Lloyd s Update. October Capital Access Advocacy Innovation

Transcription

1 Lloyd s Update October 2010 redefining Capital Access Advocacy Innovation

2 Contents 3 Executive Summary Interim Results 9 Outlook for Appendix About Aon Benfield As the industry leader in treaty, facultative and capital markets, Aon Benfield is redefining the role of the reinsurance intermediary and capital advisor. Through our unmatched talent and industry-leading proprietary tools and products, we help our clients to redefine success. Aon Benfield offers unbiased capital advice and customized access to more reinsurance and capital markets than anyone else. As a trusted advocate, we provide local reach to the world s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial, and rating agency advisory, and the right professionals to advise clients in making the optimal capital choice for their business. With an international network of more than 80 offices in 50 countries, our worldwide client base is able to access the broadest portfolio of integrated capital solutions and services. Learn more at aonbenfield.com.

3 Executive Summary The profit of GBP628 million reported by Lloyd s for the first half of 2010 represented a solid performance in the face of more than GBP1.4 billion of major loss claims. The full-year result remains heavily dependent on catastrophe experience in the remainder of Gross premiums written were virtually unchanged at the half-year stage, with rates either flat or falling in most classes. Syndicate business plans filed to the end of September suggest overall volumes will reduce in 2011, in the absence of a market-changing event. Removing foreign exchange distortions, the accident year combined ratio deteriorated from 90.5% in the first half of 2009 to 103.7% in the first half of Excluding major losses, these ratios were 87.3% and 86.6%. Claims arising from U.S. subprime and the banking crisis continue to mount, but are said to remain manageable at market level. Underlying loss activity is increasing, partly as a result of the economic downturn, but so far there has been no marked acceleration in claims trends. The favorable contribution from prior year reserves increased from 3.9% to 4.6% of net premium earned, despite around GBP250 million of adverse development at specialist motor syndicates. Management is adamant that this reflects good years getting better rather than any release of margin. Lloyd s capital position is strong. Funds at Lloyd s and mutually-held central assets for solvency purposes are both at all time highs. Risk-based capital requirements have been increased, partly to reflect weakening pricing and low interest rates, a trend which is expected to continue into New capital continues to be attracted to Lloyd s. A long queue of applicants is currently seeking entry to the market, including a number of brokers, but it will be difficult for any organization to navigate the scrutiny of the Franchise Board in the current market environment. Lloyd s continues to be heavily engaged in preparations for Solvency II. Approval of the market s internal model is considered vital if a sharp escalation of capital requirements is to be avoided and significant pressure is being applied to managing agents viewed as lagging behind. Lloyd s robust competitive position has been acknowledged by the rating agencies. A.M. Best, Standard & Poor s and Fitch all recently affirmed their market ratings at A (Excellent), A+ (Strong) and A+ (Strong), respectively. Investment returns are currently providing little support to the results the overall return stood at 1.3% in the first half of 2010 (2.6% on an annualized basis), down from 1.6% in the first half of 2009 (3.2%). 3

4 Lloyd s Update 2010 Interim Results Exhibit 1: Lloyd s Pre-Tax Results Exhibit 2: Return on Capital (Annualized) GBP Millions 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ,351 3,662 1,807 3, ,899 Interim 3,868 1, Full year Percent Interim Full year H H 2010 Lloyd s reported a pre-tax profit of GBP628 million for the first half of 2010, a reduction of GBP694 million relative to the prior year period. Softening rates and low investment yields played their part, but the main driver was exposure to the Chilean earthquake and the Deepwater Horizon loss; the level of catastrophe claims increased by almost GBP1.2 billion. Offsetting factors were a favorable foreign exchange swing of GBP484 million, an increase of GBP66 million in the level of prior year reserve releases and a GBP113 million recovery of undertakings previously paid out by the Central Fund. The development of various components of the interim pre-tax results over the past five years is shown below. Exhibit 3: Development of Interim Pre-Tax Results 2500 Accident year underwriting result Prior year reserve releases Investment result Other Pre-tax profit 2000 GBP Millions H H H H H

5 Aon Benfield Premiums Gross premiums written were virtually unchanged at the half-year stage, with movements in exchange rates having very little impact. This followed a 9% gain in local currency terms in the first half of A reduction in total premiums for established syndicates was offset by an increase at newer syndicates formed from 2008 onwards, with slightly more assumed reinsurance being written across the market as a whole. Exhibit 4: Gross Premiums Written GBP Millions 25,000 20,000 15,000 10,000 5, Interim 2009 Full year 2010 Underwriting Technical profit fell from GBP678 million in the first half of 2009 to GBP107 million in the first half of Removing the distorting effect of foreign exchange movements on non-monetary items, the accident year combined ratio deteriorated from 90.5% to 103.7%. The cost of major losses increased from 3.2% to 17.1% of net premium earned, driven by exposure to the Chilean earthquake and Deepwater Horizon. The net claims estimates for these events have remained steady at USD1.4 billion and USD million, respectively. Lloyd s specialist motor syndicates strengthened their reserves on more recent accident years by around GBP250 million in the first half of 2010, due to deteriorating claims experience. Certain syndicates also reported limited adverse development on medical malpractice insurance written for Italian hospitals. Given that the overall favorable contribution of prior years actually increased from 3.9% to 4.6% of net premium earned, releases from other areas of the account were significant. Management is adamant that this reflects good years (particularly ) getting better, rather than any release of margin above best estimate. Management stated that rates were either flat or falling in most classes. Leading operations see a potential opportunity in marine liability following the Deepwater Horizon loss, but this is unlikely to have much impact in terms of headline volumes at the year end. Lloyd s is continuing to improve its international reach. In May 2010, Lloyd s was awarded a direct insurance license by the Chinese authorities; underwriting is likely to commence in mid Representatives have also visited Moscow to explore opportunities and build relations with the local market. Exhibit 5: Interim Combined Ratios 110% 100% 90% 80% 110% 100% 90% 1H % Accident year 1H H % 17.1% Catastrophes 3.2% -4.6% Net prior year development -3.9% 98.7% Calendar year 91.6% 80% Accident year Catastrophes Net prior year development Calendar year Combined ratios exclude foreign exchange movements on non-monetary items. 5

6 Lloyd s Update The improvement in the attritional accident year combined ratio was largely driven by favorable foreign exchange movements within net operating expenses. Claims arising from U.S. subprime and the banking crisis continue to mount, but are said to remain manageable at market level. Underlying loss activity is increasing, partly as a result of the economic downturn, but so far there has been no marked acceleration in claims trends. Loss ratios in the casualty sector are said to have remained relatively stable. Investments There are three components to Lloyd s investment result: the return on syndicate-level assets, the return on centrally-held mutual assets and the notional return on the capital supporting members underwriting (Funds at Lloyd s). Exhibit 6 shows that the overall return on Lloyd s investments fell from GBP708 million in the first half of 2009 (a yield of 1.6%) to GBP597 million in the first half of 2010 (a yield of 1.3%). This relatively resilient performance was aided by capital gains on the highestquality fixed-interest securities, a trend that continued into the third quarter. Exhibit 6: Investment Returns Syndicate return (LH scale) Notional return on FAL (LH scale) Return on central resources (LH scale) Investment return (RH scale) 1, GBP Millions 1, Investment Return % H H H

7 Aon Benfield Asset Allocation Cash and investments rose by 3% to GBP47.6 billion over the six months ended June 30, 2010, the bulk of which is held in syndicate premiums trust funds. Investment allocation was little changed. There is very little exposure across the market to sovereign debt issued by Portugal, Ireland, Italy, Greece, and Spain. Exhibit 8 shows that within the Central Fund, the most notable change during the period was a shift from corporate bonds to government bonds, accompanied by a shortening of duration, to adjust for the possibility of a double-dip recession. Exhibit 7: Lloyd s Market Invested Assets Total Invested Assets at June 30, 2010: GBP47.6 billion Corporate Bonds at June 30, 2010: GBP16.7 billion 2% 2% 7% 30% 39% 31% Cash and LOCs Corporate bonds Government bonds* Equities Alternative investments 24% AAA AA A Below A 35% 30% *Includes supra nationals and government agencies Exhibit 8: Central Fund Assets Central Fund Assets at Dec 31, 2009: GBP2.1 billion Central Fund Assets at June 30, 2010: GBP2.2 billion 6% 4% 2% 2% 3% 3% 35% 6% 4% 2% 2% 3% 3% 50% Fixed income - government* Fixed income - corporate Global equity Hedge funds Cash Emerging markets & high yield bonds Property equity Emerging equity 30% 45% *Includes supra nationals and government agencies 7

8 Lloyd s Update Technical Reserves Gross provisions for outstanding claims rose by GBP2.8 billion to GBP37.0 billion over the first six months of 2010, reflecting the formation of reserves for the Chilean earthquake and the Deepwater Horizon loss. Reinsurers share rose by GBP0.7 billion to GBP9.2 billion. Within the legacy area, the claims experience of the Central Fund reflected continued favorable development on the run-off of insolvent members. A further reduction in open year liabilities is expected at the year end with the closure of additional years of account into successor syndicates. Building on a pilot scheme launched within the Claims Transformation Program at the beginning of 2010, Franchise Performance Director Tom Bolt has introduced a new more intrusive approach to the monitoring of claims-handling, focused on those managing agents exhibiting below average performance. In addition, Lloyd s is shortly expected to begin publishing a league table of brokers delivery in this area. Members Balances, also operating on a several liability basis, represent the net profit/(loss) to be distributed/ (collected) by syndicates to/(from) the members. The total fell by GBP1.9 billion to GBP2.0 billion over the first half of 2010, reflecting the distribution of accumulated profit in June. Mutually-held Central Resources rose by GBP165 million to almost GBP1.3 billion. The Central Fund has continued to build and is now comfortably in excess of Lloyd s immediate regulatory and rating requirements. Nevertheless, the member contribution rate will remain at 0.5% of written premium in Overall, including GBP941 million of subordinated debt, Lloyd s total capital base stood at GBP18.5 billion at June 30, 2010, down 3.0% from GBP19.1 billion at December 31, Exhibit 9: Lloyd s Total Capital Base Central resources Members' balances FAL Subordinated liabilities Capital Lloyd s is a partially-mutualized market rather than an insurance company and does not hold conventional equity. Instead, the three components of the capital base are Members Funds at Lloyd s (FAL), Members Balances and Central Resources. FAL represents the capital lodged and held in trust at Lloyd s to support members underwriting commitments and operates on a several liability basis. The total rose by almost GBP1.2 billion to GBP14.3 billion over the first half of 2010, an all time high. Included within this figure were letters of credit and bank guarantees of GBP7.7 billion (53.7% of FAL). GBP Billions H

9 Aon Benfield Outlook for 2011 Capacity Lloyd s reviews its risk-based capital requirements at least annually, based upon a myriad of factors. Weakening pricing and low interest rates exerted upward pressure in 2010 and will do so again in The most noticeable adjustment is likely to occur in the motor segment, which has recently exhibited a step-change in incurred claims reporting. This, however, remains a small segment of the Lloyd s market, representing 4-5% of overall premiums written. An offsetting factor for investors is the phased reduction of the U.K. corporation tax rate from 28% to 24% over the next four years, which was announced in the Emergency Budget of June 22, In the absence of a market-changing event, the Franchise Board is facing the first real test of its resolve, as newer trade capital backed operations look to expand their Lloyd s businesses in a difficult market environment. More established syndicates appear to be showing restraint; proposed capacity changes disclosed to date show an overall reduction of around 2%. These remain subject to change and most were published as long ago as July (see Appendix). The average price paid for capacity in the September 2010 auctions fell 28% relative to the prior year, reflecting the deteriorating outlook for earnings. New Entrants New capital continues to be attracted to Lloyd s, mainly because of the distribution advantages of the global license network. The growing perception that Lloyd s is very well positioned to benefit from any marketchanging event is also encouraging certain private equity investors to look at ways of establishing bridgeheads that can be built on rapidly at a later date. The latest arrivals are Chubb Corporation and Allied World Holdings, which both commenced underwriting on July 1, 2010 via Syndicates 1882 and 2232, respectively, bringing a combined GBP70 million of new capacity into the market. Management has intimated that there is currently a long queue of new applicants seeking permission to begin underwriting and that, under new rules introduced in 2008, these include a number of brokers. However, given existing competitive and regulatory pressures, it will be challenging for any organization to navigate the scrutiny of the Franchise Board and gain entry in The applications with the greatest chance of success will be those bringing new (and profitable) business into the market. Solvency II Lloyd s continues to be heavily engaged in preparations for Solvency II, the new European regulatory regime, which is due to be implemented in Management is working on the basis that overall regulatory capital requirements will increase by 5-10%, provided that the market s internal model is approved by the U.K. regulators. Failure is not an option, given that the increase would likely be around 60% under the standard model based on Quantitative Impact Study 4 calculations and, for that reason, significant pressure is being applied internally to ensure that all managing agents are fully prepared. Lloyd s has clearly stated that it will intervene with the business and capital plans of operations that are seen to be lagging behind. Mergers & Acquisitions The big story of 2010 has been the private equity approach for Brit Insurance Holdings NV. Further corporate activity is considered likely in the current environment, as new investors look for alternative ways to enter the market and existing independent operations consider strategic alternatives that might leave them better placed to cope with increasingly competitive market conditions and the pressure to comply with Solvency II. 9

10 Lloyd s Update Appendix Active Syndicates and Standalone Ratings/Rankings Syn. No. Managing Agent Agency Owner* Largest Capital Provider in 2010* 2010 Capacity m** Proposed 2011 Capacity m** A.M. Best Syndicate Rating Moody s Continuity Opinion S&P Lloyd s Syndicate Assessment 0033 Hiscox Hiscox Hiscox (72.5%) A s A- NA 0044 Sagicor Sagicor Sagicor 5.5 NR NA NA 0218 Equity IAG IAG (64.0%) NR B NA 0260 Canopius Canopius Canopius (58.8%) 69.9 NR C+ NA 0308 Kiln Tokio Berkley Life (28.0%) NR B 2pi 0318 Beaufort Munich Re Munich Re (73.2%) NR B+ 2pi 0382 Hardy Hardy Hardy A s B+ 3pi 0386 QBE QBE QBE (69.6%) NR A 5/Stable 0435 Faraday Berkshire Berkshire NR B+ 3pi 0457 Munich Re Munich Re Munich Re NR B+ 3pi 0510 Kiln Tokio Tokio (52.7%) A s A- 4pi 0557 Kiln Tokio Hampden (50.9%) NR B+ 3pi 0566 QBE Operates as a trading division of Syndicate Atrium Ariel Hampden (37.8%) A s A- NA 0609 Atrium Ariel Hampden (35.9%) A s A- NA 0623 Beazley Beazley Hampden (56.8%) A s A- 4/Stable 0626 Hiscox Operates as a trading division of Syndicate Meacock Family Hampden (48.2%) NR B 2pi 0779 Jubilee Guardian (40.0%) Hampden (37.7%) NR B+ 2pi 0780 Advent Fairfax Fairfax NR B- 2+/Stable 0807 Kiln Tokio Tokio (50.5%) NR B 3pi 0887 Amlin Operates as a trading division of Syndicate Omega Omega Omega (38.8%) A s B+ 3pi 1036 QBE Operates as a trading division of Syndicate Chaucer Chaucer Chaucer (83.9%) A s B+ NA 1110 Argenta Argenta Argenta NR NA NA 1176 Chaucer Chaucer Chaucer (54.8%) NR A- 3pi 1183 Talbot Validus Validus NR B+ NA 1200 Argo Argo Argo (60.1%) NR NA 3pi 1206 Sagicor Sagicor Sagicor NR B- 1pi 1209 XL XL XL NR B NA 1218 Newline Fairfax Fairfax 95.0 NR NA 2pi 1221 Navigators Navigators Navigators NR B+ NA 1225 Aegis Aegis Aegis A s NA 3pi 1274 Antares Lightyear (50.7%) Lightyear (45.0%) NR NA NA 1301 Chaucer Chaucer Clal (75%) NR NA 2pi 1318 Beaufort Munich Re Munich Re 50.0 NR NA Alterra Alterra Alterra NR NA NA 1414 Ascot AIG AIG NR NA 3pi 1458 RenRe RenRe RenRe 84.3 NR NA Flagstone Flagstone Flagstone NR NA NA 1880 Kiln Tokio Tokio NR NA Chubb Chubb Chubb 41.5 NR NA NA 1886 QBE Operates as a trading division of Syndicate Whittington Whittington Goldman Sachs NR NA NA 1919 Starr CV Starr Starr International NR NA NA 1955 Whittington Whittington Steel/Carlson (75.6%) NR NA NA 1967 Whittington Whittington WR Berkley 85.0 NR NA Flagstone Flagstone Argenta (76.5%) NR NA NA 10

11 Aon Benfield Syn. No. Managing Agent Agency Owner* Largest Capital Provider in 2010* 2000 QBE Operates as a trading division of Syndicate Capacity m** Proposed 2011 Capacity m** A.M. Best Syndicate Rating Moody s Continuity Opinion S&P Lloyd s Syndicate Assessment 2001 Amlin Amlin Amlin A+ s A 4/Stable 2003 Catlin Catlin Catlin A s A- 4/Stable 2007 Novae Novae Novae NR B 3-/Stable 2008 Shelbourne Enstar (50.1%) Enstar (50.1%) 10.0 NR NA NA 2010 Cathedral Alchemy (56.1%) Cathedral (57.8%) A s NA 3pi 2012 Arch Arch Arch NR NA Argenta Argenta Argenta (73.7%) NR NA NA 2122 Argenta Operates as a trading division of Syndicate Capita Capita AWAC 28.5 NR NA NA 2243 Starr CV Starr Torus 43.0 NR NA NA 2318 Beaufort Munich Re Munich Re (99.2%) 33.0 NR NA 2pi 2468 Marketform AFG (67.0%) AFG (51.0%) NR A- NA 2488 ACE ACE ACE NR NA NA 2525 Alterra Alterra Hampden (45.2%) NR NA NA 2526 Alterra Alterra Alterra (36.4%) A s A- 4/Stable 2623 Beazley Beazley Beazley A s A- 4/Stable 2791 MAP MAP (90.0%) Hampden (36.8%) NR NA 4pi 2987 Brit Brit Brit NR B 3pi 2999 QBE QBE QBE NR A- 4-/Stable 3000 Markel Markel Markel A s A- 3pi 3002 Catlin Catlin Catlin 5.0 NR NA NA 3010 Cathedral Alchemy (56.1%) Cathedral 30.0 NR NA NA 3210 Mitsui Mitsui Mitsui NR B+ NA 3334 Sportscover Sportscover Wild Goose (67.8%) NR NA 1pi 3622 Beazley Beazley Beazley 10.0 A s NA 4/Stable 3623 Beazley Beazley Beazley A s NA 4/Stable 3624 Hiscox Hiscox Hiscox NR NA Pembroke Ironshore Ironshore (71.5%) NR NA NA 4020 Ark Aquiline (45.0%) Ark NR NA NA 4141 HCC HCC HCC NR NA NA 4242 Chaucer Chaucer ICAT (22.5%) NR NA NA 4444 Canopius Bregal (83.0%) Canopius (85.4%) NR B 3-/Stable 4472 Liberty Liberty Liberty NR B NA 4711 Aspen Aspen Aspen NR NA NA 5000 Travelers Travelers Travelers NR NA 3-/Stable 5151 Montpelier Montpelier Montpelier NR NA 3-/Positive 5555 QBE Operates as a trading division of Syndicate RITC Soros/Pine Brook Soros/Pine Brook 5.0 NR NA NA 5820 Jubilee Guardian (40.0%) Guardian (34.2%) NR NA NA 6103 MAP MAP (90.0%) Hampden (66.4%) NR NA NA 6104 Hiscox Hiscox Hampden (56.5%) 45.3 NR NA NA 6105 Ark Aquiline (45.0%) Argenta (99.7%) 30.1 NR NA NA 6106 Amlin Amlin Hampden (49.9%) 49.9 NR NA Beazley Beazley Hampden (93.9%) 14.5 NR NA NA *100% unless stated **Unofficial and subject to change Hampden and Argenta are Lloyd s members agents acting mainly on behalf of third party capital providers. All ratings/rankings as at October 15, 2010 and subject to subsequent change; for further information about the underlying methodologies, contact Aon Benfield Research., A.M. Best, Moody s, Standard & Poor s 11

12 Contact Information Aon Benfield Research Mike Van Slooten Aon Benfield Research Kathryn Moyse Aon Benfield Research Eleanore Obst Aon Benfield Research E. Randolph Street, Chicago, Illinois t: f: aonbenfield.com Copyright Aon Benfield Inc # /2010