Guy Carpenter finds Lloyd’s market at its ‘healthiest in 300 years’

September 24, 2007

Guy Carpenter & Co., Marsh’s reinsurance broker and risk management division, has released “The Lloyd’s Market in 2007,” its fifth annual review of Lloyd’s financial and operational performance.

The finding are exceptionally good — overall Lloyd’s is probably in the healthiest position it has been in for the last 300 years. It reported record results for 2006, with net pre tax profits of £3.662 billion ($7.417 billion*), gross premiums written of £16.414 billion ($33.25 billion*), and a combined ratio of 83.1 percent. Underwriting capacity for 2007 is at an all-time high of £16.1 billion ($32.61 billion).

The report indicated that the strong performance was chiefly “driven by rising rates on U.S. catastrophe-exposed business, favorable claims experience and improved returns on investment. It also stressed that Lloyd’s is “in an increasingly strong competitive position, as recognized in recent rating upgrades to ‘A+’ from both Standard & Poor’s and Fitch.”

Guy Carpenter’s CEO Nick Frankland pointed out: “In 2006, leading players demonstrated once again that it is possible to achieve outstanding returns on equity at Lloyd’s, which is crucial to the continuing strength of the market. In addition, the significant strengthening of the balance sheet over the last five years provides a good platform for the future.”

The author of the report, Senior Vice President Mike Van Slooten, added: “Substantial mitigation of legacy issues has resulted in a reappraisal of the market’s competitive advantages, with the result that new investors are being attracted to the platform. Lloyd’s focused efforts to reduce the cost of mutuality, widen access to the market and improve service standards can only be to the benefit of policyholders.”

Legacy issues

The “legacy issue” Lloyd’s managed to get rid of were the liabilities it has carried since 1996 when it set up Equitas as a run-off vehicle for its pre-1992 claims, principally asbestos and environmental. In March Lloyd’s completed the first phase of the transfer of its Equitas liabilities to National Indemnity Company (NIC), a member of the Berkshire Hathaway group of insurance companies.

The arrangement with NIC initially reinsures all of Equitas’ liabilities, and provides a further $5.7 billion of reinsurance cover to Equitas. In addition NIC acquired Equitas Management Services Limited and will continue to conduct the run-off of its liabilities. The transaction received the approval of the UK’s Financial Services Authority (FSA) and the Equitas Trustees.

The record underwriting capacity (up 8.9 percent compared to 2006) was bolstered by six new start-ups, who contributed a further £217 million ($440 million). Guy Carpenter’s study indicated that, given the excellent result, “investor interest remains strong, driven by Lloyd’s wide access to business and strong ratings.”

The report also noted:

1) “Reinsurance recoverables have reduced by a third, with no collection issues reported on the 2005 hurricanes. Net resources (defined as total assets less policyholder and other liabilities) have increased by 21 percent to £13.3 billion [$27 billion],” bolstering Lloyd’s balance sheet strength.

2) The issuance of £500 million [$1.014 billion] of debt in June 2007 “has allowed syndicate loans to be repaid and discontinued and will facilitate an expected halving of the Central Fund contribution rate for 2008.” As a result, Lloyd’s has reduced the amounts the Syndicates are required to contribute to the Central Fund. The ending of these assessments makes doing business at Lloyd’s less expensive and more competitive.

3) “Business process reform has significantly improved controls over placement and is continuing to improve the control environment for claims and accounting and settlement.”

Changes at Lloyd’s

In recent years, Lloyd’s brokers and underwriters have experienced vast changes in how they conduct business. Chairman Lord Peter Levene, who just announced that he will seek a third term in the post, former CEO Nick Prettejohn and his successor, Richard Ward, are dedicated to seeing that the mountains of paper Lloyd’s produces, eventually joins the sailing ships Lloyd’s used to insure in the pages of history.

After a few false starts — notably the Kinnect fiasco — they’re now on the way to achieving that goal. Xchanging and RI3K, who just introduced a new e-message system, have rolled out complementary platforms and software that are broker/underwriter friendly, use ACORD standards, and enable more and more of Lloyd’s back office work to be processed electronically. The days of the slipcase appear to be numbered.

Two factors have made the changeover a first priority at Lloyd’s. The FSA has said in no uncertain terms that the policies based on “deal now, details later” are no longer acceptable. London got the message. In January the FSA acknowledged that “90 percent of contracts in the subscription market [Lloyd’s] and 88 percent in the non-subscription market are now achieving contract certainty.”

The second factor is cost. Lloyd’s is more expensive than places like Bermuda, and, unless it brings those costs down, it stands to lose business. Companies like Hiscox, Catlin and Kiln moved their respective domiciles to Bermuda because it’s quicker, easier and cheaper to do business. Instituting electronic processing will cut the costs of doing business in London, and make the entire market, especially Lloyd’s, more competitive.

Market access, cats and the cycle

Guy Carpenter’s report also listed:

Market Access: Lloyd’s continues to focus on enhancing local distribution platforms in emerging markets and streamlining the broker accreditation and cover-holder approval process.

Catastrophe Exposure: Lloyd’s reports that, based on its Realistic Disaster Scenario output, U.S. windstorm exposure has been reduced by one third since 2005, and

Cycle Management: The Franchise Performance Directorate is expected to be successful in limiting the downside of underwriting in softening market conditions.

Concerning that last point, Frankland observed: “The primary threat to Lloyd’s remains the possibility of a marked downturn in the insurance cycle. In the absence of a major loss, we expect underwriting conditions to become difficult in most classes as we move into 2008, presenting a significant challenge to the Lloyd’s franchise model.

We are already seeing leading players returning capital to shareholders and proposing sizable capacity cuts for next year, but it remains to be seen whether the same degree of discipline will extend across the broader market. There is no room for complacency if Lloyd’s is to emerge in a position to fully capitalize on the next upswing.”

At this point complacency doesn’t appear to be a significant concern. Lloyd’s leaders have their priorities firmly in mind and the reins of control, in the form of the Franchise Board, firmly in their hands.

A full copy of the report is available for download at: Printed copies can be obtained by contacting Guy Carpenter at:

Editor’s Note: * The recent strength of the pound, currently worth more than $2.00, has somewhat inflated the dollar equivalent figures since they were first calculated.

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