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1 Lloyd s Review OMMQ

2 Contents Introduction Executive summary Global results and forecasts Capitalization Trends in capacity Lloyd s Franchise implementation Regulatory and accounting environment Ratings Equitas Appendices 1. Syndicates active for 2004 year of account 2. Incidental syndicates 3. Cessations, mergers and new syndicates 4. Capacity and alignment of managing agents 5. Lloyd s top 20 capital providers 6. Market activity Capital Structure 8. Equitas Contact details For further information please contact your account executive. For additional copies please contact the Reinsurance Publications Department. Tel: +44 (0) Fax: +44 (0) expositos@willis.com Willis Limited Ten Trinity Square London EC3P 3AX United Kingdom Copyright 2004 Willis Limited All rights reserved : No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the permission of Willis Limited. The information contained in this report is compiled from sources we consider to be reliable; however, we do not guarantee and are not responsible for its accuracy. This report is for general guidance only and action should not be taken without obtaining specific advice.

3 Introduction The Lloyd's franchise continues to evolve as Lloyd's moves away from its traditional role of market supervisor to a proactive manager of a commercial franchise. Lloyd's senior management team has driven forward with a range of initiatives in the past year centred on the ultimate goal of creating a commercial environment where the long-term return to all capital providers is maximised. Lloyd's strong return to profitability and the attractive underwriting conditions, affords Lloyd's management with a window of opportunity to invest time and resources in creating a disciplined marketplace of well-managed, independent businesses. Significant progress has been achieved by Lloyd's management in the past year, and the market appears well placed to continue with the momentum generated for further reform. The challenge for Lloyd's will be to proactively manage the franchise and avoid the extremes of underwriting ill-discipline of a small number of businesses, that in the past caused significant damage to Lloyd's central resources and brand. Against a background where underwriting conditions in most classes of business are beginning to weaken, the acid-test to the Lloyd's franchise system will be to deliver profitability over the underwriting cycle, and not micro-manage Lloyd's independent business to the extent that Lloyd's renowned entrepreneurial sprit, innovation and flexibility are destroyed. This review seeks to identify and comment upon some of the key trends and developments at Lloyd's during the past year, and to give a brief insight into the state of the market in Willis Re Lloyd s Review 1

4 Executive summary Lloyd's underwriting capacity for 2004 is a record high at billion, albeit marginally larger than the opening figure in Lloyd's forecasts capacity to contract in subsequent years, as it expects underwriters to focus on profit rather than maintaining market share in the next downturn in the underwriting cycle. At 1.9 billion, Lloyd's profit in 2003 on a pro-forma annual accounting basis represented a more than twofold increase on the figure achieved in Lloyd's combined ratio for 2003 improved to 90.7 per cent, down from 98.6 per cent in This result was achieved in spite of a further charge for adverse loss reserve development for US casualty business for years 1997 to The 2001 year closed - on a three year accounted basis - with a loss of 2.4 billion representing 21 per cent of capacity. The result was heavily influenced by losses arising from September 11. Underwriting conditions remain attractive, with the 2003 year seen by Lloyd's as the peak of the underwriting cycle. Prospects for future earnings are good, and in April 2004 Lloyd's forecast combined profits for the 2002 and 2003 years account in the region of 3.5 billion. The Lloyd's market financial strength market ratings were affirmed by Standard & Poor's and A.M. Best at A (Strong) and A- (Excellent) respectively. Lloyd's aims to achieve a one-notch upgrade in its market rating from both rating agencies by the end of The market's positive results in 2003 contributed to a further strengthening of Lloyd's balance sheet. Net resources (Lloyd's measure for shareholders' funds), rose by 35 per cent in 2003 to 10.1 billion. Lloyd's achieved its widely stated goal of increasing central net assets to in excess of USD1 billion by December 31, Lloyd's central net assets, largely comprising Lloyd's Central Fund, increased by 39 per cent to stand at 781 million as at the 2003 year-end. The Lloyd's franchise continues to evolve. This was evidenced in 2003 by developments such as : the creation of the franchise performance directorate a more rigorous business planning process amendment to the relevant EU directive to facilitate the move to annual accounting, and the appointment of a head of business process reform. Equitas announced its results for year ended March 31, 2004, reporting that accumulated surplus, after tax, decreased by 67 million to 460 million, driven by the need to further strengthen asbestos claims reserves. However, Equitas' solvency ratio improved to 9.8 per cent from 8.7 per cent in In 2003 the Financial Service Authority (FSA) began the process to take a more direct approach in the regulation of the Lloyd's market. The FSA proposed new requirements, which will be introduced from January 1, 2005, designed to ensure that senior management at both the Corporation of Lloyd's and at managing agents focus on their responsibilities for managing risk effectively and on the level of capital needed to support the risks of the insurance businesses. 2 Willis Re Lloyd s Review

5 Global results and forecasts Lloyd's reported a 1.9 billion profit for 2003 on a pro-forma annual accounting basis. This is an all-time record and more than twice the profit reported for Lloyd's stated that these results reflect a strong underwriting environment and a disciplined approach to underwriting by the market. Lloyd's overall calendar year combined ratio improved to 90.7 per cent in 2003, down from 98.6 per cent in the previous year. This combined ratio compares favourably with Lloyd's international peer group. These positive results, coupled with last year's return to profit, contributed to a further strengthening of Lloyd's balance sheet. Net resources of the Society and members rose by 35 per cent in 2003 to 10.1 billion. Financial Results/Projections Annually Accounted 3-Year Accounted ( m) ( m) ,892 1,780 (p) ,671 (p) 2001 (3,110) (2,378) 2000 (1,211) (2,397) Note: Under annual accounts the whole of the loss for September 11 falls into 2001, whilst under three year accounting it is split between 2001, 2000 and (p) = projection Lloyd's capital and reserves ( m) ( m) % change Cash & investments 27,893 24, % Reinsurers' share of technical provisions 11,180 13,693-18% Other assets 9,830 11,091-11% Total assets 48,903 49, % Total liabilities 38,758 41,787-7% Net resources 10,145 7, % Lloyd s vs industry 2003 combined ratio (Calendar year combined ratio) Lloyd's 2003 European Reinsurers European primary US (Re)insurers Bermuda (Re)insurers Source: Lloyd's Willis Re Lloyd s Review 3

6 2003 Result (annually accounted) Lloyd's 2003 profit on a pro-forma annually accounted basis of 1,892 million benefited from favourable market conditions, with strong premium rates continuing, and a comparatively low financial impact on the Lloyd's market from catastrophe losses. Lloyd's noted that aggregate insured catastrophe losses in 2003 were above the long term average, and included hurricane Isabel, a Japanese earthquake and severe Californian forest fires. However, Lloyd's believes a more cautious underwriting approach in the hard market resulted in a relatively modest financial impact of these losses on the market. Key financial highlights ( m) ( m) % change Net earned premiums 11,711 10, % Net incurred claims (6,697) (6,652) +1% Net operating expenses (3,922) (3,586) +11% Loss on exchange (30) (401) -93% Investment return % Profit on ordinary activities 1, % Combined ratio Calendar year 90.7% 98.6% -8% Accident year 86.0% 92.7% -7% Net resources 10,145 7, % Central assets % Pre-tax return on average net resources 24.1% 14.4% +67% Lloyd s net catastrophe losses ( millions) 3,000 2,500 2,663 2,000 1,500 1, Source: Lloyd's 4 Willis Re Lloyd s Review

7 Lloyd's, in common with its peers, was not immune from developing claims in US casualty business. The 2003 result included reserve strengthening of 545 million for 2001 and prior years. This, combined with the last year's 625 million of reserve strengthening, brings adverse reserve development recorded at Lloyd's for the 2002 and 2003 years to in excess of 1 billion. The majority of the reserve development related to US casualty business for years , with the D&O class having the greatest effect on Lloyd's results. Losses such as the corporate collapses of Enron and Worldcom, and litigation arising from the bursting of the dot-com bubble were cited by Lloyd's as driving the loss development in the D&O line. Lloyd's believes that its reserve actions taken in the last two years will account for the majority of reserve strengthening required for prior years. However, Lloyd's will not rule out further minor reserve development in the casualty sector going forward, given the unpredictability of claims awards in the courts, particularly in the US combined ratio Overall Casualty Property Reinsurance Motor Marine Energy Aviation Accident year 86.0% 94.8% 89.1% 84.9% 96.8% 95.6% 88.6% 94.2% Prior year reserve movement 4.7% 15.6% 0.3% 4.4% (3.2%) (5.9%) (5.2%) (1.2%) Calendar year 90.7% 110.4% 89.4% 89.3% 93.6% 89.7% 83.4% 93.0% Willis Re Lloyd s Review 5

8 The divergence of performance among syndicates indicates that under-performance still exists in the market. Lloyd's reported that the top 25 per cent of syndicates in 2003 achieved an annually accounted combined ratio of 77 per cent, which compares very favourably with industry peers. In contrast, the bottom quartile of syndicates (including discontinued businesses), produced a combined ratio of 126 per cent, in spite of the strong market conditions. This under-performance in the market will be a central issue for the Franchise Board to address, particularly as the underwriting cycle begins to weaken. Lloyd's positive performance over the last two years has resulted in a strengthening of the market's global assets available to meet policyholders' claims. Lloyd's net resources (Lloyd's measure for shareholders' funds) totalled 10.1 billion at year-end 2003, up 35 per cent from the 2002 level. Lloyd s performance by class of business 2003 calendar year combined ratios 120% 100% 80% 110.4% 89.4% 89.3% 93.6% 89.7% 83.4% 93.0% 60% 40% 20% 0 Casualty Property Reinsurance Motor Marine Energy Aviation Source: Lloyd's 6 Willis Re Lloyd s Review

9 Reinsurance asset Lloyd's traditionally high use of reinsurance support moderated in The percentage of outward reinsurance premiums ceded was 25.4 per cent of GWP in 2003, down from 31.1 per cent in This downward trend in reinsurance purchase was also matched by a reduction in Lloyd's reinsurance recoverable asset, which decreased to 11.6 billion (or 114 per cent of net resources), down from 13.8 billion (184 per cent) in Lloyd's reported that 87 per cent of its reinsurance asset is with reinsurers rated "A-" and above, with 30% of the total asset concentrated with five top reinsurance groups (excluding Lloyd's). Lloyd's inter-syndicate reinsurance accounted for 14 per cent of the total asset. Lloyd's has provided for a bad debt provision of 7.4 per cent of the total reinsurance asset across the market. The total paid reinsurance debt at year-end 2003 was 1.5 billion, of which 23 per cent was greater than 12 months old. Reinsurance asset ( millions) O/S & Total % of net Date Debt IBNR Recoverable resources December 31, ,896 14,626 16, % December 31, ,079 11,746 13, % December 31, ,596 9,996 11, % Lloyd s net resouces ( millions) 12,000 10,000 10,145 8,000 7,509 6,000 4,000 4,052 2, Source: Lloyd's Willis Re Lloyd s Review 7

10 Outlook With the exception of casualty business, Lloyd's noted that the tightening of premium rates and policy terms and conditions began to slow by late 2003, and acknowledged that 2003 will prove to be the peak of the underwriting cycle for most classes of business. Consequently, the 2004 year result will benefit significantly from the flow of earned premiums from Lloyd's predicts that market capacity and its utilisation will contract from current peak levels once the insurance cycle begins to weaken. The challenge to the Franchise Board will be to maintain the market's focus on profitable underwriting as opposed to maximising premium growth and market share. However, Lloyd's is confident that it continues to be well placed to take advantage of what are still very attractive market conditions. Premium rating index 2003 Calendar Year Class of business Combined Ratios Casualty Property Reinsurance Motor Marine Energy Aviation Lloyd s capital ratio % (Net resources / NWP) 90% 80% 70% 60% 67.3% 82.8% 50% 40% 44.9% 30% 20% 10% Source: Lloyd's 8 Willis Re Lloyd s Review

11 2001 year of account result (3-year accounted) The 2001 year of account has closed with a loss of 2,378 million representing 21.1 per cent of capacity. The result was heavily influenced by losses arising from September 11, but it also included a number of other major catastrophes witnessed in 2001 including: the loss of the Petrobas oil rig off the coast of Brazil the terrorist attacks on the Air Lanka fleet in Sri Lanka the explosion at the AZF factory in Toulouse, France tropical storm Allison that struck the Mid West and East Coast of the US 2002 and 2003 year of account forecasts (3-year accounted) Lloyd's forecasts - as at April for the projected results for the 2002 and 2003 years of account are for profits of 1,671 million and 1,780 million respectively. These forecast results are reflective of the favourable underwriting conditions, as well as the low financial impact of catastrophe losses to date. Results after personal expenses ( m) Total capacity 8,784 10,898 10,195 9,994 10,324 10,169 9,870 10,045 11,263 Net premiums 5,892 5,690 5,893 4,810 4,709 4,869 5,785 6,203 6,930 Underwriting result: - pure year 1,629 1,604 1, (904) (1,563) (1,794) (1,396) - prior years (959) (166) (329) (580) - total 670 1,662 1, (777) (1,729) (2,123) (1,976) Gross investment return Result after personal expenses 225 1,095 1, (209) (1,065) (1,952) (2,397) (2,378) Lloyd s results and forecast (under 3-year accounted) ( millions) 2,000 1,500 1, ,000-1,500-2,000-2,500-3, f 2003f Source: Lloyd's Willis Re Lloyd s Review 9

12 September 11, 2001 The events of September 11, 2001 presented the global insurance industry with its greatest challenge. Lloyd's, faced with its largest ever loss, acted swiftly to ensure claims were effectively managed. Lloyd's loss projections for September 11, 2001 have remained stable. As at December 31, 2003, the estimated gross ultimate loss for the market, excluding inter-syndicate reinsurance, was USD8.89 billion. This compares to USD8.75 billion estimated as at December 31, Lloyd's ultimate net loss estimate at December 31, 2003 was USD3.17 billion (December 31, 2002: USD3.26 billion). The quality of Lloyd's reinsurance asset for September 11, 2001 remains high with 89 per cent of recoverables due from reinsurers rated "A-" or above. Lloyd's notes that a substantial degree of uncertainty remains over its ultimate gross and net liabilities arising from the September 11, 2001 losses. This uncertainty is only to be expected since Lloyd's, together with the rest of the insurance industry, is faced with uncertainties arising from legal disputes, reinsurance collectability issues and the emergence of further information. A number of syndicate auditors' opinions continue to reflect this uncertainty, although all of them were unqualified. Lloyd s September 11, 2001 loss estimates (US$ billion) Source: Lloyd's Gross before reinsurance Dec 2001 Net after reinsurance Dec 2002 Dec Willis Re Lloyd s Review

13 Lloyd's business profile Lloyd's remains a leading marketplace in today's global insurance industry. Its skilled and experienced underwriters provide specialist insurance and reinsurance solutions to many of the world's leading organizations, with over 90 per cent of the FTSE 100 companies and 93 per cent of Dow Jones IA companies choosing to have policies at Lloyd's. More than half of the London market's gross premiums are placed at Lloyd's, which underwrites 29 per cent of world aviation and 12 per cent of world marine business. As a global reinsurer, Lloyd's was ranked 6th in terms of net premium written in The Lloyd's market conducts business in over 120 countries and is authorised to trade in 72 territories worldwide, including all 25 EU countries. North America continues to be Lloyd's leading market with an anticipated 45 per cent of premium income in Lloyd's is one of the leading surplus lines insurers in the United States, with a 21 per cent market share in Other major marketplaces for Lloyd's are the UK and Europe. Lloyd's intends to further develop its position in continental Europe and Asia. This was evidenced recently by Lloyd's application to establish an onshore reinsurance branch in China, and the creation of a new subsidiary in Spain, namely Lloyd's Espana. Lloyd s 2004 gross premium split by territory North America 45% UK 27% Continental Europe 12% Asia Pacific 8% Latin America / Caribbean 5% Africa / Middle East 3% Source: Lloyd's Willis Re Lloyd s Review 11

14 The casualty segment - covering professional indemnity, directors' and officers' liability, medical malpractice, employers' liability/workers' compensation, accident and health, and other general liability business - continues to be Lloyd's single largest premium source. Property business is the market's second largest component of overall premium income, closely followed by reinsurance business. Lloyd's business is sourced via a global network of independent insurance brokers. The market remains significantly reliant on a small number of brokers with 47 per cent of the market's premium income generated by its top three brokers. Lloyd s gross premium by lines of business ( million) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Accident and Health Motor (including third party liability) Marine, aviation and transport Fire and other property damage Third party liability Other Reinsurance Source: Lloyd's Lloyd s distributor concentration Top 3 Brokers 47% Brokers % Others 23% 12 Willis Re Lloyd s Review

15 Capitalization Lloyd's capital requirements are largely determined by its risk-based capital (RBC) system. In its Special Report on Lloyd's of September 2003, A.M. Best considers the RBC system to be "at least comparable to other internal models used in the insurance industry", and notes how the system was tested by the World Trade Center event, which occurred at a time when Lloyd's had suffered a succession of heavily loss-making years. Lloyd's has conducted a Capital Project, the principal aim of which is to determine an appropriate capital and solvency level for the market. It is expected that the results of this project will be announced during Risk-Based Capital system (RBC) The RBC system is employed to determine the capital requirements of each member of Lloyd's, and is designed to equalize the expected loss per unit of net premium or net reserve to the Central Fund. It is the Franchise Board's aim to bring the RBC system to a level as close as possible to industry best practice, and continued development of the model is expected (for example, to improve the way reinsurance risk is treated and its ability to distinguish on reserving strength between syndicates). Amendments were made to the RBC methodology that increased the Funds at Lloyd's requirements for members in The adjustments in the RBC methodology took into account, or improved the assessment of the underwriting cycle, operating risk, catastrophe risk, and portfolio diversification. No significant change in the RBC system is envisaged in 2004, although new realistic disaster scenarios will be included. Regulatory activity in 2004/5 is expected to impact the RBC system. From 2005, the Financial Services Authority (FSA) will require managing agents to assess the capital requirements of each active syndicate under management. Future developments to the RBC system will be linked with the implementation of the FSA's requirements. Ultimately, it is envisaged that managing agents will be responsible for calculating their own RBC requirements, with Lloyd's playing a facilitative and monitoring role to protect the commercial franchise. Realistic Disaster Scenarios (RDSs) Realistic disaster scenarios (RDSs) are used by Lloyd's as an input to its RBC system to set capital requirements, as well as to profile the market's prospective reinsurance asset. Introduced in 1995, RDSs require syndicates to carry out disaster planning based on a range of hypothetical scenarios, and report the results to the Franchise Board. Syndicates (including syndicates in run-off with live exposures), are required to report on a minimum of nine RDSs, seven of which are mandatory scenarios, including a new terrorism scenario and a second event scenario. Syndicates are required to provide a breakdown, by reinsurer, of their anticipated reinsurance recoveries for each event. It should be noted that a terrorist event such as the World Trade Center had not been considered as a RDS in Lloyd's RBC system at the time of this loss. Mandatory RDSs Second event (i.e. an "Andrew" hurricane in the immediate aftermath of a "Northridge" earthquake) Florida Windstorm (comprising two separate events) California Earthquake (comprising two separate events) New Madrid Earthquake European Windstorm Japanese Earthquake Terrorism Lloyd's has commenced a two year RDS overhaul project that is due to complete in April This project is designed to improve consistency of risk assessment and raise loss modelling standards in the market. This project has been assisted by experts in the market, as well as catastrophe modelling organisations AIR, EQECAT and RMS. Willis Re Lloyd s Review 13

16 The chain of security Lloyd's unique capital structure is based on a "chain of security" with four links represented diagrammatically below. Please refer to appendix 7 for a more detailed description of Lloyd's capital structure. Traditional members Premiums trust funds Corporate members Premiums trust funds million end ,995 Funds at Lloyd's Funds at Lloyd's 9,659 Other declared assets Lloyd's central net assets (includes Central Fund of 711 million) It is important to recognise that members of Lloyd's underwrite severally and not jointly. It is the fourth and final link in the chain of security that is only available to meet the liabilities of any member that fails. Lloyd's syndicates are collections of one or more Lloyd's members that allow members to accept underwriting risks. Syndicates do not have a legal identity. The fourth and final link in the chain of security comprises Lloyd's central assets, and principally consists of the Central Fund and its insurance protection The Central Fund The Lloyd's Central Fund continues to be held and administered by the Council of Lloyd's principally as a fund for the protection of policyholders. The Central Fund is financed by levies on members. For 2004, Central Fund contributions are to increase to 1.25 per cent of members overall allocated premium limits, up from 1 per cent in New corporate members underwriting on new syndicates are required to make contributions at double the annual rate for the first three years of operations at Lloyd's. The premium levy that was charged at 2 per cent of gross written premium for most classes of business ceased at the end of Immediately after September 11, Lloyd's stated that it would aim to increase its central net assets to in excess of 700 million by December 31, This target was achieved as central net assets increased by 39 per cent to 781 million as at the 2003 year-end. The Central Fund accounted for 711 million of this total. However, it should be recognised that in April 2003 Lloyd's commenced arbitration proceedings in respect of the insurance policy that provides protection to the Central Fund. A significant threat to the Central Fund comes from syndicates in run-off. Costs to the Central Fund from run-off years have escalated in recent years, compounded by the lack of reinsurance to close capacity in the market. Lloyd's will actively manage this issue over the near-term, seeking alternative solutions and improving the monitoring and reporting of run-off performance. The appointment of Lloyd's first Head of Claims and Reinsurance in 2003 to oversee Lloyd's run-off project, is seen as evidence of Lloyd's commitment to resolve this important issue. 14 Willis Re Lloyd s Review

17 The Central Fund insurance policy Lloyd's Central Fund has been supported by a five year insurance cover that ceased at the end of The insurance cover is designed to meet unrecovered losses to the Central Fund where it has been applied to meet members' cash calls. For a brief overview of the Central Fund insurance policy, please refer to appendix 7. Claims made by Lloyd's under the policy are expected to increase during 2004 to reach the overall aggregate limit of 500 million. However, insurers have disputed their liability to meet claims made under the policy, and in April 2003, Lloyd's commenced arbitration proceedings for recovery of the sums claimed from the insurers. Lloyd's remains confident that the arbitration, which is due to present its ruling towards the end of 2004, will be determined in its favour. If the arbitration is not determined entirely in favour of Lloyd's, then Lloyd's estimates that the net assets of the Central Fund will be reduced by 290 million as a worst case scenario. This is Lloyd's stated worst case scenario of the insurance policy being declared void and all premium and claim payments being returned to the respective parties. In April 2003, both A.M. Best and Standard & Poor's affirmed their ratings of Lloyd's, stating that the ratings were not affected by the commencement of the arbitration proceedings in respect of the Central Fund insurance policy. Lloyd's is understood to be reviewing the appropriate level for its Central Fund as part of its Capital Project. Lloyd's has stated that it continues to explore options for some form of protection for the Central Fund, but indicates that another insurance policy is unlikely at present. Market commentators suggest that Lloyd's may borrow money, perhaps from its members, to further strengthen the Central Fund. Exposure to Central Fund insurance ( million) Maximum exposure to Central Fund insurance Source: Lloyd's Willis Re Lloyd s Review 15

18 Trends in capacity Overview Following the significant increases in capacity in 2002 and 2003, Lloyd's announced an opening capacity figure for the 2004 year of billion, marginally up on the 2003 opening capacity of billion, but little changed from the 2003 year-end capacity figure. Described by Lloyd's as underlining the continued strength and underwriting discipline within the market, the 2004 capacity figure follows the first business plan approval process under Lloyd's new Franchise arrangements. Lloyd s capacity ( billion) Capacity Source: Lloyd's 16 Willis Re Lloyd s Review

19 The opening capacity figure for 2004 excludes Qualifying Quota Share (QQS) capacity, which is expected to contract materially. Reflecting Lloyd's desire to reduce the market's reliance on this transient source of capital, Lloyd's restricted the maximum permitted level for a QQS contract to 10 per cent of a syndicate's capacity for 2004, down from 30 per cent in the previous year. All QQS arrangements require Lloyd's approval, and as at February 2004, 200 million of QQS capacity had been approved for 2004, compared with 1,100 million for 2003 as a whole. The number of businesses in the Lloyd's market recorded a further reduction in 2004, being: 66 syndicates commenced trading for 2004 as compared to 71 for managing agents are active in the market, unchanged from 45 in Three new syndicates commenced trading for 2004 (includingtrenwick syndicate 839 that was renumbered to create Canopius syndicate 4444), with a combined opening capacity of million. Excluding mergers and including Trenwick syndicate 839, six syndicates, with a combined capacity of million, ceased trading during Five syndicates were involved in mergers during 2003, of which two traded forward into Average Total Managing Syndicate Individual Corporate Capacity Agents Syndicates Capacity ( m) Members Members ( m) , , , , , , , ,961 Willis Re Lloyd s Review 17

20 2004 Capacity profile Capacity Provision ( m) ( m) 2004 vs 2003 Source of capacity Capacity Market Share Capacity Market share % change Trade Investors 5,926 40% 6,292 44% -6% UK Listed 4,444 30% 4,227 29% +5% UK Non-Listed 1,090 7% 991 7% +10% Other Corporate 687 5% 163 1% +321% Conversion Capital 945 6% 878 6% +8% Names (Unlimited) 1,869 12% 1,844 13% +1% Total % % +4% Source: Lloyd s Providers of Lloyd s capacity Capacity ( billion) Source: Lloyd's Names unlimited Names limited liability UK listed and other corporate Other insurance industry Bermudian insurance industry US insurance industry 18 Willis Re Lloyd s Review

21 The 2004 capacity profile remains diverse both in terms of source of the investor and from a geographical perspective. This diversity of investor - including major international insurance companies, investment institutions and individuals - is considered by some as a strength to Lloyd's capital structure, as demonstrated by the market's ability to retain and attract capital to support continued trading following the Word Trade Center event. The insurance industry remains the largest provider of capital support with 43 per cent (2003: 44 per cent) of total market capacity. UK listed vehicles are the next largest source of capacity at 30 per cent (29 per cent) of total capacity. Lloyd s capacity profile Capacity ( billion) Source: Lloyd's Trade investors UK Listed UK Non-Listed Other corporate Conversion capital Names (unlimited) Willis Re Lloyd s Review 19

22 The 20 largest capacity providers in 2004 provide 62 per cent (2003: 62 per cent) of the market's capacity, with no one capital provider supplying greater than seven per cent of the market's total capacity. Amlin remains the largest single capital provider with capacity of 1,000 million for 2004, and Limit (QBE) closely behind with capacity of 918 million. Capacity provided by Liberty Mutual witnessed an 85 per cent increase over the 2003 figure, lifting Liberty Mutual from the market's 10th largest provider in 2003, to third place for The ACE Group's capacity contracted by 24 per cent to 550 million as ACE continued to focus growth of London market business on ACE INA UK. Capacity provided by St Paul reduced by 25 per cent to 329 million. In terms of managed capacity, Limit (QBE) is Lloyd's largest managing agent in 2004, with capacity of 1,130 million, or a 7.6 per cent share of the total market. The leading 20 managing agents by capacity under management controlled 77 per cent of the total market. Capacity provided by corporate members of Lloyd's (including NameCos, Scottish Limited Partnerships, and Group Conversion Vehicles), accounts for 87 per cent of total market capacity for Individual unlimited liability members account for the balance of Lloyd's capacity. Lloyd s capacity Capacity ( million) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Individual - unlimited ILV Individual - limited Spread corporates Dedicated corporates Source: Lloyd's 20 Willis Re Lloyd s Review

23 Trends Opening market capacity for 2004 is a record high at billion, albeit only marginally larger than the opening figure in Lloyd's has stated that it expects capacity to contract in the next down-cycle, and believes underwriters will focus on profit rather than market share. High capacity utilisation, a trend that commenced in the late 1990s, is expected to continue as fully aligned corporate vehicles will closely match premium income to capacity. Lloyd s capacity utilisation ( billion) Capacity Gross Utilisation incl. QQS Source: Lloyd's From a market in 1993 where all capital was provided by individual private investors, sources of Lloyd's capacity providers have diversified to the current position in 2004, where 87 per cent of capacity is supplied by limited liability corporate members. Lloyd's has ceased to admit new unlimited liability members, and recent changes to UK tax legislation has removed one of the last barriers to unlimited liability members converting to limited liability membership. Whilst prospects for profitable underwriting remain good, it is expected that individual members will remain a feature of the market. In recent years, individual investors have been an important source of capital for start-up syndicates. Concentration of Lloyd's capital increased with aligned capacity rising by eight per cent to 11,066 million in 2004 to represent 74 per cent (2003: 71 per cent) of the total market. Willis Re Lloyd s Review 21

24 The trend to fully integrated status - Integrated Lloyd's Vehicles (ILVs) - continued. 27 syndicates, with a combined capacity of 7,808 million, or 52 per cent of the market, commenced trading in 2004, with 100 per cent of their capacity aligned with managing agent control. This compares to 6,947 million, or 48 per cent, in The number of active members of Lloyd's declined again in 2004: Individual members decreased from 2,198 in 2003 to 2,048 in Corporate members (including Namecos, SLPs and other conversion vehicles) were down from 762 in 2003 to 752 in The trend for a smaller number, but larger in capacity terms, of syndicates continues. There were 66 syndicates (2003: 71 syndicates) that commenced trading in 2004, with an average capacity size of 227 million, up from an average size of 203 million in The increase in the average size of each syndicate and of each member has raised concerns with analysts regarding the increased risk to Lloyd's Central Fund from the risk posed from large members. Lloyd's review of its capitalization structure is expected to address this issue. Corporate capacity - aligned / spread ( billion) Aligned Spread Source: Lloyd's Active members of Lloyd s Number of active members 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Corporate members Individual members Source: Lloyd's 22 Willis Re Lloyd s Review

25 Providers of Lloyd s capacity Capacity ( billion) Names unlimited Names limited liability UK listed and other corporate Other insurance industry Bermudian insurance industry US insurance industry Source: Lloyd's Market capacity and syndicate numbers Capacity ( billion) Number of active syndicates Capacity Number of syndicates Source: Lloyd's Willis Re Lloyd s Review 23

26 Lloyd's Franchise implementation Evolution of the franchise Over the past year, Lloyd's has continued to evolve from a traditional statutory regulator to a much wider role of managing and developing the Lloyd's franchise. Lloyd's continued to drive forward with the implementation of its franchise system, and achieved a number of key initiatives in 2003, most notably: the creation of the Franchise Board and committees. the establishment of the Franchise Performance Directorate to improve the commercial performance of the market. the development of the Risk Management Division to identify, prioritise and address those risks that could threaten the franchise. the continued development of Lloyd's licences, services and brand. amendments to relevant European Union directives to facilitate the move to annual accounting. Lloyd's describes the franchise as encompassing the Lloyd's brand, reputation, security ratings and world-wide trading rights that are conferred on all members of Lloyd's. With the franchise structure designed to redefine the relationship between Lloyd's, as franchisor, and managing agents, as franchisees. Background Lloyd's recognised that the market needed to modernise its complicated and opaque structure if it was to compete effectively in the future and become the trading platform of choice for specialist insurance and reinsurance business. In early 2001, the Chairman's Strategy Group (CSG) was created to look at Lloyd's future strategy. July 2002 saw the publication of a 56-page consultation document, described by the then current chairman of Lloyd's as, "the route map to a new Lloyd's". Members voted in favour of the CSG proposals in September 2002, thereby giving Lloyd's its mandate to create a modern, transparent and profitable marketplace. The CSG proposals broadly centred on two aims: to improve profitability and performance by moving to a franchise structure for Lloyd's. to provide a more financially intelligible and transparent market by implementing a range of capital and reporting reforms. 24 Willis Re Lloyd s Review

27 Franchise vision and objectives The franchise vision for Lloyd's developed through the CSG process is: "We will be the leading specialist insurance marketplace. Our businesses are independent and operate within a franchise: committed to delivering consistent underwriting profit, benefiting from a common rating and mutual security, and attracting the highest quality management and underwriting talent." The main objective of the franchise is "to create and maintain a commercial environment in which the long-term return to all capital providers is maximised". Franchise Board One of the first steps taken by Lloyd's was to create the Franchise Board at the end of 2002 to replace the Lloyd's Market Board and the Lloyd's Regulatory Board. The Franchise Board sets the franchise strategy and is responsible for risk management and performance targets across the market. The Franchise Board - under the leadership of the chairman of the Council of Lloyd's, Lord Levene - has 11 members, including four independent non-executive members. The chairman, together with the Lloyd's Chief Executive Officer, the Director of Finance and Risk Management Operations, and the Franchise Performance Director, constitute the Board's executive members. The Council has set the Franchise Principles within which the Franchise Board will operate to achieve its main objective. The Principles cover three main areas: overriding principles relating to legal, regulatory and corporate governance. capital principles that emphasise equity between capital providers and prudence in capital setting. operating principles that include creating the market supervision framework in accordance with the Financial Services Authority (FSA) requirements. Franchise strategy The overriding objective for the franchise in the near-term is managing the performance of the market in order to maintain underwriting discipline as the insurance cycle weakens. To support its principal objective to create and maintain a commercial environment at Lloyd's in which the long-term return to all capital providers is maximised, it is understood that a franchise business plan will focus on four themes over the next two years, namely: 1. Manage the performance of the market to support the achievement of a set long-term profit target. 2. Maintain Lloyd's security by ensuring capital requirements strikes a balance between the need for prudence and allowing capital providers to achieve competitive returns. In the short-term, the Franchise Board aims to achieve a one notch upgrade in Lloyd's market rating from both Standard & Poor's and A.M. Best. 3. Drive forward with business process reforms. 4. Improve services and benefits available to franchisees, to include: a project aimed at defining the current Lloyd's brand. the application of an onshore reinsurance licence in China. the completion of the transition to UK GAAP annual accounting. The Council will monitor the Franchise Board's performance versus those Principles through the mechanism of the Compliance Committee. In turn, the Franchise Board will hold the Executive accountable for carrying out the policy of the Board. Willis Re Lloyd s Review 25

28 Franchise Performance Directorate The Franchise Performance Directorate has been established, with Rolf Tolle appointed as its director. The role of the Directorate will be to implement the performance-related aspects of the franchise. The Franchise Board has set a cross-cycle profit target for Lloyd s of a seven per cent pre-tax underwriting return, in excess of a circa three to 3.5 per cent risk free return on Funds at Lloyd s. The Franchise Performance Directorate will play a central role in the achievement of this target. In the short-term the Directorate will aim to improve the franchisee business planning process, develop a performance management system, and undertake a series of themed reviews based on its findings of the 2004 syndicate business plans and risk management review. The Franchise Board has a number of key projects in place to drive forward the performance of the market. These include: a review of Lloyd's inwards claims processes with the aim to improve the market's claims management and reduce costs. a project to proactively manage Lloyd's outward reinsurance asset. Lloyd's run-off project looking at the solutions for closing open years of account, and improving the monitoring and reporting of run-off syndicates' performance. In June 2003, Lloyd's franchise performance director, Rolf Tolle, announced the appointment of Jeremy Pinchin (previously Special Council for September 11), in the new role of Head of Claims and Reinsurance. His role will include responsibility for Lloyd's oversight of the market's inwards claims and outwards reinsurance and run-off project. Business process reform Lloyd's is determined to modernise business processes to improve customer service standards and reduce operating costs, and thereby remain a marketplace of choice for policyholders and brokers. Initiatives underway include London Market Principles (LMP) and Kinnect. LMP is a market-wide initiative supported by the underwriting and broking communities at Lloyd's and in the London company market. Sponsored by Lloyd's Market Association (LMA), the London Market Insurance Brokers' Committee (LMBC), the International Underwriting Association (IUA) and Lloyd's, LMP aims, through a process of reform, on improving services standards in the placing of business, the payment of premiums, the production of policy documentation and the settlement of claims. Kinnect (formerly project Blue Mountain) is an international venture, sponsored by Lloyd's, designed to remove paper from the placement of risk in the Lloyd's market. It enables commercial lines trading partners to send and receive risk data electronically via the Kinnect Platform. In December 2003, Willis passed the first risk through the Kinnect Platform. In October 2003, Lloyd's appointed as Chairman of Kinnect, Iain Saville, who became at the same time its first head of business process reform to co-ordinate Lloyd's reform initiatives at the highest level. Governance of Lloyd's Under the Lloyd's Act 1982, the Council of Lloyd's remains the governing body of the market and has supervisory responsibilities that it cannot shed. Ultimate regulatory responsibility for Lloyd's rests with the Financial Services Authority (FSA) under the Financial Services and Markets Act The Council of Lloyd's can discharge some of its functions directly, but has delegated substantial powers to the Franchise Board to manage both the supervisory and commercial affairs of the Lloyd's franchise. 26 Willis Re Lloyd s Review

29 Regulatory and accounting environment Lloyd's and the Financial Services Authority (FSA) The Financial Services Authority (FSA) assumed full regulatory responsibility for the supervision of Lloyd's on December 1, Under the Lloyd's Act 1982, the Council of Lloyd's remains the governing body of the market with the power to regulate and direct the business of Lloyd's. Whilst the Council discharges some of its function directly, for the majority of its functions, the Council acts through the Franchise Board. In the past, the FSA delegated the majority of its regulatory functions to Lloyd's to avoid a duplication of effort. In 2003 the FSA began the process to take a more direct approach. The FSA's risk and capital requirements for the Lloyd's market In April 2003, the FSA published a consultation paper (CP178 - Review of prudential regulation of the Lloyd's market), that proposed the FSA should change its rules to bring Lloyd's insurance business within the scope of the FSA's Integrated Prudential Sourcebook. The FSA reports that feedback to the consultation paper supports its proposals for Lloyd's, and in particular that the FSA should: regulate the market more directly by applying rules not just to the Society of Lloyd's, but also to managing agents, on the basis of the responsibility in practice for managing the underlying risks; and follow the same policy for Lloyd's the FSA proposes for other general insurers. A further consultation paper was released in April 2004, outlining the proposed rule changes for the FSA's risk and capital requirements for the Lloyd's market. In publishing this paper, the FSA stated: "The proposals we are setting out today will help to ensure that senior management at both the Society of Lloyd's and at managing agents focus on their responsibilities for managing risk effectively and on the level of capital needed to support the risks of the insurance businesses. This will, in turn, enhance confidence in the Lloyd's market and improve protection for policyholders". (David Strachan, FSA Insurance Sector Leader, April 30, 2004). The proposed new requirements apply mostly to managing agents and to the Society. There are, however, significant implications for Lloyd's members, as the FSA expects that capital requirements for some will increase, although members as well as policyholders should benefit from better risk management as a result of the proposals. The FSA states that the proposals are not designed to undermine the Society's ability to set capital levels, or to make other internal rules for the market, so long as those rules are consistent with the FSA's own regime. Willis Re Lloyd s Review 27

30 The FSA policy proposals: dividing responsibilities between the Society and managing agents The April 2004 consultation paper outlines the proposed rules and guidance which are required by managing agents: establish and maintain appropriate controls over risks affecting insurance business carried on through syndicates, including credit risk and market risk, within limits that are substantially the same as those for insurance companies; and assess the capital needed to support the insurance business carried on through each syndicate that they manage. The FSA believes this "will help engender better understanding and management of the risks involved in the conduct of that business, and help to ensure that financial resources are adequate at all times." With regards to the Society, the proposed rules and guidance require Lloyd's to: establish and maintain appropriate controls over the risks affecting funds that it holds and manages centrally, including managing risk within appropriate limits; and assess the capital needs for each member, taking into account the capital needed to support the insurance business carried on through each syndicate, as assessed by managing agents. This reflects the fact that the Society has an aggregate view across the market, but managing agents do not. In particular, the Society can take account of members' participation on more than one syndicate, assets held outside syndicates, and the obligations that its own central assets need to support. Consistency with other insurers To achieve a demonstrable level playing field, the FSA proposals for Lloyd's are largely consistent with those for other insurers, with the vast majority of the prudential regulation rules applying to both. With this aim in mind, the FSA proposes: to in future allow audited interim profits to qualify as capital resources for insurance businesses at Lloyd's; and to extend to Lloyd s the use of a new Enhanced Capital Requirement (ECR), which is a higher and more risk-sensitive measure than the current solvency requirements under the EU Insurance Directives, developed for other insurers. The FSA proposes that the ECR should be met for the business of all active members, as well as members that go into run-off after January 1, The FSA recognizes that there are areas where the proposed changes do not address fully some inconsistencies between its rules for Lloyd's and other insurers. Perhaps, of most importance, the FSA proposes to continue to allow the admissibility of some assets, such as letters of credit, that are exceptionally permitted for Lloyd's. Timing The FSA is seeking responses to its proposals by July 30, It is intended that the new requirements will then become effective from January 1, 2005, coinciding with Lloyd's move to annual accounting. 28 Willis Re Lloyd s Review

31 Implementation of annual accounting A business objective of the Franchise Board is the move to annual accounting as the main statutory reporting regime for the market to achieve greater transparency between Lloyd's performance and its global peers. Under the current statutory three year accounting basis, all premiums and claims and associated expenses are related to the underwriting year in which the policy incepts and the determination of the underwriting result is deferred until the year of account is closed at the end of three years. Lloyd's announced in November 2003, that the market will adopt UK Generally Accepted Accounting Principles (UK GAAP) from January 1, Lloyd's plans to adopt International Accounting Standards (IAS) when there is more clarity on the proposed standard on accounting for insurance contracts. The necessary amendments to the European Commission's Insurance Accounts Directive were made and this now provides the framework to enable Lloyd's to adopt annual accounting for statutory reporting purposes. Lloyd's reports that much of the work remains to be done during 2004 to ensure a "smooth transition to UK GAAP". Lloyd's has published pro-forma unaudited annually accounted results since Willis Re Lloyd s Review 29

32 Ratings Market ratings Strong and stable financial strength ratings are widely regarded as increasingly necessary to operate effectively in today's global (re)insurance markets, and Lloyd's recognises that it is no exception to this requirement. After consulting widely, the Franchise Board has determined that the target security ratings for Lloyd's should be a minimum of "A+" from Standard & Poor's (S&P), and "A" from A.M. Best (Best's). This will represent a one notch upgrade by both rating agencies and will restore Lloyd's market ratings to their pre September 11 position. The Franchise Board aims to achieve this upgrade in its ratings by the end of There has been some market comment following the announcement of its 2003 results that an upgrade in Lloyd's market ratings is imminent given the market's profitability, prospects for future profits, and the improvement in the markets capital resources. However, Lloyd's management team acknowledges that an upgrade in its rating in 2004 may still be premature, but believes this will be a realistic expectation once the market has reported its results in Traditionally, both S&P and Best's complete their annual review of Lloyd's market rating once Equitas has published its annual results for the year ending March 31. Uncertainty over the ultimate outcome of the run-off of Equitas' liabilities and the contingent liability this could create for Lloyd's has in the past been cited as a negative factor in the Lloyd's rating, and has probably represented a one notch drag on the current rating in recent years. AM Best In July 2003, A.M. Best affirmed it's "A-" (excellent) financial strength rating of the Lloyd's market with a stable outlook. AM Best stated that the affirmation of the rating reflected: Lloyd's maintenance of an excellent business profile and capitalization. its improving performance. stable investment returns. enhanced standards of risk management. Offsetting factors included: uncertainty as to the ultimate adequacy of Equitas' reserves. increasing risk to the Central Fund from large members. Standard & Poor's In its rating of the Lloyd's market published in September 2003, Standard & Poor's stated that its "A" (strong) financial strength rating of Lloyd's reflected: the continuing commitment of capital providers to the market and the consequent increase in capacity and funds at Lloyd's in the likelihood of very strong operating performance for the 2002 and 2003 years of account. the benefit of some further premium rate increases for the lines of business that Lloyd's writes in These positive factors were said to be partly offset by: Lloyd's reduced financial flexibility as a result of open-year losses. the significant structural reforms still required to maintain the market's competitive position. the poor historic returns experienced by many capital providers prior to the vulnerability of the market to reinsurance failure the projected utilisation of (and uncertainty around) the Central Fund insurance. contingent exposure to Equitas. 30 Willis Re Lloyd s Review

33 Fitch In addition to the interactive market rating issued by AM Best and Standard & Poor's, Fitch maintains a public information rating in respect of the Lloyd's market. In July 2003, Fitch affirmed its "A-" (strong) insurer financial strength rating of Lloyd's and at the same time revised the rating outlook to stable from negative. Syndicate ratings As distinct from the security of the market as a whole, it has been recognised that the performance of individual syndicates is important to policyholders. Successful syndicates are better able to attract and maintain support from capital providers and, hence, are more likely to be able to offer continuity of relationship and increased capacity over time. For several years, both Moody's and Standard and Poor's (S&P) have issued ratings which, rather than financial security, reflect the relative performance and volatility of syndicates operating in the market. In September 2002, S&P launched its Lloyd's Syndicate Assessments (LSAs), replacing its current syndicate rating product, and described by S&P as a "new tool for analysing Lloyd's syndicates". LSAs are S&P's view of the dependency of individual syndicates on Lloyd's Central Fund, brand, international licensing agreements and infrastructure. The assessments use both qualitative and quantitative analysis drawn from publicly available information. In S&P's 2003 review of its LSAs, the profile of 48 syndicates were assessed, representing 80 per cent of Lloyd's total market capacity for The syndicate assessments can be summarised as: "5pi" (very low dependency): 0 syndicates "4pi" (low dependency): 4 syndicates "3pi" (dependent): 19 syndicates "2pi" (high dependency): 15 syndicates "1pi" (very high dependency): 10 syndicates Both Moody's, since May 2000, and AM Best, since April 2001, have assigned financial strength ratings to individual Lloyd's syndicates that allow direct comparison with peers in the company market. To date, there has been limited take-up by managing agents of these interactive syndicate financial strength ratings, with Moody's rating five syndicates and AM Best rating 13 syndicates. Willis Re Lloyd s Review 31

34 At the time of publication of this report, individual financial strength ratings assigned to syndicates were: Syndicate Managing agent Moody's rating Date Comment 1007 SVB Syndicates Ltd A2 (Good) March 12, 2004 Downgraded from A Amlin Underwriting Ltd A1 (Good) May 27, 2004 Upgraded from A Wellington Underwriting Agencies Ltd A1 (Good) June 1, 2004 Rating affirmed 2147 SVB Syndicates Ltd A3 (Good) March 12, 2004 Outlook changed from negative to stable 2488 ACE Underwriting Agencies Ltd Aa3 (Excellent) January 14, 2004 Rating affirmed Syndicate Managing agent Best's rating Date Comment 0510 R J Kiln & Co Ltd A s (Excellent) November 5, 2003 Rating affirmed 0570 Atrium Underwriters Ltd A s (Excellent) December 17, 2003 Rating affirmed 0609 Atrium Underwriters Ltd A s (Excellent) December 17, 2003 Rating affirmed 0623 Beazley Furlonge Ltd A s (Excellent) October 14, 2003 Rating affirmed 0958 Omega Underwriting Agents Ltd A s (Excellent) December 9, 2003 Rating affirmed 1243 Euclidian Underwriting Ltd A s (Excellent) August 5, 2003 Rating affirmed 1414 Ascot Underwriting Ltd A+ s (Superior) March 17, 2004 Rating affirmed 2001 Amlin Underwriting Ltd A s (Excellent) December 10, 2003 Rating assigned 2003 Catlin Underwriting Agencies Ltd A s (Excellent) April 7, 2004 Rating affirmed 2010 Cathedral Underwriting Ltd A s (Excellent) April 7, 2004 Rating affirmed 2623 Beazley Furlonge Ltd A s (Excellent) October 14, 2003 Rating affirmed 3000 Markel Syndicate Management Ltd A s (Excellent) June 30, 2003 Rating assigned 32 Willis Re Lloyd s Review

35 Equitas Lloyd's retains a contingent exposure to the potential failure of Equitas via the application of overseas regulatory deposits and the funds of current members who also underwrote prior to 1993, as well as its contingent liability to Lioncover and Centrewrite. However, Lloyd's is under no legal obligation to fund Equitas should Equitas fail to discharge its liabilities. (For a background to the Equitas Group please refer to appendix 8 of this report). Given the long-tail nature of its liabilities, it will be a number of years before it can be reasonably determined whether Equitas will have the funds to run-off those liabilities. Consequently, the uncertainty surrounding Equitas' loss reserves is considered a long-term negative factor in the Lloyd's market financial strength ratings. Asbestos liabilities Asbestos reserves form the largest element of Equitas' loss reserves. As at March 31, 2004, gross undiscounted reserves were 7.3 billion (2003: 9.6 billion), of which gross undiscounted asbestos reserves amounted to 4.0 billion (2003: 5.3 billion). On a discounted basis, to take into account the time value of money, asbestos reserves were 2.8 billion (2003: 3.7 billion). Each year Equitas conducts a comprehensive review of its asbestos liabilities. For the year ended March 31, 2004, Equitas increased its gross discounted asbestos loss reserves by 296 million, primarily due to a general trend of higher payouts to mesothelioma victims, and a worsening of claims for some key assureds. Equitas sees no epidemiological evidence to lead it to change it views on the number of future mesothelioma victims. Equitas has also continued to attempt to identify unknown policyholders who may present claims in the future, and during the year has increased reserves based on its findings. Equitas continued with its strategy of seeking policy buyouts, and during the year agreed deals with seven policyholders, including three of Equitas' five largest asbestos exposures. Equitas has now completed over 180 buyout agreements, bringing certainty, reduced transaction costs and eliminating credit risk to both parties. This buyout policy will remain central to Equitas' strategy going forward. Equitas also noted that it concluded a number of commutation agreements with its reinsured policyholders seeking recovery for asbestos claims, including resolving the group's largest reinsurance exposure. Equitas believes that, in the short-term, the prospects for Federal asbestos reform legislation in the United States are remote. Equitas could not support legislation that was drafted in the past year, because it felt that being the only company in the world not protected from the risk of being rendered insolvent by the operation of the bill was "neither fair nor reasonable". Willis Re Lloyd s Review 33

36 Equitas financial results for year ended March 31, 2004 In June 2004, Equitas released its financial results for the year ended March 31, Highlights reported by Equitas were: accumulated surplus after tax decreased by 67 million to 460 million primarily driven by the need to increase asbestos claims reserves. Equitas' solvency margin (accumulated surplus stated as a percentage of net claims outstanding) increased to 9.8 per cent from 8.7 per cent. This compares to a solvency margin of 5.6 per cent when Equitas commenced operations in gross discounted reserves for asbestos claims were strengthened by 296 million. investment return exceeded the unwinding of the discount by 123 million, compared to the deficit of 72 million in the previous year. Because Equitas discounts its loss reserves, a key measure for investment performance is a comparison of investment return with the unwinding of the discount. Equitas has now generated investment returns in excess of the unwinding of the discount of 732 million since it commenced business. the group completed a number of agreements during the year to crystallize asbestos claims for three of its five largest direct asbestos exposures, as well as its largest reinsurance exposure. gross claims paid amounted to 1.4 billion, up from 1.1 billion in the previous year. The increase in payments was due to the large asbestos buyouts and commutations concluded in the year. Equitas has paid claims of over 15 billion since its inception. during the past year, Equitas completed the negotiation of 83 commutation agreements continuing with its strategy to realize the group's outwards reinsurance asset. When Equitas began, it inherited over 7 billion of reinsurance assets. Over the past seven and a half years, the group has realized over 6 billion of its reinsurance assets, reducing the outstanding debt to just over 1 billion at March 31, operating expenses, which are included within claims payments, decreased by 10 per cent to 91 million. The annual cost of running Equitas has now decreased from over 240 million. Equitas consolidated balance sheet at March 31, 2004 March 31, 2004 March 31, 2003 Assets m m Financial investments 4,717 5,780 Financial reinsurances ,098 6,367 Debtors - reinsurance operations Other debtors Other assets, prepayments and accrued income ,618 7,187 Liabilities m m Shareholders funds: Retained surplus After discount After discount Gross outstanding claims 5,353 7,039 Reinsurance recoverable Net 4,668 6,090 Other liabilities , Source: Equitas 34 Willis Re Lloyd s Review

37 Appendix 1 Syndicates active for 2004 year of account Capacity Split of 2004 allocated capacity % Corporate Unlimited Underwriter Syndicate m m Inc/Dec Aligned Unaligned MAPA Bespoke Agent Owner R S Childs 0033 HIS % 64.9% 10.4% 8.5% 16.2% Hiscox Syndicates Ltd Hiscox C Ray 0044 JDB % 78.9% 4.1% 0.0% 17.0% Canopius Managing Agents Ltd Talisman T R C Corfield 0190 FRW % 100.0% 0.0% 0.0% 0.0% Liberty Syndicate Management Ltd Liberty R White 0218 EMP % 13.2% 10.3% 18.5% Cox Syndicate Management Ltd Cox C Hart 0260 KGM % 17.3% 6.1% 28.6% KGM Underwriting Agencies Ltd Perserverance Ltd A D Elliott 0282 LSM % 100.0% 0.0% 0.0% 0.0% Liberty Syndicate Management Ltd Liberty C Toomey 0308 KLS % 86.2% 3.6% 0.0% 10.2% R J Kiln & Company Ltd Kiln M S F Pritchard 0318 MSP % 39.3% 11.1% 15.0% Ensign Managing Agency Ltd Ensign A J Walker 0382 PWH % 87.8% 3.8% 0.8% 7.6% Hardy (Underwriting Agencies) Ltd Hardy D A Constable 0386 DAC % 54.6% 12.0% 12.0% 21.5% Limit Underwriting Ltd QBE P Ceurvorst / 0435 FDY % 0.0% 0.0% 0.0% Faraday Underwriting Ltd Berkshire Hathaway M Rayner D Hoare / 0457 WTK % 100.0% 0.0% 0.0% 0.0% Munich Re Underwriting Ltd Munich Re O Crabtree T Prifti, R Hargreaves, S Jedburgh, R Chase, C Franks, A Carrier 0510 KLN % 40.9% 20.2% 14.7% 24.3% R J Kiln & Company Ltd Kiln A Carrier 0557 KCS % 18.4% 21.8% 36.6% R J Kiln & Company Ltd Kiln N C Marsh 0570 ATR % 17.3% 23.2% 16.3% 43.2% Atrium Underwriters Ltd Atrium C E Dandridge 0609 AUW % 16.4% 23.1% 17.1% 43.4% Atrium Underwriters Ltd Atrium A F Beazley 0623 AFB % 1.3% 47.2% 19.3% 32.1% Beazley Furlonge Ltd Beazley Fulonge M J Meacock 0727 SAM % 4.1% 30.1% 10.0% 55.9% S A Meacock & Company Ltd Meacock B J Jackson 0779 CDL % 13.8% 21.6% 0.0% 64.7% St Paul Syndicate Management Ltd St Paul's P D Upton 0780 ADV % 47.5% 15.8% 10.7% 26.0% Advent Underwriting Ltd Fairfax S D Mathers 0807 SDM % 33.8% 15.5% 25.9% 24.9% R J Kiln & Company Ltd Kiln J D Robinson 0958 GSC % 1.9% 34.3% 21.4% 42.5% Omega Underwriting Agents Ltd Omega J D Neal 0980 JDN % 95.3% 0.2% 1.0% Ensign Managing Agency Ltd Ensign M I C Simmonds 0994 SIM % 100.0% 0.0% 0.0% 0.0% Imagine Managing Agency Ltd Imagine J Butcher 1007 SVB % 80.4% 4.2% 3.3% 12.1% SVB Syndicates Ltd SVB C R O'Farrell 1036 COF % 100.0% 0.0% 0.0% 0.0% Limit Underwriting Ltd QBE H H Hayward 1084 CSL % 85.1% 13.3% 0.0% 1.7% Chaucer Syndicates Ltd Chaucer M Dawson 1176 COX % 44.0% 9.9% 27.3% 18.8% Chaucer Syndicates Ltd Chaucer C N R Atkin 1183 AGY % 100.0% 0.0% 0.0% 0.0% Talbot Underwriting Ltd Talbot L Rock 1200 ROC % 25.7% 64.6% 0.3% 9.6% Heritage Managing Agency Ltd Heritage Consortium M Manning 1206 GER % 100.0% 0.0% 0.0% 0.0% Gerling at Lloyd's Ltd Gerling Global N J Metcalf 1209 XL % 0.0% 0.0% 0.0% XL London Market Ltd XL Capital Willis Re Lloyd s Review 35

38 Capacity Split of 2004 allocated capacity % Corporate Unlimited Underwriter Syndicate m m Inc/Dec Aligned Unaligned MAPA Bespoke Agent Owner S L Gordon 1218 ODY % 100.0% 0.0% 0.0% 0.0% Newline Underwriting Management Ltd Fairfax C Dingley 1221 MLM % 97.4% 0.6% 0.0% 2.0% Navigators Underwriting Navigators Agency Ltd P Thorpe-Apps 1225 AES % 0.0% 0.0% 0.0% AEGIS Managing Agency Ltd AEGIS ("AEGIS") G F Johnstone 1231 FRW % 40.0% 0.0% 0.0% Jubilee Managing Agency Ltd Appleclaim J R N Collyear 1243 EUL % 100.0% 0.0% 0.0% 0.0% Euclidian Underwriting Ltd Euclidian G Bignell 1245 JAT % 10.9% 46.5% 0.0% 42.6% Heritage Managing Agency Ltd Heritage Consortium P J Gage 1301 BGT % 0.0% 100.0% 0.0% 0.0% Chaucer Syndicates Ltd Chaucer M A Petzold 1400 DRE % 100.0% 0.0% 0.0% 0.0% Danish Re Syndicates Ltd Trident Partnership M R D Reith 1414 RTH % 100.0% 0.0% 0.0% 0.0% Ascot Underwriting Ltd AIG J H A Thomas 1607 JHA % 9.1% 90.9% 0.0% 0.0% Creechurch Underwriting Ltd Creechurch J A Henderson 1861 BRM % 100.0% 0.0% 0.0% 0.0% Marlborough Underwriting Agency Ltd Berkshire Hathaway A A Pitt 1923 CSM % 100.0% 0.0% 0.0% Imagine Managing Agency Ltd Imagine A W Holt 2001 AML 1, , % 0.0% 0.0% 0.0% Amlin Underwriting Ltd Amlin P D Brand 2003 SJC % 100.0% 0.0% 0.0% 0.0% Catlin Underwriting Agencies Ltd Catlin Westgen J Hamblin 2010 MMX % 48.5% 15.3% 14.6% 21.6% Cathedral Underwriting Ltd Cathedral D Foreman 2020 WEL % 56.3% 12.6% 10.3% 20.9% Wellington Underwriting Agencies Ltd Wellington J A Hyland 2121 HYL % 53.7% 20.0% 11.1% 15.2% Sackville Syndicate Management Ltd SOC plc A Hicks 2147 SVB % 0.0% 0.0% 0.0% SVB Syndicates Ltd SVB S P Lotter 2468 MFM % 54.7% 45.3% 0.0% 0.0% Marketform Managing Agency Ltd Marketform R Pryce 2488 AGM % 100.0% 0.0% 0.0% 0.0% Ace Underwriting Agencies Ltd ACE D Pratt 2525 DLP % 0.0% 43.8% 13.6% 42.6% Abacus Syndicates Ltd Amaranth Holdings A Doré 2526 AGD % 68.4% 17.2% 14.5% Abacus Syndicates Ltd Amaranth Holdings J H A Thomas 2607 TLT % 100.0% 0.0% 0.0% 0.0% Creechurch Underwriting Ltd Creechurch A F Beazley 2623 AFB % 100.0% 0.0% 0.0% 0.0% Beazley Furlonge Ltd Beazley Fulonge D E S Shipley 2791 MAP % 57.1% 16.1% 9.1% 17.7% Managing Agency Partners Ltd Map Equity Ltd D J Pye 2962 PYE % 100.0% 0.0% 0.0% 0.0% Creechurch Underwriting Ltd Creechurch S D Clapham 2987 BRT % 0.0% 0.0% 0.0% Brit Syndicates Ltd BRIT P E Grove 2999 QBE % 100.0% 0.0% 0.0% 0.0% Limit Underwriting Ltd QBE G Albanese 3000 MKL % 100.0% 0.0% 0.0% 0.0% Markel Syndicate Management Ltd Markel D Warren 3210 MIT % 0.0% 100.0% 0.0% 0.0% Chaucer Syndicates Ltd Chaucer G Bignell 3245 LAW % 25.9% 0.7% 29.8% Heritage Managing Agency Ltd Heritage Consortium D Burniston 4040 ILM % 32.5% 17.3% 24.0% Illium Managing Agency Ltd Illium Insurance Group J A Giordano 4444 CNP % 100.0% 0.0% 0.0% 0.0% Canopius Managing Agents Ltd Talisman (Underwriting Director) M P Hudson 5000 SPL % 100.0% 0.0% 0.0% 0.0% St Paul Syndicate Management Ltd St Paul's , % 74.0% 11.9% 4.7% 9.5% , % 73.7% 11.9% 5.0% 9.5% , % 72.9% 10.6% 6.7% 9.8% 36 Willis Re Lloyd s Review

39 Appendix 2 Incidental syndicates In addition to those syndicates listed in Appendix 1, there are also a number of incidental or sub-syndicates that may appear on Lloyd's slips. These incidentals are numbers adopted by the main syndicates for internal accounting and control functions. As regards policyholders, the incidental number is transparent in that the security is identical to that of the main or 'parent' syndicate. The incidental numbers currently in use at Lloyd's are as follows: Incidental Syndicates Incidental Incidental Incidental Main Syndicate Syndicate Syndicate Syndicate No. Pseud Underwriter No. Managing Agent 0566 STN P E Grove 2999 Limit Underwriting Ltd 0626 IRK R S Childs 0033 Hiscox Syndicates Ltd 0820 MWD A W Holt 2001 Amlin Underwriting Ltd 0887 BDC A W Holt 2001 Amlin Underwriting Ltd 1952 N JJS G F Johnstone 1231 Jubilee Managing Agency Ltd 2000 HAR M Harrington 2999 Limit Underwriting Ltd 2245 MWL M Lawrence 1245 Heritage Managing Agency Ltd 2724 SJG S J Gargrave 2999 Limit Underwriting Ltd 2800* DRE M Petzold 1400 Danish Re Syndicates Ltd Incidental Syndicates Ceasing Incidental Incidental Incidental Main Syndicate Syndicate Syndicate Syndicate No. Pseud Underwriter No. Managing Agent Notes 0625 HER R S Childs 0033 Hiscox Syndicates Last underwrote in WAH M Wheeler 1007 SVB Syndicates Incidentals of 1007, all ceasing at December 31, MHW M Wheeler 1007 SVB Syndicates 1203 HMW M Wheeler 1007 SVB Syndicates 1234 CWS A Hicks 2147 SVB Syndicates Ceased at December 31, * TWK J Giordano / 0839 Trenwick Managing Ceased, following the Trenwick / Canopius restructuring G Knowles Agents Ltd N New incidental syndicate for 2004 year of account * A qualifying quota share syndicate, capitalised in accordance with Lloyd's rules, which writes a quota share of the main syndicate. (Not strictly an incidental syndicate). Willis Re Lloyd s Review 37

40 Appendix 3 Cessations, mergers and new syndicates New syndicates for 2004 year Syndicate Underwriter Capacity ( m) 2526 AGD A Doré 30.3 Abacus Syndicates Ltd A professional indemnity syndicate that started trading on January 1, The syndicate is backed primarily by corporate and individual names of CBS Private Capital Ltd, with virtually all of the 5 million balance provided by Converium Ltd. The agency is a subsidiary of CBS Holdings PLC. The underwriter, Andy Dore, was formerly of Professional Risks Insurance Ltd, which was acquired by Brit in The agency's chairman Bob Wallace, was formerly the underwriter of Syndicate LAW G Bignell 50.3 Heritage Managing Agency Ltd This professional indemnity syndicate commenced underwriting on July 21, The account was effectively formerly written by Mark Lawrence, under the 2245 incidental syndicate division of syndicate ILM D Burniston 96.4 Illium Managing Agency Ltd This syndicate started trading on January 1, 2004, as a UK third party and employers' liability syndicate. 25 million of capacity is provided by Houston Casualty Company, 15 million from Imagine Insurance, and 45 million from Hampden Agency Members. The underwriter, Denis Burniston, previously underwrote the UK liability account of Syndicate CNP JA Giordano Canopius Managing Agents Ltd In effect, a re-numbering of Syndicate 839 following the restructuring and acquisition of the Trenwick operations at Lloyd's. The 2003 capacity of these operations was million, including 113 million provided through the 2750 qualifying quota share syndicate backed by Berkshire Hathaway, which ceased at the year end. Effectively, 2750 provided the capacity for the syndicate's major Aviation account. Mergers Syndicates Merged to Agent Chaucer Syndicates Ltd Creechurch Underwriting Ltd Chaucer Syndicates Ltd Cessations Syndicate Underwriter 2003 Capacity Agent 0102 GOS P L Toomey GoshawK Syndicate Management Ltd 0389 NJA N J Allen Brit Syndicates Ltd 0839 TWK J A Giordano * Trenwick Managing Agents Limited 1204 JAN S J Helson R J Kiln & Company Ltd 2040 NEM T Sams Brit Syndicates Ltd 2241 DEX M J Bonds Thomas Miller Managing Agency Ltd 2750 TWK J A Giordano / G Knowles ** Trenwick Managing Agents Limited 3500 C Tayler 5.00 *** Kingsmead Underwriting Agency Ltd 3579 S Lotter ** Marketform Managing Agency Ltd Total * Re-numbered as 4444 in 2004 following a restructuring. ** Separately capitalised QQS Syndicates, ceasing Dec 31, 2003 *** Set up on Sept 30, 2003 to assume the RITC of 2000 and prior open years of syndicates 506 and Willis Re Lloyd s Review

41 Appendix 4 Capacity and alignment of managing agents Number of Managed Capacity Aligned capacity Syndicates Managing Agent managed m m m m % % Owner Type Abacus Syndicates Ltd Amaranth Holdings UK Non-listed Ace Underwriting Agencies Ltd % 100.0% ACE Bermudan Insurer Advent Underwriting Ltd % 46.9% Fairfax Other Insurer AEGIS Managing Agency Ltd ("AEGIS") % 100.0% AEGIS Bermudan Insurer Amlin Underwriting Ltd 1 1, , , % 86.1% Amlin UK Listed Ascot Underwriting Ltd % 100.0% AIG US Insurer Atrium Underwriters Ltd % 16.1% Atrium UK Listed Beazley Furlonge Ltd % 50.0% Beazley Furlonge UK Non-listed Brit Syndicates Ltd % 100.0% BRIT UK Listed Canopius Managing Agents Ltd % 99.7% Talisman Other Non-listed Cathedral Underwriting Ltd % 42.5% Cathedral UK Non-listed Catlin Underwriting Agencies Ltd % 100.0% Catlin Westgen Bermudan Insurer Chaucer Syndicates Ltd % 17.8% Chaucer UK Listed Cox Syndicate Management Ltd % 58.1% Cox UK Listed Creechurch Underwriting Ltd % 76.9% Creechurch UK Non-listed Danish Re Syndicates Ltd % 100.0% Trident Partnership Overseas Non-insurance Ensign Managing Agency Ltd % 23.9% Ensign UK Non-listed Euclidian Underwriting Ltd % 100.0% Euclidian UK Non-listed Faraday Underwriting Ltd % 100.0% Berkshire Hathaway US Insurer Gerling at Lloyd's Ltd % 100.0% Gerling Global Other Insurer Hardy (Underwriting Agencies) Ltd % 80.4% Hardy UK Listed Heritage Managing Agency Ltd % 3.1% Heritage Consortium UK Non-listed Hiscox Syndicates Ltd % 65.0% Hiscox UK Listed Illium Managing Agency Ltd % -- Illium Insurance Group UK Non-listed Imagine Managing Agency Ltd % 68.8% Imagine Bermudan Insurer Jubilee Managing Agency Ltd % - Appleclaim UK Non-listed KGM Underwriting Agencies Ltd % 17.6% Perserverance Ltd UK Non-listed Liberty Syndicate Management Ltd % 100.0% Liberty US Insurer Limit Underwriting Ltd 3 1, , % 78.1% QBE Other Insurer Managing Agency Partners Ltd % 44.1% Map Equity Ltd UK Non-listed Markel Syndicate Management Ltd % 100.0% Markel US Insurer Marketform Managing Agency Ltd % 30.2% Marketform UK Non-listed Marlborough Underwriting Agency Ltd % 100.0% Berkshire Hathaway US Insurer Munich Re Underwriting Ltd % 100.0% Munich Re Other Insurer Navigators Underwriting Agency Ltd % 97.4% Navigators US Insurer Newline Underwriting Management Ltd % 100.0% Fairfax Other Insurer Omega Underwriting Agents Ltd % 2.4% Omega UK Non-listed R J Kiln & Company Ltd % 37.2% Kiln UK Listed S A Meacock & Company Ltd % 4.1% Meacock UK Non-listed Sackville Syndicate Management Ltd % 26.8% SOC plc UK Non-listed St Paul Syndicate Management Ltd % 96.2% St Paul's US Insurer SVB Syndicates Ltd % 92.8% SVB UK Listed Talbot Underwriting Ltd % 100.0% Talbot Bermudan Insurer Wellington Underwriting Agencies Ltd % 56.1% Wellington UK Listed XL London Market Ltd % 100.0% XL Capital Bermudan Insurer Market total , % Market total , % Willis Re Lloyd s Review 39

42 Appendix 5 Lloyd s top 20 capital providers Capital 2004 Capacity Capacity Growth 2004 Capital 2003 Capacity Market Provider ( m) vs 2003 Market Share Provider ( m) Share Amlin 1, % 6.7% Amlin % QBE % 6.2% QBE % Liberty Mutual % 5.3% ACE % Hiscox % 3.7% Berkshire Hathaway % ACE % 3.7% Hiscox % Berkshire Hathaway % 3.6% BRIT % BRIT % 3.3% Catlin Westgen % Catlin % 3.3% SVB % SVB % 3.1% St Paul % Wellington % 2.7% Liberty Mutual % Beazley % 2.7% Wellington % Chaucer % 2.3% Euc Re % XL Capital % XL Capital % St Paul % 2.2% Trenwick % Mitsui Sumitomo % 2.1% Beazley Furlonge % Talbot % 1.9% Chaucer % AIG % 1.9% AIG % Kiln % 1.8% Markel % Canopius % 1.7% Mitsui % Cox % Cox % Top op , % 8, % 40 Willis Re Lloyd s Review

43 Appendix 6 Market activity Jun Wellington plans to expand into US specialty insurance business Wellington Underwriting plc announced that the stock purchase agreement for the acquisition of AXA Corporate Solutions Excess and Surplus Lines Insurance Company, was signed by both parties. The company being acquired is essentially a shell with valid, current, authorizations to underwrite excess and surplus lines business in 28 states across the United States. The acquisition is subject to regulatory approval. Wellington Specialty Insurance Company, as the company will be called, will write a book of business which focuses on small direct, general agency produced, commercial casualty and property business throughout the United States. Premium volume is expected to reach USD40 million by the end of Funding of the purchase and initial capital provision, expected to be approximately USD40 million, will come from Wellington's own resources. Euclidian plans 125 million IPO Euclidian Group intends to launch an estimated 125 million initial public offering on the London Stock Exchange. Berkshire Hathaway is reported to have agreed to take a 25 per cent stake in Euclidian when it floats. May Apr Hardy sells its stake e in Atrium Hardy underwriting sold its 23.2 per cent stake in Atrium Underwriting. Hardy Underwriting acquired the stake in Atrium in Chubb sells its stake e in Hiscox Chubb sold its 27 per cent stake in Hiscox plc to a range of institutional investors receiving approximately 90 million for its 54.5 million shares. Chubb acquired its stake in Hiscox from Trident in Catlin announces price of initial public offering Catlin Group Limited announced an offer price of 350 pence per share for its initial public offering of common shares, and their admission to trading on the London Stock Exchange plc's market for listed securities. At the offer price Catlin had a market capitalization of nearly USD1 billion ( 539 million). Amlin keeps under review potential for expanding beyond Lloyd's In its annual report 2003, Amlin stated that its "growth may result in Amlin exceeding limitations set by Lloyd's for any one of its franchisees, and scale benefits may outweigh the costs associated with Lloyd's mutuality". Amlin also reported how it expects to generate significant positive cash flow over the next few years to give it the option of investing surpluses in a new non-lloyd's entity. Willis Re Lloyd s Review 41

44 Mar Mike e Pritchard and team completes acquisition of Ensign Managing Agency and management of syndicate 318 Mike Pritchard and his management team announced that they had completed the acquisition of Ensign Managing Agency Ltd, and with it, the right to manage M.S.F. Pritchard syndicate 318. The agency has been renamed Beaufort Underwriting Agency Ltd. Hiscox x acquires renewal al rights Hiscox plc announced that it has reached agreement with Marlborough Underwriting Agency, a wholly owned subsidiary of Berkshire Hathaway, for the renewal rights for the majority of business currently placed with Marlborough syndicate The arrangement will take effect from April 1, Marlborough and Hiscox agreed that Hiscox syndicate 33 will offer renewal terms on business written in the energy, marine and energy liability and cargo accounts, while Marlborough will retain the marine excess of loss account and the marine hull account. Hiscox will provide a quota share reinsurance of the hull portfolio. Feb eb Jan Jubilee Managing Agency receives approval al Jubilee Managing Agency Ltd was granted authorization by the Financial Services Authority (FSA) to act as a Lloyd's managing agency. The FSA also authorized Guardian Holdings Ltd to acquire a 40 per cent interest in the ultimate parent of the managing agent. Jubilee Managing Agency manages Lloyd's motor syndicate 1231, and its sub-syndicate 1952 that trades as Jubilee Motor Policies and JJS Fleet Underwriting respectively. Transfer of household insurance from Syndicate 2987 to Brit Insurance Limited In keeping with its stated strategy to move UK business from its syndicate 2987 at Lloyd's to its FSA regulated insurance company, Brit Insurance Limited (BIL), Brit announced that all household insurance business will now be underwritten by BIL. Despite the change in legal counterparty for clients, all business will still be underwritten and administered by the existing team. Wellington to underwrite property reinsurance business in 2004 Wellington syndicate 2020 is expecting to underwrite up to 40 million of property reinsurance business in 2004, following the ending of a noncompete agreement with Aspen Insurance Holdings. 42 Willis Re Lloyd s Review

45 Appendix 7 Capital structure Capital structure The overall financial security of Lloyd's is based on a chain of security with four links, represented diagrammatically below. The aggregate resources of all members of Lloyd's, and those of the Corporation of Lloyd's, as at December 31, 2003, was declared at 29.7 billion. The total amount of estimated current and future liabilities at the end of 2003 was 18.1 billion. However, it is important to recognise that Lloyd's members underwrite severally, not jointly, and that, consequently, the security offered by a particular policy is dependent, firstly, upon the resources supporting the particular syndicate, or syndicates that underwrote the risk, and, secondly, upon the resources of the Central Fund as a last resort. Traditional members Premiums trust funds Corporate members Premiums trust funds million end ,995 Funds at Lloyd's Funds at Lloyd's 9,659 Other declared assets Lloyd's central net assets (includes Central Fund of 711 million) st Link: Members' Premiums Trust Funds (PTFs) All premiums and other monies received or receivable in connection with the member's underwriting business are initially paid into PTFs, managed by the managing agent of the syndicate concerned. Payments from these funds may only be made to meet permitted trust outgoings: claims, reinsurance premiums, underwriting expenses and the like, including funding overseas regulatory deposits. The vast majority of claims are met from the first link in the Lloyd's chain of security. 2nd Link: Members' Funds at Lloyd's (FAL) All members must place assets at Lloyd's determined by Lloyd's risk-based capital methodology, subject to prescribed minimum levels. These assets must be readily realisable and may include letters of credit and bank and other guarantees. Minimum capital ratios for both individual and corporate members are set at 40 per cent of their overall premium limit (35 per cent for those members writing predominately UK motor business). 3rd Link: Other declared assets The third link is the other declared personal wealth of individual members and any assets other than funds at Lloyd's of corporate members. Individual members who show a minimum level of personal wealth (i.e. funds at Lloyd's and other personal wealth) of 350,000 may reduce their net funds at Lloyd's requirement by the amount of declared other personal wealth. This credit is limited to 20 per cent of the member's net funds at Lloyd's requirement and must not reduce the net funds at Lloyd's below 35 per cent of premium limit. The value of any assets held by corporate members outside their funds at Lloyd's is not included in the amount of 278 million shown in the diagram. In addition, individual members of Lloyd's have other assets, not declared to Lloyd's, which are available to meet claims. Willis Re Lloyd s Review 43

46 4th Link: Central net assets The fourth link includes the Central Fund assets resulting from annual contributions made by all members. A new Central Fund has been established to be available - at the discretion of the Council of Lloyd's - to meet policyholders' claims in the event of members being unable to meet their underwriting liabilities relating to 1993 and post non-life business and all life business. The new Central Fund has been supported by a five-year insurance contract, which commenced in 1999 and expired at the end of Features included: an annual limit of cover of 350 million, subject to an annual excess point of 100 million, and subject to an aggregate maximum cover of 500 million over the five year period. The six insurers underwriting the cover were: SR International Business Insurance Company Ltd (a subsidiary of Swiss Re). Employers Reinsurance Corporation (ERC). St Paul International Insurance Company Ltd (St Paul). International Insurance Company of Hannover Ltd (a subsidiary of Hannover Re). XL Mid Ocean Reinsurance Ltd (XL). Federal Insurance Company (a subsidiary of Chubb). Lloyd's expects claims under the policy will increase to a total of 500 million during However, the insurers dispute their liability to meet the claims made under the policy. Lloyd's does not accept that the insurers have grounds for disputing liability, and commenced arbitration proceedings on April 2, 2003, under the terms of the policy for recovery of the sums claimed from the insurers. Central Fund assets may be supplemented by an extra three per cent of members' current overall premium limits callable from members' premium trust funds. In addition, the other assets of the Corporation, totalling 70 million, are available to meet underwriting liabilities in the last resort. Solvency controls Since the beginning of the last century, Lloyd's has required an annual report of each member's underwriting position - the annual solvency test. The managing agent of each syndicate must estimate and provide for all current and future liabilities for each year of account. These liabilities (referred to as solvency reserves) are subject to a statement of actuarial opinion. The Lloyd's solvency test has two stages: Firstly, each member's solvency position is calculated. Each member must have sufficient assets - those held in the premium trust funds, overseas regulatory deposits and funds at Lloyd's - to cover their underwriting liabilities, and on top of this an additional solvency margin. Broadly speaking this solvency margin, calculated individually for each member, is the greater of 16 per cent of total annual premium income or 23 per cent of annualised claims incurred over a three-year period. Where a member's assets are not sufficient to cover the aggregate of their underwriting liabilities and their solvency margin, the member has a solvency shortfall. The second stage of the solvency test calculation requires that Lloyd's central assets must be sufficient to cover the aggregate of all members' solvency shortfalls calculated at the solvency test date. Lloyd's is required to maintain solvency on a continuous basis, and the solvency position of each member - and thus of Lloyd's as a whole - is monitored on a regular basis. The Financial Services Authority (FSA) are advised of the results of this monitoring. Where it is apparent, either from the solvency testing process or elsewhere, that a member is insolvent, Lloyd's will take action in respect of that member in order to protect policyholders, which will result in the member having to cease underwriting unless new funds are provided by that member. Each year, Lloyd's files a return - the Lloyd's Return - with the FSA. This return is intended to ensure Lloyd's regulatory reporting requirements are in line with other UK insurers, and is adapted where appropriate to reflect Lloyd's unique structure. This return reports the results of the Lloyd's solvency test. 44 Willis Re Lloyd s Review

47 Appendix 8 Equitas Background The Equitas Group is a group of limited liability companies in whom Lloyd's has no ownership. It is independent of Lloyd's and outside the Lloyd's regulatory regime. Its results are not reflected in Lloyd's global results. On September , Equitas received authorisation to reinsure and run-off Lloyd's 1992 and prior years' nonlife liabilities. Formed as part of the Reconstruction and Renewal plan, it is anticipated that it will take Equitas in excess of 40 years to settle its asbestos, pollution and health hazard (APH) claims, with the remaining liabilities expected to be settled in the next several years. Equitas Holdings Ltd Owned by discretionary trust whose seven trustees are required to act with regard to the interest of reinsured Names Equitas Reinsurance Management Services Ltd Equitas Policyholders Trustee Ltd Equitas Reinsurance Ltd 11.2bn reinsurance premium 130m R&R costs Names 1992 & prior liabilities Lloyd's 10.4bn retrocession premium 710 capital Equitas Both Equitas Reinsurance Ltd and Equitas Ltd are authorised and regulated by Financial Services Authority (FSA) to conduct reinsurance business, but not to underwrite new business. Equitas Reinsurance Ltd reinsured the business written in 1992 and prior years, and retroceded all its business to its wholly owned subsidiary, Equitas Limited. Those involved advise that the business was structured this way for tax reasons. Equitas Reinsurance Ltd, Equitas Ltd and the holding company share the same board members. One member is nominated by Lloyd's and two by the Equitas Trust. Willis Re Lloyd s Review 45

48 Equitas Reinsurance Ltd has wide powers to manage the run-off of the business it has reinsured and to pay claims directly to underlying policyholders. It is also empowered to collect under reinsurance policies of the syndicates whose business it reinsured (involving nearly 250,000 reinsurance contracts with approximately 3,000 reinsurers and 2,000 reinsurance "pools"). These powers and the business itself have been retroceded to Equitas Ltd. Brokers deal exclusively with Equitas Ltd with regards to the claims handling. In recent years, Equitas has moved to consolidate all claims and reinsurance processing activities in-house. Initially, the management of most of these services was contracted out, often to Lloyd's managing agencies and specialist companies. In early 2001, Equitas formed an in-house broking department to assume the collection of reinsurance debt in cases where the broker that originally placed the business does not perform to the company's required standards. If at any time the directors of Equitas determine that there are insufficient assets to meet liabilities in full as they fall due, then, under the contract by which the Equitas group reinsured the 1992 and prior years liabilities, the directors may implement a proportionate cover plan. Under this plan, Equitas will be entitled to pay claims at a reduced rate, and liabilities will be restricted in aggregate to assets available such that shareholders' funds would not become negative - although they may be reduced to nil. 46 Willis Re Lloyd s Review

49 Notes Willis Re Lloyd s Review 47

50 Notes 48 Willis Re Lloyd s Review

51 Contents Introduction Executive summary 2001 global results and forecast Capitalization Trends in capacity Lloyd s Franchise implementation Regulatory and accounting environment Ratings Equitas Appendices 1. Syndicates active for 2004 year of account 2. Incidental syndicates 3. Cessations, mergers and new syndicates 4. Capacity and alignment of managing agents 5. Lloyd s top 20 capital providers 6. Market activity Capital Structure 8. Equitas `çåí~åí=çéí~áäë For further information please contact your account executive. For additional copies please contact the Reinsurance Publications Department. Tel: +44 (0) Fax: +44 (0) expositos@willis.com Willis Limited Ten Trinity Square London EC3P 3AX United Kingdom Copyright 2004 Willis Limited All rights reserved : No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the permission of Willis Limited. The information contained in this report is compiled from sources we consider to be reliable; however, we do not guarantee and are not responsible for its accuracy. This report is for general guidance only and action should not be taken without obtaining specific advice.