Update on Lloyd’sUpdate on Lloyd’s

CAS Spring Meeting, Miami CAS Spring Meeting, Miami

May 8, 2001May 8, 2001

Todd J. HessTodd J. Hess

Lloyd’s OverviewLloyd’s Overview

Insurance Company Insurance Company • Licenses Licenses • PaperPaper• Common ratingCommon rating

MarketplaceMarketplace• over 100 syndicatesover 100 syndicates• Subscription marketSubscription market• CompetitionCompetition

Market ParticipantsMarket Participants

The Corporation of Lloyd’s The Corporation of Lloyd’s SyndicatesSyndicates BrokersBrokers Capital ProvidersCapital Providers Managing AgenciesManaging Agencies Members’ AgentsMembers’ Agents

Capital ProvidersCapital Providers

Bespoke NamesBespoke Names Corporate CapitalCorporate Capital MAPAMAPA Conversion VehiclesConversion Vehicles Listed CompaniesListed Companies

View of Lloyd’s for Capital View of Lloyd’s for Capital providerprovider

S yn d ica te 1

S yn d ica te 2

M a na g ing A ge n t A

S yn d ica te 3

F u n d s a t L lo yd 's/P ro fit o r L o ss

S yn d ica te 4

M a na g ing A ge n t B

S yn d ica te 5

M a na g ing A ge n t C

M e m b e rs ' A g e ntA d v iso r to N a m es

B e sp o ke N a m eC a p ita l P ro v id er

Integrated Lloyd’s VehicleIntegrated Lloyd’s Vehicle

Common ownership of capital and Common ownership of capital and agencyagency

ILV ownership variantsILV ownership variants• Listed companyListed company• Privately heldPrivately held• Combinations there-ofCombinations there-of

ILV Organisation ChartILV Organisation Chart

N a m e co C a p ita l L tdC a p ita l P ro v id er

F u n d s a t L lo yd 's/P ro fit o r L o ss

S yn d ica teU n d e rw rit ing a t L lo yd 's

A M an a g ing A ge n cyS yn d ica te M a n a ge m e nt

H o ld in g Co m p a ny

Chain of Security Chain of Security (Doug’s topic)(Doug’s topic)

Premium FundsPremium Funds• Trust FundsTrust Funds• Held for Three Years (3 year accounting)Held for Three Years (3 year accounting)

Solvency ReservesSolvency Reserves Funds at Lloyd’s (FAL)Funds at Lloyd’s (FAL) Central fundCentral fund

• Actual FundingActual Funding• Reinsurance LayerReinsurance Layer• callable fundscallable funds

3 year Accounting3 year Accounting

Year of Account FocusYear of Account Focus• Closing a yearClosing a year• Reinsurance to Close (RITC)Reinsurance to Close (RITC)

Equity among namesEquity among names Reserving/cash flowReserving/cash flow

US Situs Trust FundsUS Situs Trust Funds

Name (Premium Trust Fund)Name (Premium Trust Fund) suggests that funded by premium suggests that funded by premium

CRTF (100% of gross, cash)CRTF (100% of gross, cash) SLTF (30% of gross-may be LOCs)SLTF (30% of gross-may be LOCs) NYID has held-up release of funds for NYID has held-up release of funds for

some syndicatessome syndicates

Bigger Burden for Lloyd’sBigger Burden for Lloyd’s

Requirement not exclusive to Lloyd’s, Requirement not exclusive to Lloyd’s, butbut

Higher reinsurance spendHigher reinsurance spend Capital structure often cash lightCapital structure often cash light Double-funding of losses > 100%Double-funding of losses > 100%

(solvency reserve and trust funding if fund as LOC)(solvency reserve and trust funding if fund as LOC)

Reconstruction and RenewalReconstruction and Renewal

Agreed in 1996 Agreed in 1996 Equitas took RITC for 1992 and priorEquitas took RITC for 1992 and prior Equitas solvency positionEquitas solvency position Lloyd’s welcomed rating agency Lloyd’s welcomed rating agency

reviewreview Less data for on-going business (tails Less data for on-going business (tails

look shorter)look shorter)

Lloyd’s Core StrengthsLloyd’s Core Strengths

Strong BrandStrong Brand• Marketplace where difficult things get doneMarketplace where difficult things get done• Leader in important marketsLeader in important markets• Never failed to pay valid claimNever failed to pay valid claim

Global LicensesGlobal Licenses Mutualised SecurityMutualised Security ‘‘Robust Regulatory Management’ Robust Regulatory Management’ (from S&P)(from S&P)

Lloyd’s ChallengesLloyd’s Challenges

World-wide competition increasingly World-wide competition increasingly technicaltechnical

Cost of CapitalCost of Capital ART and other non-traditionalART and other non-traditional Service StandardsService Standards Rating issuesRating issues