Lloyd s Update. Evolution. October Capital Access Advocacy Innovation

Lloyd s Update Evolution October 2009 redefining Capital Access Advocacy Innovation

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AON BENFIELD Contents Evolution 4 Capacity, Strategy and Ratings 5 Capacity Indicators for 2010 5 Lloyd s Corporate Strategy: Equitas Resolution and Corporate Review 6 Lloyd s Market Rating 7 Lloyd s 1H 2009 Pro Forma Results 8 Balance Sheet 8 Investment Return 10 Underwriting Profit 10 Listed Integrated Lloyd s Vehicles (ILVs) 12 Balance Sheet 12 Investment Return 12 Underwriting Profit 13 Pre-tax Profits 16 Appendix 1: Syndicate Capacity Pre-Emptions 18 Appendix 2: Lloyd s Capacity 19 Appendix 3: Lloyd s Syndicate Assessments 22 3

LLOYD S UPDATE - EVOLUTION Evolution Lloyd s pro forma capital increased by 13%, to GBP16bn, in the six months to June 30, 2009, and 30% year on year. Gross premiums written increased by 35% from 1H 2008, to GBP13.5bn, largely due to currency movements and firmer pricing in some of the key Lloyd s markets. Pro forma pre-tax profits rose by 39% to GBP1.3bn, with GBP315mn in prior year reserve releases being offset by the adverse effect of the accounting treatment of foreign exchange on non-monetary items. While the investment approach of Lloyd s remains conservative, it benefited from the improved investment market in the second quarter of the year. The period has seen a continued effort by Lloyd s to realize its ambition to be the platform of choice. The resolution of the Equitas deal, coupled with the affirmation of Lloyd s ratings by A.M. Best, Standard & Poor s and Fitch, are indicative of the progress Lloyd s has made since its near death 1 experience of the late 1980s. In addition, new offices in Dublin and Stockholm reflect Lloyd s response to the different challenges of the global insurance market. To fully address these challenges, the management has announced that it is conducting a review of Lloyd s three year plan, with the results to be published in the first quarter of 2010. Late 2008 and early 2009 saw high levels of interest in the Lloyd s market, as the subscription market model increased its attractions to ceding companies looking to diversify risk. Aside from a number of mergers and acquisitions, nine new syndicates were established for, or during 2009, and opening capacity for 2009 was estimated at GBP17.4bn 2. Interest in the Lloyd s model has continued into 2009, although at a less frenetic pace. Two notable transactions have taken place over the period, and to date one new syndicate has been announced to commence writing business in 2010. Lloyd s sounded a more cautious note on the outlook for rates than most of the integrated Lloyd s vehicles (ILVs). With the syndicates currently undergoing the process of having their business plans approved for 2010 (or coming into line ), those syndicates which have disclosed their pre-emption/de-emption data provide a slightly mixed picture. While most are continuing to post a strong increase in expected opening capacity for 2010, a minority of syndicates are scaling back the amount of capacity required, indicating a less positive outlook on business conditions than was widespread at the start of the year. The ILVs premium growth was also boosted by the currency movements in the second half of 2008. In addition, capital raisings in late 2008 and early 2009 helped enable the ILVs to generate some of this premium growth as they sought to take advantage of the apparent hardening in the market. However, price improvements have been confined to a few areas, with improvement lagging expectations in many others, particularly casualty. Nevertheless, a number of the ILVs continued to anticipate a more widespread stabilization or improvement in rates in the second half of the year. As in the first quarter statements, the companies continued to benefit from the benign claims environment. Only aviation stood out as an area which had experienced a number of large losses in the period. For most of the ILVs, recession related losses do not yet appear to be material. 1 Lloyd s City Dinner Speech by Lord Levene, Lloyd s Chairman, September 17, 2009 2 Lloyd s, Moody s, Aon Benfield Research 4

AON BENFIELD Capacity, Strategy and Ratings Reported disclosures suggest a strong increase in opening capacity for 2010, although this has been scaled back by some syndicates in response to less positive than anticipated market conditions. As the global (re)insurance market continues to change, Lloyd s corporate strategy has developed. The announcement of a review of Lloyd s three year plan, and incremental changes such as the opening of more regional offices, appear progressive, particularly in the context of the resolution of the Equitas issue. Affirmations of Lloyd s financial strength ratings cited its resilient performance, despite the difficulties of 2008. Capacity Indicators for 2010 While Lloyd s no longer publishes a figure for opening capacity, the 2009 opening capacity was estimated at GBP17.4bn 3. Including the new entrants to the market during 2009, Aon Benfield estimates the current capacity at GBP17.6bn 4. The Lloyd s syndicates were required to submit their business plans for 2010 by September 18. Once approved, the syndicates then have until November 29 to complete the coming into line process by which syndicates submit their business plans to the Franchise Board and ensure they have sufficient capital to support their plans. Indicative opening capacity for 2010 looks likely to be up markedly on 2009; available disclosures of 2010 preemptions are given in Appendix 1, giving an indicative increase in capacity of over 20%. Most notable was Hiscox s announcement that it plans to increase capacity for its syndicate 33 by 33.3%, to GBP1bn. The highest relative increases in capacity are from syndicates 6103 (77%), 623 (62%), 510 (46%) and 6104 (39%). However, a number of syndicates have recently revised down their growth rates. These downward revisions were announced in September, when the syndicates submitted their final business plans for approval. Those syndicates affected are shown in Table 1. A less positive outlook on business conditions was generally cited as the reason for the change. KGM announced that it would not be proceeding with its initial pre-emption of 7.44% for its syndicate 260 in 2010, and would instead be maintaining 2009 capacity, in the light of current and anticipated market conditions 5. Munich Re-backed syndicate 318, managed by Beaufort, submitted a revised business plan for 2010. The original pre-emption offer of 25% was revised down to 11.5%, reflecting a less positive outlook on rate increases on its worldwide property account. Omega revised its pre-emption offer down in response to its June and July renewals. Table 1 Changes to 2010 Capacity Syndicate Managing Agent 2009 Capacity GBPmn Original 2010 Capacity Increase Revised 2010 Capacity Increase 2010 Capacity GBPmn 260 KGM Underwriting Agencies Ltd 72.5 7.4% 0.0% 72.5 318 Beaufort Underwriting Agency Ltd 202.0 25.0% 11.5% 225.0 958 Omega Underwriting Agents Ltd 249.0 20.0% 12.0% 280.0 1176 Chaucer Syndicates Ltd 31.5 0.0% 0.5% 31.7 2010 Cathedral Underwriting Ltd 300.0 16.7% 16.7% 350.0 Source: Company Data, Aon Benfield Research Cathedral Underwriting Limited announced that, while its intention to pre-empt capacity to GBP350mn remained unchanged, it had revised its forecast for gross income (after brokerage) to be 5% lower than in the original June business plan reflecting more cautious assumptions as to likely conditions on our non marine reinsurance and direct 3 Lloyd s, Moody s, Aon Benfield Research 4 Aon Benfield Research 5 KGM Underwriting Agencies Limited, Syndicate Business Forecast (SBF), September 7, 2009 5

LLOYD S UPDATE - EVOLUTION property accounts next year 6. In addition, while capacity was remaining unchanged, capacity utilization for 2010 was forecast to be approximately 77%, down from the 81% utilization submitted in the original business plan. Assumptions for the aviation, satellite and contingency accounts remained unchanged. The marginal increase in 2010 capacity for Chaucer s syndicate 1176 reflected the allocation of an additional GBP160k of capacity to a corporate name. Despite market speculation that a number of new syndicates are in the pipeline, there has been only one announcement to date of a new syndicate for 2010. On September 23 Flagstone Re announced its intention to create a worldwide property division, which would initially write on behalf of Marlborough Underwriting Agency s (Flagstone s Lloyd s arm) existing syndicate 1861. In 2010 the property division will be supported by a new mixedcapital syndicate 1969 which will provide the majority of the capacity and utilize managing agency services and systems provided by Marlborough and Flagstone. Lloyd s Corporate Strategy: Equitas Resolution and Corporate Review Lloyd s has continued to evolve during 2009. Most significantly, it achieved resolution on the Equitas deal. Equitas was established in September 1996 to reinsure and run-off the 1992 and prior years non-life liabilities of Names at Lloyd s. In October 2006, National Indemnity Company, a member of the Berkshire Hathaway group, reinsured and took on the run-off of all Equitas liabilities. Phase 1 of this transaction was completed in March 2007. Phase 2 was completed on June 25, 2009, when the High Court made an order approving the transfer of the 1992 and prior years non-life business of members and former members of Lloyd s to Equitas Insurance Limited. The transfer covers all the business reinsured by Equitas at the time of Reconstruction and Renewal in 1996, and includes the PCW syndicates business reinsured by Lioncover Insurance Limited and the Warrilow syndicates business reinsured by Centrewrite Limited. The transfer took effect on June 30, 2009, and means that Names are no longer liable for their 1992 and prior years underwriting liabilities at Lloyd s as a matter of UK law. On July 28, 2009, Lloyd s announced that it was initiating a review of its three year plan, first published in 2006. The review will mainly be focusing on features outside the Lloyd s market and how they might impact Lloyd s operations and competitiveness. Issues likely to be addressed will be current global economic conditions, opportunities afforded by change, the impact of potential developments in regulatory and legislative conditions and forecasting industry trends and developments. A 2010-2012 Three Year Plan, with strategy review results, will be published in the first quarter of 2010. Levels of corporate activity in 2009, including mergers and acquisitions (M&A), have been much more subdued than in 2008. In June 2009 RenaissanceRe announced its intention to acquire Spectrum Syndicate Management Ltd, a Lloyd s managing agent. The other significant transaction of the period was Fairfax Financial Holdings acquisition of 32.49% of the shares in Advent, adding to the 66.7% of shares already owned by Fairfax. The offer for Advent was declared unconditional on September 2. In July 2009, Omega announced the take up of its successful capacity offer for syndicate 958, at a cost of USD30.6mn. The result will be increased participation in syndicate 958 of 34.7% for the 2010 year of account onwards (2009 year of account: 16.4%). Finally, Chaucer withdrew itself from negotiations with third parties and remains independent. Pamplona Capital Management (Pamplona) continues to await FSA approval to increase its equity stake in Chaucer from 9.9% to a maximum of 29.9%. Pamplona has stated that it has no intention of acquiring more than 29.9% or of making an offer for Chaucer 7. Although the second half of 2009 has so far been relatively quiet in terms of M&A activity, Lloyd s has continued to diversify its business profile geographically. In July Lloyd s demonstrated its confidence in the Irish economy by opening its first permanent office in Dublin, and in September it opened a representative office in Stockholm. Lloyd s has recognized the growth opportunities presented by the Nordic region, being its third largest European market. 6 Cathedral Underwriting Limited, 2010 SBF and pre-emption announcement, September 23, 2009 7 RNS Statement, Keefe Bruyette & Woods Ltd, June 29, 2009 6

AON BENFIELD The Corporation is also in the process of launching a new business model for Lloyd s Japan and endeavoring to improve the efficiency of the Lloyd s market through the introduction of the Lloyd s Exchange. Lloyd s Market Rating In recent months, A.M. Best, Fitch and Standard & Poor s have all affirmed Lloyd s financial strength ratings. The agencies mentioned Lloyd s strong and diverse capital base and financial flexibility during the financial storm, while other (re)insurers have experienced difficulties in raising capital during the period. The Lloyd s market ratings are shown in Table 2 and apply to all business written by all syndicates, and consequently to all policies issued by Lloyd s from the 1993 year of account onwards. Table 2 Ratings for Lloyd s Market Rating Outlook Action A.M. Best A+ (Excellent) Stable Affirmed 13 July 2009 Fitch Ratings A+ Stable Affirmed 23 July 2009 Standard & Poor s A+ (Strong) Stable Affirmed 12 Aug 2009 Source: Rating Agencies While all syndicates benefit from the Lloyd s market ratings, Standard and Poor s also grades some syndicates individually. Appendix 3 lists the 38 syndicates which currently carry Lloyd s Syndicate Assessments (LSAs). LSAs are based on the level of dependency a syndicate has on Lloyd s. 7

LLOYD S UPDATE - EVOLUTION Lloyd s 1H 2009 Pro Forma Results Lloyd s 1H 2009 pro forma results were significantly affected by currency movements in the period. These accounted for much of the growth in premiums. In addition, the effect of accounting for foreign exchange movements on nonmonetary items added five percentage points (pp) to Lloyd s combined ratio, although this was largely offset by a 3.9% benefit from the release of prior year reserves. Lloyd s capital base remains strong, growing by 13% in the first half of the year. Lloyd s has a solvency surplus of GBP2.5bn. Table 3 Lloyd s Pro Forma Results GBPmn FY 2007 1H 2008 FY 2008 1H 2009 1H 2009/ 1H 2008 Change Gross premiums written (GPW) 16,366 9,983 17,985 13,462 35% Reinsurance as % of GPW 19% 26% 21% 26% 0pp Net premiums written 13,256 7,388 14,217 9,984 35% Net premiums earned 13,097 6,362 13,796 8,086 27% Net claims incurred 6,547 3,407 8,464 4,461 31% Net operating expenses 4,451 2,256 4,134 2,947 31% Underwriting result 2,099 699 1,198 678-3% Combined ratio 84.0% 89.0% 91.3% 91.6% 2.6pp Pre-tax profit / loss 3,846 949 1,899 1,322 39% Net resources (incl. sub debt) 14,461 13,371 15,264 16,949 27% Capital 13,449 12,342 14,182 16,000 30% Central assets 2,465 1,936 2,072 2,008 4% Pre-tax return on average net resources 29.3% 14.7% 13.7% 17.5% 2.8pp Source: Lloyd s Balance Sheet As a partially mutualized market rather than an insurance company, Lloyd s does not hold conventional equity. Instead, its capital base comprises Members Funds at Lloyd s (FAL), Members Balances and Central Reserves. The total capital base increased by 13% in the first six months of 2009, to GBP16.0bn. The main driver of the increase was a 23% increase in Members FAL to GBP13.1bn, reflecting capital raised by members in the period. Members Balances fell by 27% in the period as distributions more closely matched results declared. The Central Reserves represent the mutual assets of Lloyd s and increased by 7% to GBP1.1bn, reflecting additional contributions. Syndicate premium assets comprise the largest proportion of invested assets in the Lloyd s market. Syndicates investment strategies have tended to include relatively high proportions of cash and short-term investments ensuring adequate liquidity. Members capital (members balances and FAL) is generally held centrally at Lloyd s. A proportion is maintained in investment assets and managed at members discretion. The remainder comprises letters of credit (LOCs) and bank and other guarantees. Equities and alternative investments each accounted for 2% of Lloyd s total invested assets at June 30, 2009. As shown in Chart 1, cash and LOCs accounted for the largest proportion of invested assets, at 35% of the total. Corporate and government bonds accounted for 32% and 29%, respectively. 72% of the corporate bond portfolio was rated AA or AAA. Lloyd s also took advantage of favorable market conditions to repurchase GBP102mn of subordinated debt during the period, generating a gain of GBP36mn for the Central Fund. 8

AON BENFIELD Chart 1 Lloyd s Market Invested Assets 29% 1H 2009 Total: GBP43.8bn 2% 2% 35% Cash and LOCs Corporate Bonds Government Bonds* Equities Alternative Investments 20% 1H 2009 Corporate Bonds GBP14.0bn 8% 50% AAA AA A Below A 32% 22% *Includes supra nationals and government agencies Source: Lloyd s Chart 2 shows the asset breakdown for the Society of Lloyd s Central Fund. In response to the stabilization of market conditions in the second quarter of 2009, Lloyd s decided to add some high quality corporate bonds within the Central Fund. Consequently, corporate bonds accounted for 27% of the total Central Fund disposition at June 30, up from 16% at December 31, 2008. Lloyd s solvency assets of GBP2.6bn comprise the Central Fund assets, plus a callable layer. The net solvency surplus is Lloyd s solvency assets minus the deficit for those members Lloyd s is supporting from the Central Fund, and remained in excess of GBP2.5bn at the half year stage. Chart 2 Central Fund Assets FY 2008 Central Fund Assets GBP2.1bn 1H 2009 Central Fund Assets GBP2.0bn 4% 2% 2%1% Fixed Income - Government* 6% 64% Fixed Income - Corporate 5% Global Equity Cash 5% 3% 2%1% 4% 4% 54% 16% Hedge Funds Emerging Markets & High Yield Bonds Property Equity Emerging Equity 27% *Includes supra nationals and government agencies Source: Lloyd s 9

LLOYD S UPDATE - EVOLUTION Investment Return The pro forma accounts include a notional investment return on FAL together with the investment return on central assets and syndicate investment return. The split is shown in Chart 3. Total investments at Lloyd s generated a return of GBP708mn or 1.6% in 1H 2009 (1H 2008: GBP346mn or 0.9%). The improvement in the return was primarily due to the stabilization of financial markets that occurred in the second quarter of 2009. The narrowing of yield spreads on corporate debt securities during this period proved particularly beneficial to Lloyd s, given the profile of its investment portfolio. Included in the investment return is the GBP36mn gain from the sale of corporate debt. Chart 3 Investment Return 1,150 3.5 950 3.0 GBPmn 750 550 350 150 2.5 2.0 1.5 1.0 0.5 Investment Return % -50 1H 2007 2H 2007 1H 2008 2H 2008 1H 2009 Investment Return on Society Assets (LH scale)* Notional Return on FAL (LH scale) Syndicate Investment Return (LH scale) Investment Return (RH scale) *1H 2009 includes surplus on subordinated debt repurchase GBP36mn Source: Lloyd s, Aon Benfield Research 0.0 Underwriting Profit As illustrated by Table 3, Lloyd s gross premiums written (GPW) increased by 35% in 1H 2009. The impact of the US dollar s strength against sterling in the period accounted for a significant proportion of this growth. On a constant currency basis, premiums rose by 9%, with 4pp of the increase accounted for by rate increases in catastrophe lines of business and 5pp from growth in both new and established syndicates. Lloyd s stated that growth in premiums was also indicative of increasing demand for Lloyd s security and a flight to quality from both brokers and policyholders wanting to use the Lloyd s platform 8. Lloyd s has seen only patchy improvement in rates during the period, with the strongest increases seen in classes affected by Hurricanes Ike and Gustav in 2008. The Corporation flagged that other areas remained difficult, particularly casualty, and that with balance sheets in the sector rapidly being restored, there will be increased pressure on rates and underwriting profits. The development of the combined ratio is shown in Chart 4. The 1H 2009 accident year combined ratio was 95.5% (95.4%), but this benefitted from a prior year reserve release of 3.9% (6.4%) to give an overall combined ratio of 91.6% (89.0%). Like the majority of the ILVs, Lloyd s emphasized the relatively benign claims experience of the first half of the year. There were three significant losses: Air France, Windstorm Klaus and the Australian bushfires. However, Lloyd s flagged that claims were rising in frequency, particularly in recession-related business lines. 8 Chairman and Chief Executive s Statement, Lloyd s Interim Report, September 24, 2009 10

AON BENFIELD Chart 4 Lloyd s Pro Forma Combined Ratio 110% 90% 84.0% 89.0% 91.3% 91.6% Combined ratio 70% 50% 30% 86.7% 92.9% 87.8% 92.3% 10% -10% FY 2007 1H 2008 FY 2008 1H 2009 Accident year Catastrophes Net prior year development Source: Lloyd s 11

LLOYD S UPDATE - EVOLUTION Listed Integrated Lloyd s Vehicles (ILVs) With a number of the ILVs having raised capital in late 2008 and early 2009, shareholders funds for the group grew 19% year on year. The ILVs premium growth benefited from currency movements in the second half of 2008, and underlying growth as the companies sought to take advantage of an improved, if patchy, rating environment. Pretax profits were adversely affected by the foreign exchange translation of net non-monetary liabilities, but supported by a largely benign claims experience. Balance Sheet Table 4 shows shareholders funds of the listed ILVs. Total shareholders funds for the group increased by 9% in the first six months of 2009, and by 19% over 1H 2008. However, growth varied considerably between the companies. The majority of the group raised equity either at the end of 2008 or beginning of 2009. Omega, Chaucer, Beazley and Hardy, which raised the largest amount of equity relative to total shareholders funds, delivered the highest level of growth. Amlin and Catlin raised smaller amounts. Brit and Novae, which did not make a call to shareholders or placing, both saw a decline in shareholders equity as retained earnings fell, reflecting losses after tax. Table 4 Shareholders Funds GBPmn 31/12/2007 30/6/2008 31/12/2008 30/6/2009 1H 2009 Change Amlin 1,052 1,098 1,216 1,297 7% Beazley 399 377 413 561 36% Brit 849 840 850 811-5% Catlin 1,511 1,505 1,706 1,820 7% Chaucer 282 261 226 302 34% Hardy 85 90 102 142 40% Hiscox 824 818 951 965 1% Novae 270 279 301 280-7% Omega 155 155 196 294 50% Total 5,427 5,422 5,960 6,472 9% Source: Company Data, Aon Benfield Research Investment Return The companies maintained their conservative investment stance, with a high proportion of the portfolio held in cash and other liquid assets. This was reflected in the low level of investment returns during the period. In the first quarter of the year, the investment markets had been volatile and dominated by continued fears of an economic depression. However, in the second quarter, returns benefitted from greater stability in the financial markets. In particular, a number of the companies benefited from tightening spreads on their non-government bonds. Given the more stable environment, a number of the ILVs chose to moderately increase their risk exposure. Amlin, Hiscox and Novae increased their exposure to corporate bonds. Elsewhere however, de-risking continued to be a feature of the results. Beazley increased the allocation of highly liquid and government guaranteed investments. Chaucer significantly de-risked its portfolio, with hedge fund disposals. Catlin benefited from recovery in the value of its diversified asset holdings, while continuing to de-risk by disposing of equity holdings in the first half and issuing redemption notices for USD240mn (one third) of its hedge funds/fund of fund holdings. Novae reduced its exposure to pooled money market funds. Looking ahead, a common theme of the results was the difficulty in generating meaningful investment returns in the current low interest rate environment, particularly when further volatility is likely. 12

AON BENFIELD Table 5 Investment Return 1H 2008 1H 2009 Comment Amlin 0.7% 1.6% Strong returns in 2Q Beazley* 1.7% 2.9% Credit portfolio de-risking completed Brit 0.1% 1.8% Cautious approach maintained Catlin 0.9% 2.9% Defensive investment asset allocation maintained Chaucer 0.2% 2.7% Investment portfolio significantly de-risked Hardy 1.8% 0.9% Conservative asset allocation maintained Hiscox* 1.6% 7.0% Increased exposure to corporate bonds Novae* 4.3% 2.0% Reduced pooled money market funds Omega 1.8% 0.7% Cash and fixed income based portfolio *Annualized Source: Company Data Underwriting Profit Half year statements provided an update on the premium rate environment in 2009. As in the 1Q interim statements, the strongest upturns in rates were seen in catastrophe-exposed business lines. Table 6 summarizes performance for the first six months of 2009. Table 6 Reported Premium Rate Movements Premium Rate Change Comment Amlin 4.9% Average renewal rate change Beazley 5.0% Average renewal rate change Brit 5.2% Total average weighted premium rates Catlin 6.0% Total average weighted premium rates Chaucer 6.0%+ Average renewal rate change Hardy 6.5% Renewal rate change Novae 8.0% Renewal rate change Source: Company Data In line with the wider market trend, rates in catastrophe-exposed business saw the strongest growth, with more patchy improvement elsewhere. Amlin saw strongest growth in its reinsurance business, where average renewal rates grew 7.3%. The company stated that rates for US catastrophe exposures rose by 10.9%, almost reaching the peak levels experienced in 2007. Elsewhere, property and casualty business experienced some signs of improvement, with an average renewal rate increase of 3.5% for the period. Within this, US property insurance achieved average rate increases of 7.0%, and US casualty business saw average rate decreases of 2.9%. Like Amlin, Beazley saw wide variations in pricing across its portfolio, with the strongest growth in hurricane-exposed business. Rates in the reinsurance division increased 10%, while offshore energy rose 35% and US commercial property was up 13%. In contrast, specialty lines saw rates for renewal business fall by 1%, although this represented a slower rate of decline. Brit reported rate increases of 5.2%, where reinsurance rates were helped by 18.8% growth in marine XL and 11.5% increases in property treaty North America. Brit also saw rates rising in its Global Markets and UK business segments. 13

LLOYD S UPDATE - EVOLUTION In line with its peer group, Catlin saw rates in the reinsurance, energy and marine lines increase by 10% and hoped that rates for casualty and other non-catastrophe classes would improve over time. Elsewhere, Chaucer anticipates premium rates to increase by approximately 5.9% for 2009 in syndicate 1084. Hardy stated that in its non-marine property book it had seen US catastrophe rates increase by 10-15%. However, pricing for business areas with little or no catastrophe exposure was patchier. There was some improvement in marine where there is a good record on risk. Hiscox stated that rates remained strong in catastrophe exposed areas, but weaker in non-catastrophe business as underwriters seek diversity and those who have reduced their catastrophe exposures seek to diversify their income. Novae sounded a more cautious note, emphasizing that while rates were firming in property reinsurance, energy and FI, these were all areas where there were actual or perceived market losses. Table 7 Gross Premiums Written GBPmn FY 2007 1H 2008 FY 2008 1H 2009 1H 2009/1H 2008 Change Amlin 1,045 716 1,034 950 33% Beazley 781 407 876 596 46% Brit 1,265 755 1,395 983 30% Catlin 1,680 1,051 1,873 1,489 42% Chaucer 584 404 741 491 22% Hardy 148 97 173 150 54% Hiscox 1,199 639 1,147 906 42% Novae 333 186 349 220 18% Omega 121 94 145 126 34% Total 7,155 4,349 7,732 5,912 36% Source: Company Data, Aon Benfield Research Growth in gross premiums written for the ILVs was 36%; a considerable change from the 8% experienced for 2008 as a whole. Growth rates for the individual companies are given in Table 7. However, a significant proportion of this growth was accounted for by the weakness of sterling in the period, particularly against the US dollar and euro. Even on a constant currency basis, premium growth increased sharply for most of the ILVs. Catlin and Omega, which report in US dollars, reported less dramatic levels of premium growth. Chart 5 shows premium growth on both a reported and constant currency basis where available. 14

AON BENFIELD Chart 5 Growth in Gross Premiums Written Hardy Beazley Hiscox Amlin Brit Chaucer Novae Catlin Omega Source: Company Data 0% 10% 20% 30% 40% 50% 60% % Change GPW growth At constant exchange rates The underlying growth is more reflective of the improved rating environment, especially for catastrophe reinsurance. In addition, a number of the ILVs benefitted from acquisitions. Amlin s acquisition of Anglo French Underwriters, in November 2008, generated GBP20.9mn of premium in the period. Beazley s acquisitions of First State (April 2009) and Momentum Underwriting Management Ltd (September 2008) added USD54mn and GBP23.7mn of premium, respectively. Finally, growth was also generated by the capital raising that took place in late 2008 and early 2009 as the players sought to position themselves to take advantage of improved market conditions and fund organic growth. Table 8 Combined Ratios FY 2007 1H 2008 FY 2008 1H 2009 1H 2009/1H 2008 Change Amlin 63.0% 67.0% 76.0% 73.0% 6.0pp Beazley 90.0% 89.0% 90.0% 90.0% 1.0pp Brit 92.7% 88.8% 99.4% 93.8% 5.0pp Catlin 84.1% 90.9% 95.0% 96.0% 5.1pp Chaucer 82.6% 97.2% 93.9% 91.3% -5.9pp Hardy 80.5% 83.3% 77.2% 87.7% 4.4pp Hiscox 84.4% 79.7% 76.1% 88.3% 8.6pp Novae 91.7% 86.7% 100.4% 112.2% 25.5pp Omega 79.3% 83.7% 101.4% 82.5% -1.2pp Source: Company Data, Aon Benfield Research The majority of the ILVs experienced a relatively benign claims environment in the first half of 2009, with a low frequency of catastrophe losses and large individual risk losses. The most significant catastrophe losses in the period were the Australian bushfires, the Italian earthquake and Windstorm Klaus. Brit and Novae were hit particularly hard by aviation losses. Air France added 1.6% to Brit s combined ratio, while aviation catastrophe losses added 13.3% to Novae s combined ratio. Catlin also noted Air France as a significant loss in the period, in addition to the Australian bushfires, other aviation losses, loss of EutelSat W2M communications satellite and Washington Metro crash. 15

LLOYD S UPDATE - EVOLUTION With the exception of Novae, where increased losses from its credit insurance unit added 8.5% to the combined ratio, the ILVs have not yet experienced any dramatic increase in claims due to the recession. That is not to say that there have not been signs of its impact in some areas. Beazley experienced a significant number of claims on political risks due to the financial crisis, but mostly its claims experience was stable in response to the recession. Brit mentioned that it had received some recession related E&O, D&O and credit loss claims; Hardy had experienced some increased claims in FI. Two companies experienced a fall in their combined ratio in the reporting period. For Omega, this largely reflected an absence of large losses in the period. Chaucer cited a more stable claims environment as the reason behind the 5.9pp fall in its combined ratio. Table 9 Reserve Release (Strengthening) as % of Net Premiums Earned GBPmn 1H 2008 1H 2008 as % of NPE 1H 2009 1H 2009 as % of NPE Amlin 59.9 13.4% 71.9 14.1% Beazley 23.4 7.5% 35.7 10.0% Brit 21.5 3.9% 19.0 2.6% Catlin 36.5 2.9% 26.2 2.0% Chaucer 12.6 4.6% 22.2 7.6% Hardy 4.8 7.9% 10.0 11.5% Hiscox 66.0 13.6% 73.0 12.9% Novae 5.4 4.3% 18.3 12.6% Total 230.1 8.0% 276.3 7.7% Source: Company Data, Aon Benfield Research As in previous periods, combined ratios were also helped by further releases of prior year reserves, although for the majority of companies the levels of releases were below those seen in 1H 2008. At Amlin, reserve releases occurred across a number of lines of business, following a review of the reserving approach to UK commercial claims. Beazley s reserve releases came from marine, reinsurance and specialty lines, where claims reserves have continued to develop well. Chaucer s releases were mainly in energy and specialty. The increased level of releases at Hardy was largely attributable to its non-marine property segment, while Novae benefited from releases from its financial institutions and personal indemnity units. Pre-tax Profits As in the second half of 2008, exchange translation differences continued to be significant in 1H 2009 due to the weakness of sterling. This resulted in a negative impact on pre-tax profits of GBP300mn in 1H 2009 in the foreign exchange translation of net non-monetary liabilities, up from GBP13mn in 1H 2008, with a corresponding negative impact on pre-tax profits 9. This contrasts with a GBP255mn benefit to pre-tax profit for the 2008 full year. 9 The exchange difference on net non-monetary liabilities arises from translation of unearned premium reserves, deferred reinsurance expenditure and deferred acquisition costs at historical rates, whereas all other related balance sheet items are translated at the closing exchange rates. 16

AON BENFIELD Table 10 Pre-tax Profit / Loss GBPmn FY 2007 1H 2008 FY 2008 1H 2009 1H 2009/1H 2008 Change Amlin 445 137 122 177 29% Beazley 139 45 87 20-55% Brit 191 50 89-9 -117% Catlin 272 76-7 161 112% Chaucer 89 4-26 17 336% Hardy 18 9 23 8-11% Hiscox 237 109 105 141 29% Novae 41 16 40-19 -213% Omega 30 12 15 15 24% Total 1,462 459 449 513 12% Source: Company Data, Aon Benfield Research 17

LLOYD S UPDATE - EVOLUTION Appendix 1: Syndicate Capacity Pre-Emptions Table 11 Proposed Syndicate Pre-Emptions for 2010 Syndicate Managing Agent 2009 Capacity GBPmn Pre-emption Proposed 2010 Capacity GBPmn 33 Hiscox Syndicates Ltd 750 33.3% 1,000 218 Equity Syndicate Management Ltd 452 7.5% 486 260 KGM Underwriting Agencies Ltd 72 0.0% 72 308 RJ Kiln & Co Ltd 15 36.4% 20 318 Beaufort Underwriting Agency Ltd 202 11.5% 225 386 QBE Underwriting Ltd 340 7.4% 365 510 RJ Kiln & Co Ltd 630 46.0% 920 557 RJ Kiln & Co Ltd 120 0.0% 120 570 Atrium Underwriters Ltd 125 15.6% 145 609 Atrium Underwriters Ltd 200 37.7% 275 623 Beazley Furlonge Ltd 150 62.3% 243 727 SA Meacock & Company Ltd 74 8.4% 80 779 Jubilee Managing Agency Ltd 30-10.0% 27 807 RJ Kiln & Co Ltd 120 16.2% 140 958 Omega Underwriting Agents Ltd 250 12.0% 280 1176 Chaucer Syndicates Ltd 32 0.5% 32 1200 Heritage Managing Agency Ltd 325 7.5% 350 2010 Cathedral Underwriting Ltd 300 16.7% 350 2121 Argenta Syndicate Management Ltd 130 34.6% 175 2525 Max at Lloyd's Ltd 42 0.0% 42 2526 Max at Lloyd's Ltd 32 0.0% 32 2791 Managing Agency Partners Ltd 404 23.8% 500 3334 Sportscover Underwriting Ltd 20 25.0% 25 4040 HCC Underwriting Agency Ltd 54 0.0% 54 6103 Managing Agency Partners Ltd 40 77.2% 70 6104 Hiscox Syndicates Ltd 43 39.0% 60 Source: Company Data, Aon Benfield Research 18

AON BENFIELD Appendix 2: Lloyd s Capacity Chart 6 Sources of Capacity 1999-2009 GBPbn 18 16 14 12 10 8 6 4 2 0 16.1 17.4 16.0 14.4 15.0 14.8 13.7 11.3 12.2 9.9 10.1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Names (unlimited liability) Individual members (limited liability) UK listed and other corporate Bermudian insurance industry US insurance industry Worldwide insurance industry Source: Lloyd s, Moody s, Aon Benfield Research Chart 7 Stamp 1 Capacity as at 1 January 2009 18 16 14.4 15.0 13.7 14.8 16.1 16.0 17.4 14 12 10.9 10.2 10.0 10.3 10.2 9.9 10.1 11.3 12.2 GBPbn 10 8 6 4 2 0 8.9 1993 1995 1997 1999 2001 2003 2005 2007 2009 Stamp 1 capacity 5 year CAGR: 6.1%, 10 year CAGR: 6.2% Source: Lloyd s, Moody s, Aon Benfield Research 19

LLOYD S UPDATE - EVOLUTION Chart 8 Syndicates, Managing Agents and Average Capacity as at 1 January 2009 GBPmn 250 200 150 100 50 0 0 1989 1993 1997 2001 2005 2009 Average syndicate capacity (LH scale) Number of syndicates (RH scale) Number of managing agents (RH scale) 450 400 350 300 250 200 150 100 50 Number of syndicates Source: Lloyd s, Moody s, Aon Benfield Research Chart 9 2009 Capacity of Ten Largest Syndicates (Managing Agent) 2987 (Brit) 2623 (Beazley Furlonge) 2008 2009 510 (R J Kiln) 1084 (Chaucer) 1414 (Ascot Underwriting) 2999 (QBE) 4472 (Liberty) 33 (Hiscox) 2001 (Amlin) 2003 (Catlin) Source: Company Data, Moody s, Aon Benfield Research 0 GBPmn 200 400 600 800 1,000 1,200 20

AON BENFIELD Chart 10 2005-2009 Listed ILVs Aligned Capacity Omega Hardy Novae 2005 2006 2007 2008 2009 Brit Chaucer Hiscox Beazley Amlin Catlin 0 GBPmn 200 400 600 800 1,000 1,200 1,400 Source: Company Data, Aon Benfield Research Chart 11 2005-2009 Listed ILVs % of Capacity Owned % owned capacity 100 90 80 70 60 50 40 30 20 10 0 Amlin Beazley Brit Catlin Chaucer Hardy Hiscox Novae Omega 2005 2006 2007 2008 2009 Source: Company Data, Aon Benfield Research 21

LLOYD S UPDATE - EVOLUTION Appendix 3: Lloyd s Syndicate Assessments Table 12 Standard & Poor s Current Lloyd s Syndicate Assessments (LSAs) Syndicate Number Managing Agent LSA Grade 260 KGM Underwriting Agencies Limited 1pi 308 R J Kiln and Co. Limited 2pi 318 Beaufort Underwriting Agency Limited 2pi 382 Hardy (Underwriting Agencies) Limited 3pi 386 QBE Underwriting Limited 5/Stable 435 Faraday Underwriting Limited 3pi 457 Munich Re Underwriting Limited 3pi 510 R J Kiln and Co. Limited 4pi 557 R J Kiln and Co. Limited 3pi 727 S A Meacock & Company Limited 2pi 779 Jubilee Managing Agency Limited 2pi 780 Advent Underwriting Limited 2+/Stable 807 R J Kiln and Co. Limited 3pi 958 Omega Underwriting Agents Limited 3pi 1084 Chaucer Syndicates Limited 3/Negative 1176 Chaucer Syndicates Limited 3pi 1200 Argo Managing Agency Limited 3pi 1206 Sagicor at Lloyd's Limited 1pi 1218 Newline Underwriting Management Limited 2pi 1225 AEGIS Managing Agency Limited 3pi 1231 Jubilee Managing Agency Limited 2pi 1301 Chaucer Syndicates Limited 2pi 1414 Ascot Underwriting Limited 3pi 2001 Amlin Underwriting Limited 4/Stable 2003 Catlin Underwriting Agencies Limited 4-/Positive 2007 Novae Syndicates Limited 3-/Stable 2010 Cathedral Underwriting Limited 3pi 2468 Marketform Managing Agency Limited 2pi 2623 Beazley Furlonge Limited 4/Stable 2791 Managing Agency Partners Limited 4pi 2987 Brit Syndicates Limited 3pi 2999 QBE Underwriting Limited 4-/Stable 3000 Markel Syndicate Management Limited 3pi 3334 Sportscover Underwriting Ltd 1pi 4040 HCC Underwriting Agency Limited 2pi 4444 Canopius Managing Agents Limited 3-/Stable 5000 Travelers Syndicate Management Limited 3-/Stable 5151 Montpelier Underwriting Agencies Limited 3-/Stable pi = Syndicate is assessed on a public information basis Rating scale: 1 = very high dependency; 5 = very low dependency Source: Standard & Poor s 22

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