Bigger Is Better for Lloyd’s Syndicates with Active Cycle Mgmt: S&P

By | June 10, 2016

Benign catastrophe losses, combined with lower and less frequent casualty lines claims, helped Lloyd’s syndicates deliver another strong set of results in 2015, reporting an average combined ratio of 90 percent, according to a report published by Standard & Poor’s.

However, the industry is under growing pressure from strong competition, excess capacity, and softening rates – factors that have taken their toll on some syndicates, S&P indicated in its report titled “Bigger Lloyd’s Syndicates that Pursued Active Cycle Management Have Fared Best in Soft Market Conditions.”

Syndicates with the strongest underwriting performance tended to be bigger than underperformers and wrote a lot of catastrophe cover, thereby benefiting from lower, less frequent claims in 2015, said S&P. On the other hand, the worst performers were generally newer, smaller or had higher levels of liability exposures.

Best Performers

In an analysis of 94 syndicates that operated in 2014 and 2015, S&P found that syndicates with capacity of over £500 million ($724.3 million) all reported a combined ratio below 100 percent,* with an average combined ratio was 88 percent. (See S&P’s table below for the 10 top performing syndicates).

Of the syndicates analyzed by S&P, 29 (31 percent of S&P sample) disclosed that their combined ratios rose by more than 5 percentage points in 2015, compared with 2014.

“Many of the more successful syndicates have acted defensively by reducing their net catastrophic risk appetites in anticipation of possible lower returns,” said S&P, noting they have scaled back their lines of business and amount written, reverting to their core books.

Top performers were “mostly cautious and proactive in terms of cycle management, with good underwriting discipline,” said S&P, emphasizing that careful risk selection matters in a soft market.

Worst Performers

The syndicates that reported the highest combined ratios – or the worst performers – were generally “smaller, newer or had higher-than-average liability line-of-business exposures,” the S&P report explained. (See S&P’s table below for the 10 worst-performing syndicates).

New syndicates “are typically burdened by high start-up expenses when they enter the Lloyd’s market,” the report said, adding that three of the bottom 10 underperformers were new syndicates.

“Market challenges also caused rates to plummet further,” S&P said. “In the energy market, the slump in oil prices led to a scaling back in demand for insurance. Meanwhile the marine, aviation and property markets are still awash with sufficient capacity to defy loss experience.”

“The number of syndicates reporting combined ratios above 100 percent rose to 22 (23 percent) from 17 (18 percent) in 2014. Of these, nine syndicates reported a combined ratio of over 115 percent (defined as a disastrous year) in 2015,” the report noted. “The number of syndicates reporting a disastrous year rose by two from 2014.”

Syndicates reporting underwriting losses represented only about 12 percent of the Lloyd’s market’s overall 2015 allocated capacity of £26.1 billion ($37.8 billion)

Enhanced Central Oversight

Although the limited impact of catastrophes has generally helped the Lloyd’s market, S&P suggested that “enhanced central oversight has also aided syndicates in avoiding disastrous years over the past decade.”

* Lower combined ratios indicate better profitability. A combined ratio of greater than 100 percent signifies an underwriting loss.

10 Worst-Performing Syndicates, By Combined Ratio

Syndicate number Managing agent 2015 combined ratio (%) Net loss (mil.) Notes
Icat 6123 Asta Managing Agency Ltd. 384 £1.8 Commenced operations as a special-purpose syndicate (SPS) that reinsures Syndicate 4242 in May 2015. High combined ratio reflects that the syndicate recognized start–up expenses immediately; wrote less than planned; and purchased more reinsurance than needed.
AmTrust 2526 (formerly AG Dore) AmTrust at Lloyd’s Ltd. 258 £47.2 The professional indemnity, directors and officers, and medical malpractice lines of business all took a significant hit on the 2013 and prior years of account, affecting the syndicate’s overall results. Net loss was double the previous year. The syndicate made an £8.4 million cash call to cover further liabilities (the 2014 cash call was £21.3 million).
Standard 1884 Charles Taylor Managing Agency Ltd. 216 £9.6 Commenced operations in April 2015. Results were slightly worse than expected due to lower-than-planned premium in the first year of operation offset, to some extent, by lower expenses and reinsurance costs.
Sportscover 3334 Hamilton Underwriting Ltd. 148 £10.7 Sold by previous owner Wild Goose Holdings Pty Ltd. on April 1, 2015. The syndicate decided to put the 2012 and 2013 years of account into run-off–this represents most of its business. However, its loss exposure and expenses continued. As a result, the combined ratio for 2015 was very high. The problems arose in the travel binder book. There were two reasons why the board chose to put two years of account into run off: the continued uncertainty regarding collecting refunds on Australian taxes (which are not recognized as an asset in the balance sheet) and volatility and deterioration in the reserves held on Dec. 31, 2014.
DTW 1991 R&Q Managing Agency Ltd. 148 £18.1 The syndicate’s premium levels fell, reflecting current market conditions. Results were also eroded by costs related to building a new business platform and by reinsurance expenses. In addition, the syndicate further strengthened its reserves for the casualty account in the 2013 year of account.
Marketform 2468 Marketform Managing Agency Ltd. 138 £60.9 The syndicate’s main problem account is third-party liability, and it has also seen adverse reserve movements on all underwriting years, apart from 2007. The 2007 year of account remains open because the ultimate cost of malpractice claims against Italian public hospitals remains uncertain. The syndicate ceased underwriting this business from the 2008 year of account. Cumulative loss on the 2007 year of account was over £200 million. That said, reduced uncertainty enabled the syndicate to release some of the reserves on the 2007 and prior years of account, resulting in an operating profit of £8.3 million for the financial year. The syndicate sold its U.K. medical malpractice book to Beazley in March 2016 and put its general liability account into run-off.
Axis 1686 Asta Managing Agency Ltd. 133 $32.7 Most of the 2015 losses stem from the reinsurance segment. Among the syndicates that publicly disclosed their whole-account rate changes, it had the highest drop, at 7.6% (see chart 2).
ANV 0779 ANV Syndicates Ltd. 124 £3.6 The 2015 financial year saw aggressive pricing from other life syndicates, along with an increased appetite for niche life business in overseas markets. Losses mainly stem from the resulting dip in premium.
Chubb 1882 Chubb Managing Agent Ltd. 120 £16.1 Most of the 2015 losses stem from third-party liability and reinsurance lines.
Beazley 6050 Beazley Furlonge Ltd. 114 $0.9 Established in 2015 as a SPS. It writes whole-account reinsurance on a quota-share basis for Syndicates 2623 and 0623.

10 Top-Performing Syndicates, By Combined Ratio

Syndicate number Managing agent 2015 combined ratio (%) Net profit (mil.) Notes
Hiscox Syndicates Ltd. Asta Managing Agency Ltd. 25 £19.1 Established in 2008 as a special-purpose syndicate (SPS) that provides quota-share reinsurance to Syndicate 0033’s excess-of-loss property catastrophe reinsurance account.
MAP 6103 Managing Agency Partners Ltd. 30.7 £3.7 Quota-share reinsurer to Syndicate 2791 that sharply reduced its gross premium written in 2015.
Nephila 2357 Asta Managing Agency Ltd. 31 £16.7 Property catastrophe reinsurer whose results benefitted from the benign catastrophe year.
Chaucer 1176 Chaucer Syndicates Ltd. 32.2 £17.1 Syndicate writing nuclear risk, which predominantly comprises cover for physical damage loss to civil nuclear power stations, as well as nuclear liability. Despite its combined ratio deteriorating by 10.5 points, compared with 2014, it is still one of the best performers.
TMK 557 Tokio Marine Kiln Syndicates Ltd. 39 £10 Despite covering three notable events, the syndicate forecasts that these will produce limited losses because claims to the syndicate were low. The events were the Tianjin explosions in China, which produced a very limited loss; the Southern India floods, which was a severe event for the area concerned but did not produce a large loss for the syndicate; and the storms and flooding that affected the U.K. around the end of 2015. The cost of the U.K. losses is still being assessed, but they are not expected to have a significant impact upon the reinsurance account.
Novae 2007 Novae Syndicates Ltd. 52.4 £74.7 Property catastrophe reinsurer whose results benefitted from the benign catastrophe year.
Cathedral 2010 Cathedral Underwriting Ltd. 61.1 £54.1 Once again, Syndicate 2010 has mostly steered clear of major losses in 2015. In 2016, the active underwriter plans to step down. The chairman will also step down in the middle of the year.
MAP 2791 Managing Agency Partners Ltd. 68.7 £42.4 Syndicate went into defense mode. It is down to its core book, and wrote gross volumes of 22.5% less than in 2012. It also reduced its net catastrophe risk appetite. Because of the absence of any meaningful catastrophic activity, 2015 proved as profitable as 2012.
Beazley 6107 Beazley Furlonge Ltd. 70 $7.8 Established in 2010 as an SPS. Still provides quota-share reinsurance to Syndicates 0623 and 2623.
Faraday 435 Faraday Underwriting Ltd. 70.5 £54.5 The 2015 property results benefited from a lack of major loss activity during the calendar year. Favorable developments also enabled it to release some prior-year reserves. The syndicate’s most notable catastrophe event occurred in December, when the U.K. experienced a series of storms. Reserves have been established to cover the resulting losses.

Source: Standard & Poor’s

Topics Catastrophe Profit Loss Excess Surplus Underwriting Reinsurance Property Lloyd's Uk

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