Closing the performance gap
Closing the performance gap Market environment PMD s oversight approach Portfolio gap Capital & Planning Group (CPG) process Key focus areas Jon Hancock, Performance Management Director Jon Hancock Brian Secrett, Interim Head of Underwriting Performance Peter Montanaro, Head of Syndicate Capability Oversight Jon Hancock Q&A 2
2016 performance Lloyd s aggregated results m Dec 2015 Dec 2016 Change Gross written premium 26,690 29,862 +12% Net earned premium 20,565 22,660 +10% Net incurred claims (10,262) (12,987) +27% Operating expenses 1 (8,256) (9,205) +11% Underwriting result 2,047 468 (77)% Combined ratio 90.0% 97.9% 1. Underwriting result only 468m 2. Underwriting result 77% lower 3. Premium growth of 12% +2% at constant exchange 4. Combined ratio up to 97.9% Profit before tax 2,122 2,107 (1)% At first glance it looks very similar to 2015 3
Is the performance gap widening? 97.9% + RARC = underwriting loss 103.1% + RARC = bigger underwriting loss (Note: Lloyd s is not saying these scenarios will occur, only that they might) 4
Growing into a down-cycle is counterintuitive 120 110 100 90 80 Premium Combined ratio Pricing 2012 2013 2014 2015 2016 Pricing Premium Combined ratio Source: PMDR Feb 2017, QMB Latest Approved 5
Competitors are outperforming Lloyd s # Company Combined ratio 1 Everest Re 87.00% 2 Chubb 88.00% 3 Arch Capital 88.20% 4 SCOR 93.10% 5 Partner Re 93.60% 6 Hannover Re 94.00% 7 XL Catlin 94.20% 8 Swiss Re 94.80% 9 Munich Re 96.60% 10 Mapfre 97.40% 11 Lloyd's average 97.90% 12 AIG 133.10%...but we have a great opportunity to move up the table Source: Competitor financial statements, 31 December 2016 and Lloyd s pro forma financial statements, 31 December 2016. Competitor group comprises of 11 companies operating in US, European & Bermudan markets: AIG, Arch, Chubb, Everest Re, Hannover Re, Mapfre, Munich Re, Partner Re, SCOR, Swiss Re & XL Catlin 6
We must close the performance gap We expect the market to shrink in 2018 doing the same is not sustainable for underperforming syndicates doing more of the same is only an option for syndicates who deliver doing something different can drive sustainable, profitable growth 7
Working together to close the gap Our commitment A risk-based approach Provide clarity and direction Be consistent Make it easier for you to do business Be stronger / better in our oversight Your commitment Show true underwriting discipline Take brave and bold decisions Improve underwriting performance Manage down your acquisition costs Act quickly Better conversations and greater impact Aligned to your internal processes 8
What this means in practice Action 1. Account management 2. Better, faster, earlier communication 3. Fewer Minimum Standards reviews 4. Targeted portfolio review classes 5. Action plans for all underperformers 6. Centralised compliance 7. Changed delegated authority governance 8. Faster interventions 9. Fast turnaround on new proposals 10.Improved CPG process Benefit 1. Better understanding, more joined up oversight 2. Less time wasted, faster decisions 3. Identify and action the material issues 4. Less granular, more targeted on performance 5. Faster turnaround in performance 6. Making it easier for you to do business 7. We set the standards, you decide who, we oversee 8. Issues solved before they escalate / accumulate 9. Supporting innovation not stifling 10.Achievable, profitable, transparent plans less subjectivities, restrictions rather than loading 9
Closing the portfolio gap Brian Secrett, Interim Head of Underwriting Performance 10
The portfolio gap Poor performance Flattering ourselves with tail risk Action needed now 11
2016/17 portfolio review Planned premium fell by 400m in 2017 planning Meaningful reductions in Gross Written Premium Airline Casualty Treaty (non-us) Energy Offshore Property Engineering General Aviation Removed from 2018 portfolio review Space Non-US Casualty Treaty 12
2017/18 portfolio review Focus on performance Class selection a greater focus on poor performance Three selection criteria remain five-year Gross Combined Ratio > 100% five-year actual vs planned Gross Combined Ratio > 5% planned Gross Written Premium with Gross Combined Ratio > 100% is > 20% and one added classes with a trailing 12-month Gross Combined Ratio > 100% at the 75th percentile Introduced materiality threshold 13
2017/18 portfolio review Outcomes and expectations Impact of class selection and materiality threshold 34 Lloyd s generic classes of business (37 in 2017) 152 syndicate classes (220 in 2016) representing 3.3bn Gross Written Premium at 106% Gross Combined Ratio (2016) 14
2017/18 portfolio review Outcomes and expectations Process Written, quantitative, action plans - end of July actions being taken to curtail poorly performing classes evidence of active management board to have sight of plan Classes shared earlier this month Addressed in strategic business discussions Further discussions on progress for the 2016/17 portfolio review plans 15
Gross Combined Ratio 2017/18 portfolio review Focus classes the poorest performers Performance in the focus class 140% CPG will pay particular attention to be paid to all plans in these classes 120% 100% Motor, incl. Motor XL Non-US PI Engineering Non-US EL General Aviation Yacht 80% 2012 2013 2014 2015 2016 16
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 GBP M Limiting the downside 2013-2015 cat losses are not the norm Major losses 100% 80% 60% 40% 20% 6,000 5,000 4,000 3,000 2,000 1,000 Absence of major / catastrophe losses flatters results Exposures are growing Return to normal cat losses in 2016 0% 0 Major losses Major losses as % capital 17
Limiting the downside The trend towards greater volatility Net underwriting losses as a proportion of Funds at Lloyd s at the 90th percentile 21% Losses in the tail are growing Greater net downside risk Weakening of underlying rates 20% 19% 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 18
Taking action on the drivers Which classes drive the tail? Largest contributors: Lloyd s generic class of business to modelled net losses exceeding the 90 th percentile GL Non US Property Cat US Property Binder US GL US Property OM US Energy Offshore Property Property Cat Non US PI Non US Property Binder Non US PI US Property OM Non-US A&H Medical Malpractice Cargo UK Motor Marine Hull Political Risk and Credit Marine Liability Property Pro Rata Terrorism 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% These classes present a growing downside risk Review these - particularly US Cat exposed and GL - beyond the 90th percentile Reduce expected net losses which drive the tail at / beyond the 90th percentile 19
Taking action on loss ratios Attrition, large and catastrophe - are they realistic? Planned gross ultimate loss ratios 2013 2016 SBF Year Attritional Large Catastrophe Total 2013 32.6% 13.1% 11.2% 56.9% 2014 32.2% 13.8% 11.5% 57.4% 2015 33.8% 13.6% 10.8% 58.3% 2016 33.8% 14.6% 11.0% 59.5% RARC -20% since 2010; -15% since 2014 Planned ratios to reflect worsening conditions Focus on planned loss ratios which are realistic 20
Cyber Oversight and actions Activities / Reviews Property Terrorism cyber-attack coverage Implementation of Y4938 Cyber-attack: managing catastrophe risk with managing agents Cyber strategy Non-Affirmative cyber questionnaire Update May completion Kick off May/June Post findings of PRA consultation CP39/16 Re-run in Q3 17 Cyber insurance is growing Not explicitly identified in policy terms is a problem Risk must either be recognised and priced - or excluded The endgame: the market will explicitly recognise cyber risk in policy terms and conditions for all lines of business 21
Capital and Planning Process Peter Montanaro, Head of Syndicate Capability Oversight and Chair of CPG 22
We are changing the CPG process Our experience in 2016 May market presentation set the tone No surprises in September We can still improve Still too granular in July More focus on issues / more delegation to teams Early communication of challenging news LMA conducted a survey to help identify improvements 23
What we heard and how we re responding.. Feedback High level plan Loss ratio Timetable Direct presentations to CPG Communication Changed for 2017/18 business plan A high(er) level plan Focus on what matters and less granular discussions A timetable tailored to recognise different demands of aligned and non-aligned syndicates Direct presentations from two managing agents Account Managers will improve communication 24
CPG focus to close the performance gap Agree achievable and profitable plans with realistic loss ratios True underlying underwriting performance Focus on current year/accident year performance Growth plans Portfolio review classes narrative and action plan Reinsurance approach and strategy Line size dispensations will be challenged CAT exposures Market facilities underwriting reasons, controls and oversight Acquisition costs initiatives 25
Key PMD focus areas Jon Hancock, Performance Management Director 26
Closing the performance gap Hobbies Acquisition costs Competition Capital Operating Rate expenses Market facilities Cover Catastrophe cover 27
01-Jul-12 01-Oct-12 01-Jan-13 01-Apr-13 01-Jul-13 01-Oct-13 01-Jan-14 01-Apr-14 01-Jul-14 01-Oct-14 01-Jan-15 01-Apr-15 01-Jul-15 01-Oct-15 01-Jan-16 01-Apr-16 01-Jul-16 01-Oct-16 Projected 2017 Catastrophe risk measure Catastrophe exposures have been steadily climbing Source: Lloyd s Catastrophe Model in a low-earnings environment 28
Catastrophe risk Not every syndicate has been growing above plan Growth in syndicate % contribution relative to 2016 plan 29
Our actions to close the gap The market will continue to be significant and leading writers of CAT We expect every syndicate to be within their appetite at all times We will focus actions on those syndicates who have most impact For 2017 performance address syndicates who are writing in excess of their 2017 plans agree actions to return within plan For 2018 plan market and syndicate level targets agreed during CPG all syndicates must stay within forecast throughout 2018 30
Market facilities present an opportunity and a challenge Written well they are a good source of business Written blindly can be uncontrolled and lead to unknown exposure We need to better understand what is written at Lloyd s This will be addressed through the planning process which facilities? what underwriting control? what is the cost of entry? how will you track performance? 31
Expenses must reduce for Lloyd s to compete Total expenses have risen to a combined 41% TOM is critical what else are you doing to manage costs? Lloyd s Corporation expenses levy COM You tell us acquisition costs are unjustifiably high we need good data to drive conversations transparency and fairness to policyholders any prudential concerns regarding sustainable business performance where payments are not justified or they do represent value for money 32
Insanity: Doing the same thing over and over again and expecting different results 33
Now is the time for sanity! The only option is to take action now The market will shrink and performance improves My team is 1. Taking a risk-based approach 2. Focused on the poorest performers 3. Concentrating on the things that really matter We ask you to 1. Make bold and brave decisions 2. Take action on costs 3. Act right now 34
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