lloyd’s market briefing march 2004. 2 disclaimer the information contained in this presentation is...
TRANSCRIPT
Lloyd’s Market Briefing
March 2004
2
DisclaimerThe information contained in this presentation is being provided on a confidential basis and should not be made available to the general public, the media or any third party without the express prior written consent of Lloyd’s. This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
The content of this presentation does not represent a prospectus or invitation in connection with any solicitation of capital. Nor does it constitute an offer to sell securities or insurance, a solicitation or an offer to buy securities or insurance, or a distribution of securities in the United States or to a U.S. person, or in any other jurisdiction where it is contrary to local law. Such persons should inform themselves about and observe any applicable legal requirement.
It is the responsibility of any person publishing or communicating the contents of this document or communication, or any part thereof, to ensure compliance with all applicable legal and regulatory requirements.
Lloyd’s has provided the material contained in this presentation for general information purposes only. Lloyd’s accepts no responsibility and shall not be liable for any loss which may arise from reliance upon the information provided.
This presentation includes forward-looking statements. These statements reflect Lloyd's current expectations and projections about future events and financial performance, both with respect to Lloyd's in particular and the insurance, reinsurance and financial and services sectors in general. All forward-looking statements address matters that involve risks, uncertainties and assumptions. Based on a number of factors, actual results could vary materially from those anticipated by the forward-looking statements. These factors include, but are not limited to, the following:
(a) rates and terms and conditions of policies may vary from those anticipated;(b) actual claims paid and the timing of such payments may vary from estimated claims and estimated timing of payments, taking into account the
preliminary nature of such estimates;(c) claims and loss activity may be greater or more severe than anticipated, including as a result of natural or man-made catastrophic events;(d) competition on the basis of pricing, capacity, coverage terms or other factors may be greater than anticipated, or Lloyd's products could
become uncompetitive in light of changes in market conditions;(e) reinsurance placed with third parties may not be fully recoverable, or may not be paid on a timely basis, or such reinsurance from creditworthy
reinsurers may not be available or may not be available on commercially attractive terms;(f) developments in the financial and capital markets may adversely affect investments of capital and premiums, or the availability of equity capital
or debt;(g) changes in legal, regulatory, tax or accounting environments in relevant countries may adversely affect (i) Lloyd's ability to offer its products or
attract capital, (ii) claims experience, (iii) financial return, or (iv) competitiveness;(h) mergers, consolidations, divestitures and other transactions by third parties could adversely affect Lloyd's, including but not limited to changes
in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;] or(i) economic contraction or other changes in general economic conditions could adversely affect (i) the market for insurance generally or for
certain products offered by Lloyd's, or (ii) other factors relevant to Lloyd's performance.
The foregoing list of factors is not comprehensive, and should be read in conjunction with other cautionary statements that are included herein or elsewhere. Lloyd's undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
3
Agenda
Market profile in 2004
Financial results
Building capital strength
Lloyd’s market ratings
Franchise performance & risk management
Appendix - Equitas
4
Market profile in 2004
6
The Lloyd’s market in 2004
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
FRANCHISEES
45 Managing Agents
66 Syndicates
$26.78bn Capacity
AM Best: A-S&P: A
CLIENTS
BUSINESS FLOW
Reinsureds
Personal
Commercial
165Lloyd’sBrokers
Service Companies
F R A N C H I S O R
4Members’
Agents
MEMBERS
53 Corporate
Groups
2,048 Individuals(Unlimited
Liability Members)
637Conversions
CAPITAL PROVISION
7
Managing Agent
Structure of a Lloyd’s business
Corporate Member 1
NamesCorporate Member 2
Syndicate
Management
Underwriting
Capital Provision
Market profile in 2004
8
Profile of capacity provision: 1993-2004
Source: Lloyd’s, N.B. capacity figures shown at beginning of each yearBased on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
$bn
0
5
10
15
20
25
30
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Cap
acit
y
Other insurance industry
US insurance industry
Bermudian insurance industry
UK listed and other corporate
Names conversion capital
Names (unlimited)
15%
14%
42%
6%
12%
11%15.9
18.219.5
17.9 18.5 17.718.2 18.1
20.2
21.8
25.826.78
9
Profile of capacity remains largely unchanged
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
(Year End) (Jan 2004)
Mid year pre-emption
$bn
0
5
10
15
20
25
30
2003 2004
Cap
acit
y
Other corporate capital
UK non-listed
UK listed
Trade investors
Conversion capital
Names (unlimited)
2004
5%
7%
30%
40%
6%
12%
26.7826.60
10
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
2003
2004
$m
Major trade investors continue to support the Lloyd’s market
Capacity provided by owned corporate members
(No 1 Stamp)
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
11
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
2003
2004
$m
Lloyd’s listed companies successfully grow their businesses
Capacity provided by owned corporate members
(No 1 Stamp)
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
12
Business mix: 2004 year of account
Source: Lloyd’s, Syndicate business plans
Geographical source
Class of business
Market profile in 2004
48%52%
Direct
Reinsurance
29%
11%
9%
8%
7%
36%
Property
Casualty
Marine
Aviation
Motor
Energy
27%
12%
8%
5% 3%
45%
North America
UK
Europe
Asia Pacific
Latin America
Africa/Middle East
Financial results
14
2002 results summary
$1,493m annually accounted profit
Combined ratio of 98.6%
Balance sheet resources +85%
Central Assets +55% (Central Fund +70%)
WTC estimates remain stable:
$8.7bn gross and $3.3bn net
89% of reinsurance asset ‘A-’ or above
US funding requirements met in full
Financial results
Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003
15
* Source: Reinsurance Association of America 2002 Figures** Source: Insurance Information Institute 2002 Figures*** Source: Credit Suisse First Boston 2002 Figures
Lloyd’s vs industry 2002 combined ratios
Financial results
105.1%
107.2%
121.3%
98.6%
0 10 20 30 40 50 60 70 80 90 100 110 120 130
Europeanreinsurers***
US P/C**
US reinsurers*
Lloyd's
%
16
0 10 20 30 40 50 60 70 80 90 100 110 120 130
Amlin
Atrium
Beazley
Brit
Chaucer
Cox
Goshawk
Hardy
Hiscox
Kiln
SVB
Wellington
H1 2003
H1 2002
%
Performance of the Lloyd’s listed companies*(combined ratio – 6 months interims 2003)
Source: 6 month interim results by companies* as at 30 June 2003
Financial results
17
0 10 20 30 40 50 60 70 80 90 100 110 120 130
Kiln
Hardy
Beazley
Amlin
Cox
Brit
Chaucer
Atrium
Wellington
Hiscox
US Reinsurers**
European Reinsurers*
SVB
US P/C***
Goshawk
%
…standing favourable comparison with rest of industry
* Source: Credit Suisse First Boston 2003 Figures** Source: Reinsurance Association of America 2003 Figures*** Source: Insurance Information Institute 2003 Figures
Combined ratio – H1 2003
Source: Lloyd’s analysis of 6 month interim results announced by companies
Financial results
18
Market capitalisation: Lloyd’s vs peersMarket capitalisation (10/09/01 vs 19/02/04)
Source: Reuters, as at 19 February 2004
Financial results
-60
-40
-20
0
20
40
60
80
100
120
140
Lloyd
's lis
ted
ACE
Berks
hire
Hatha
way
Chubb
ZFS
St Pau
lAXA XL
AIG
Swiss R
e
Allianz
Mun
ich R
e
% g
row
th
%
Building capital strength
20 Source: Lloyd’s analysis, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Net resources vs peers2002 net resources*
* as at 31 December 2002 / net resources = total assets – total liabilities
Lloyd’s net resources $15.7bn at H1 2003
Update
Building capital strength
0
2
4
6
8
10
12
14
16
18
Mun
ich R
e
Lloyd
's
Swiss R
e
Chubb
XL Cap
ital
Liberty
ACE
St Pau
l
Hanno
ver R
e
Evere
st Re
Partn
er R
e
Trans
atla
ntic
Re
Conve
rium
Mar
kel
$bn
21
Net resources vs peers
Source: Lloyd’s analysis
2002 net resources % growth (YoY)
Lloyd’s net resources grew 115% as at H1 2003 since
12/31/01Update
Building capital strength
-40
0
40
80
120
Lloy
d's
Evere
st Re
XL Cap
ital
Partne
r Re
St Pau
l
Conve
rium
Trans
atlan
tic R
e
Libe
rty
Mar
kel
ACE
Chubb
Hanno
ver R
e
Swiss R
e
Mun
ich R
e
%
22
Growth in key components of chain of security
Building capital strength
Premiums Trust Funds(PTFs)
Premium Trust Funds(PTFs)
$30,749m(+28%)
Funds at Lloyd’s(set by RBC)
(FAL)
Funds at Lloyd’s (set by RBC)
(FAL)
$16,053m(+16%)
Other Personal Wealth(OPW)
$503m(-14%)
Central Fund Other central assets
Central Fund + Other central assets
$853m $155m
$1,008m (+55%)
Corporate Members Individual MembersEnd 2002
(% change from 2001)
Several assets
Mutual assets
Key:
Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003
23
Lloyd’s risk based capital (RBC) model
The Lloyd’s RBC model was introduced in 1995 for Corporate Members
The model is used to calculate the capital (Funds at Lloyd’s / FAL) required to underwrite a planned book of business, expressed as a percentage of authorised premium
Lloyd’s applies a minimum requirement after the RBC calculation of 40%
The underlying concept of the model is to equalise the potential risk to the Central Fund irrespective of the portfolio underwritten
Building capital strength
24
Risk based capital concept
time
MOTOR
Central Fund
RBC + premium
loss
time
loss Central Fund
CAT X/L
RBC + premium
Building capital strength
25
Risk based capital: summary
Security
Promote efficient distribution of capital in relation to risk
Aim to minimise loss to Central Fund for given level of market capital
Consistent with optimising policyholder security
Note that capital distribution optimal for risk, not profit
Competitiveness
Ensure policyholders not disadvantaged by paying extra premiums to service unnecessary levels of capital
Reduce possibility of each member being required to mutualise the losses of others
Best practice
To ensure Lloyd’s capital-setting process is in line with industry “best practice” in regulating capital to risk
Equity between members
To support the equitable allocation of capital between capital providers
Building capital strength
26
Realistic disaster scenarios
Realistic disaster scenarios (RDS) deployed since 1995 to manage catastrophe exposure at a syndicate and market level
Generic scenarios include:
USA Windstorm ($50bn/Florida-Gulf of Mexico)
Aviation collision (two aircraft over major US city/$3bn liability plus hull & products)
Specific event-based scenarios with theoretical return periods include:
Florida Windstorm / Los Angeles Quake ($60bn/1-in-250-year return period)
Japanese Earthquake ($19bn/Zone 5 epicentre of magnitude MMI IX plus adjacent zones)
Further enhancements underway:
Introduction of terrorism RDS for 2003
Inputs to capital allocation model (risk based capital)
Franchise guidelines
Source: Lloyd’s
Building capital strength
27
Market ratings
29
Lloyd’s market ratings Lloyd’s is interactively assessed by the leading two insurance
rating agencies:
Lloyd’s is rated as a market:
All Lloyd’s policies are ultimately backed by the common security of the Central Fund
The Lloyd’s market ratings apply to all business underwritten by all 66 syndicates
AM BestA-
‘Excellent’ Affirmed 17/07/03
Stable outlook
Standard & Poor’sA
‘Strong’ Affirmed 12/02/03
Source: AM Best, Standard & Poor’s
Lloyd’s market ratings
30
Shift in S&P ratings of the world's largest reinsurers since September 11th
Source: Standard & Poor’s
Lloyd’s market ratings
0
1
2
3
4
5
6
7
8
Berks
hire
Hatha
way
Lloyd
's
XL Cap
ital
Conve
rium
Swiss R
e
Hanno
ver R
e
Allianz
Emplo
yers
Re
Mun
ich R
e
SCORGer
ling
Global
Re
S&P notches downgraded
Unchanged since Sept 2001 Downgraded since June 02 Rating withdrawn since June 02
31
Future rating prospects
Franchise Performance team takes a more active role in managing performance at Lloyd’s, particularly into next down cycle
Continued strong support from capital providers
Substantially improved operating performance from 2002
Continuation of ‘hard market’ conditions through 2003-2004
Maintenance of strong niche business position in global insurance and reinsurance
Reduction in exposure to reinsurance receivables, with overall credit quality of asset maintained
No material deterioration in Equitas solvency
Resolution of the Central Fund insurance dispute, with no material impact on Central Fund
Lloyd’s market ratings
Source: Lloyd’s
32
Syndicate-level measurements
The rating agencies apply a range of rankings and measures at a syndicate-level, none of which are endorsed by Lloyd’s
In general, Lloyd’s is not supportive of rating individual syndicates:
Security/solvency is at a member not syndicate level
All members are capitalised by Lloyd’s Risk Based Capital model - independently verified as one of the most technically sophisticated models in the industry
All policies underwritten by all syndicates are backed by the Lloyd’s Chain of Security which is partially mutualised by the Central Fund
Lloyd’s believes that brokers remain best placed to assess client needs based on a wide range of factors placing confidence in the strength of the common security underpinning all Lloyd’s policies on which the Market ratings are predicated
Lloyd’s market ratings
33
Franchise performance & risk management
35
Focus on franchise performance/risk management
Lloyd’s change programme
Franchise performance & risk management
Drivers of change Lloyd’s change programme
initiative
Unacceptably poor performance between 1997 and 2001
Huge disparity between the best performing and worst performing businesses (syndicates)
New corporate governance structure to promote more commercial, coordinated approach
Need to provide a competitive trading platform
Business process improvements seek to address inefficient and costly practices
Premium levies for Central Fund eliminated for 2004
Franchise performance controls and RBC model aim tominimise ‘costs of mutuality’ in medium/long term
Complex financial reporting and accounting, lack of transparency; antiquated concept of unlimited liability
Transition to full annual accounting from 1 January 2005
Commitment from HM Treasury to change tax treatment to allow unlimited liability members to convert
Increased policyholder / cedant concern with financial security
Target market rating initiative to determine target IFS ratings and focus on requirements to achieve them
Source: Lloyd’s
36
Lloyd’s Franchise
A new franchise structure with the “centre” taking a more active commercial role
The Corporation of Lloyd’s has become the “franchisor”, the managing agencies, “the franchisees”
A new underwriting byelaw sets out the relationship between “franchisor” and franchisees” including a syndicate business planning process and franchise guidelines
The challenge is now to balance greater scrutiny whilst maintaining the opportunistic and entrepreneurial culture
The ultimate sanction is to remove a franchisee from the franchise
Source: Lloyd’s
Franchise performance & risk management
37
Franchise implementationKey milestones to date
Key franchise performance and risk management initiatives implemented
New syndicate business planning regime – structured commercial approach
Franchise guidelines - control / manage underwriting exposures
Syndicate risk assessment - provides focus for central risk management effort
Performance benchmarking – identify under performance at the earliest opportunity
Key strategic initiatives well advanced
New underwriting byelaw to provide a clear and transparent relationship between the Franchisor and Franchisees
Comprehensive review of Lloyd’s capital structure commenced
Benchmark profitability measures being established by line of business
On target to achieve conversion to annual accounting 1/1/2005 through changes in EU legislation
Franchise performance & risk management
Source: Lloyd’s
38
Franchise performance: primary areas of focus
Quarterly internal review of agents by Franchisor executive
Efforts concentrated on agents with underwriting and capital issues
RDS process reviewed for 2003 and 2004
Review of pre-emption application process
Review of new syndicates seeking admission to the market
QQS policy reviewed
Source: Lloyd’s
Franchise performance & risk management
39
Qualifying quota shares (QQS)
Maximum level of QQS set at 10% for 2004
QQS to be used where exceptional underwriting prospects exist – not to maximise capacity
No longer to be on all business written by the syndicate
Terms should reflect underlying profitability of the business
Applications require specific approval of FPD – an approved business plan stipulating intent to use QQS does not constitute approval of the QQS
Franchise performance & risk management
Source: Lloyd’s
40
Business planning process
All syndicates are required to submit business plans for the following year in September / October
All business plans reviewed in depth
Strategic plan
Forecast financial performance
Lines of business
Outwards reinsurance
Catastrophe exposure
Franchise guidelines
Close oversight of underwriting – but careful not to stifle opportunistic/entrepreneurial culture
Franchise performance & risk management
Source: Lloyd’s
41
Franchise guidelines
Gross underwriting profit on each line of business
Catastrophe exposure management using risk management modelling, minimum return periods and maximum gross and net exposures to a single RDS event (gross 75%, net 20% of syndicate capacity)
Approved reinsurer selection process
Maximum gross line size - 10% of capacity
Minimum reinsurance retention - 10% of gross line
Restrictions on multi-year contracts
Source: Lloyd’s
Franchise performance & risk management
42
Performance benchmarking
Franchise performance & risk management
Actual syndicate development
0%
20%
40%
60%
80%
100%
120%
1 2 3 4 5 6 7 8 9 10 11 12 13Quarter (13 = ultimate)
Lo
ss r
atio
50%confidenceinterval
Syndicateform 2 data
Marketmedian
Bottom quartile
Top quartile
Actual syndicate development
0%
50%
100%
150%
200%
250%
300%
350%
1 2 3 4 5 6 7 8 9 10 11 12 13Quarter (13 = ultimate)
Lo
ss r
atio
50%confidenceinterval
Syndicateform 2 data
Marketmedian
Bottom quartile
Top quartile
Future year “expectation”
0%
20%
40%
60%
80%
100%
120%
1 2 3 4 5 6 7 8 9 10 11 12 13Quarter (13 = ultimate)
Lo
ss r
atio
50%confidenceinterval
Marketmedian
Bottom quartile
Top quartile
Source: Lloyd’s
43
Appendix - Equitas
45
Equitas
Appendix
Established as a company independent of Lloyd’s in 1996
Formed as part of Lloyd’s R&R to reinsure the liabilities of Lloyd’s syndicates’ 1992 and prior years of account (excl. life syndicates)
Ahead in the reserving cycle:
Ground-up actuarial reviews conducted mid 90s; further augmented over last 3 years
Gross undiscounted asbestos reserves increased $5.7bn during 2000 - 2001. $716m discounted increase for 2003
Equitas reserves consistent with Schedule F analyses
Survival ratio of 24.6 years1
1 Equitas survival ratio 2003 excludes buyouts and commutations; US Industry survival ratio 2003: Equitas sample incl. buyouts and commutations, if any Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
46
Equitas
Appendix
2001, 2002: Year end data
Solvency margin = (accumulated surplus) / (net claims o/s)Equitas survival ratio excludes commutations; US Industry: AM Best report Oct. 2002
Start up: September 1996
Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Accumulated Surplus Solvency Margin Survival Ratio
1,053
1,215
931
0
200
400
600
800
1,000
1,200
1,400
Startup 2002 2003
$m
5.6%
10.3%
8.7%
0
2
4
6
8
10
12
Startup 2002 2003
%
11
24.6
0
5
10
15
20
25
30
US Industry Equitas Gross
Yea
rs
47
www.lloyds.com