % 5.2% W.R. Berkley W.R. Berkley W.R. Berkley % 6.2% ANV ANV Argenta (79.8%) % 3.2% Liberty Operates as a trading division of Syndicate 4472 *100% unless otherwise stated **Unofficial and subject to change Subject to Lloyd s/regulatory approval 1/2 24

25 Aon Benfield Syn. No. Managing Agent Agency Owner* Largest Capital Provider in 2014* 2013 Gross Premiums Written GBPmn 2013 Combined Ratio 2013 Pre- Tax Result as % of NPE 2014 Capacity GBPmn** 1991 R&Q R&Q Argenta (21.2%) 5 n.m. n.m Amlin Amlin Amlin 1, % 12.8% 1, Catlin Catlin Catlin 1, % 9.9% 1, Novae Novae Novae (90.0%) % 8.2% Cathedral Lancashire Lancashire (57.8%) % 34.0% Arch Arch Arch % -5.0% Pembroke Ironshore Hampden (81.5%) Formerly SPS 6110, re-launched from January 1, Channel SCOR SCOR % -12.0% Catlin Catlin China Re % -0.2% Argenta Argenta Argenta (86.9%) % 13.6% Allied World Allied World Allied World % -15.5% Asta Tawa/Paraline/Skuld Nephila % 66.5% Marketform American Financial American Financial (70.0%) % 5.7% ACE ACE ACE % 19.7% Asta Tawa/Paraline/Skuld Hampden (45.3%) % 34.2% Asta Tawa/Paraline/Skuld AmTrust (60.8%) % -23.3% Beazley Beazley Beazley 1, % 24.9% 1, MAP MAP (90.0%) Hampden (38.1%) % 35.3% Brit Brit Brit 1, % 9.4% 1, QBE QBE QBE 1, % 21.0% 1, Markel Markel Markel % 16.9% Catlin Catlin Catlin % 11.3% Cathedral Lancashire Lancashire % -8.6% Mitsui MS&AD MS&AD % 12.3% Sportscover Sportscover Wild Goose % -8.3% Beazley Beazley Beazley % -15.3% Beazley Beazley Beazley % -5.3% Hiscox Hiscox Hiscox % -0.4% Ark Operates as a trading division of Syndicate Pembroke Ironshore Ironshore % 11.0% Ark Ark Ark % 18.1% HCC HCC HCC % 16.2% Asta Tawa/Paraline/Skuld Paraline (15.7%) % 10.9% Canopius NKSJ NKSJ (74.0%) % 12.5% Liberty Liberty Liberty 1, % 6.5% 1, Aspen Aspen Aspen % 3.0% Travelers Travelers Travelers % 21.0% Montpelier Montpelier Montpelier % 13.0% Vibe Soros/Pine Brook Soros/Pine Brook Commenced trading July 1, ANV ANV ANV (51.1%) % 16.8% MAP MAP (90.0%) Hampden (55.1%) % 80.3% Hiscox Hiscox Hampden (45.9%) % 58.6% Ark Ark Argenta (43.3%) % 15.2% Beazley Beazley Hampden (49.9%) % 35.8% Catlin Catlin Hampden (58.0%) % 5.2% Catlin Catlin Everest Re % 5.4% Barbican Barbican Hampden (35.8%) % 40.1% Canopius NKSJ NKSJ (50.0%) % -8.5% Asta Tawa/Paraline/Skuld Hampden Commenced trading January 1, Barbican Barbican ARIG/Labuan Re Commenced trading January 1, Catlin Catlin GIC Commenced trading January 1, *100% unless otherwise stated **Unofficial and subject to change Subject to Lloyd s/regulatory approval Hampden and Argenta are Lloyd's members' agents acting mainly on behalf of third party capital providers Source: Lloyd's, Aon Benfield Market Analysis 25