2020 NEWSLETTER ISSUE TWO
APRIL 2020 THE VOICE OF INDEPENDENT CAPITAL AT LLOYD’S
ARTICLES FROM ALM WEBINAR 16 APRIL 2020
LLOYD’S RESULTS See pages 23 & 28
JOINT ALM/HPG ANNUAL CONFERENCE 22 OCTOBER 2020
Haberdashers' Hall, London EC1 See page 63
ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS
Copyright © ALM Ltd. No part of this publication may be reproduced or provided to CONTENTS others without the prior written permission of ALM Ltd. The ALM publishes advertisements and articles describing EDITORIAL services and/or products and/or investment or trading Belinda Schofield, ALM 4 vehicles that could be of value or interest to its members. The contents of advertisements and articles are subject to review by the editor and the ALM office, and whilst the ALM seeks to ensure that all published material is factually REVIEW OF LLOYD’S 2019 ANNUAL RESULTS correct, fair and objective, the ALM gives no warranty Chandon Bleackley, ALM 6 and does not recommend any of the services, products, investment or trading vehicles described. The ALM gives no warranty, guarantee or any other assurance for any LLOYD’S RESULTS: REVIEW OF THE 2017 statement made in any advertising material. RESULT AND FORECAST FOR 2018 The articles contained in this publication are the views Andrew Colcomb, Head of Syndicate Research, and opinions of the respective authors. The ALM offers Argenta Private Capital Limited 23 information, opinions and material in good faith and makes every effort to ensure accuracy, however no responsibility is accepted for any information, opinion or other material ANALYSIS OF LLOYD'S 2019 RESULTS: appearing in this or any other publication by the ALM. HISTORICAL AND INDUSTRY COMPARATIVES Readers should always consult their professional advisers Markus Gesmann and Quentin Moore, ICMR 28 before purchasing or investing and should determine whether such services, products, trading or investment are suitable to their own particular circumstances and only purchase or invest COMPARATIVE PORTFOLIO 2017 once they are completely satisfied of the appropriateness of PERFORMANCES: ALPHA’S APPROACH any such purchase or investment for their own circumstances. TO SYNDICATE SELECTION The ALM is not a regulated body and does not hold itself out Emily Apple, Alpha Insurance Analysts Limited 36 as providing any service or advice to any member or reader and cannot accept any responsibility for any loss or liability arising from any act, error, omission and/or negligence, PAINT IT RED – THE IMPACT OF THE PANDEMIC whether directly or indirectly, by reason of any information, ON THE INVESTMENT MARKET opinion or material contained in this or any of its publications. Richard Carter, Head of Fixed Interest Research, Editor Quilter Cheviot Investment Management 38 Chandon Bleackley [email protected]
COVID 19 - WHAT IS THE SCOPE OF THE Company Secretary INSURANCE COVER FROM A UK LEGAL Andrew Armitage PERSPECTIVE? Tel: 0207 283 0931 [email protected] Simon Kilgour and Diane Jerry, CMS law firm 42 Published by The Association of Lloyd’s Members MARCH LUNCH: REVIEW OF 2019 CAPACITY 22 Bevis Marks, AUCTIONS; JANUARY RENEWALS; AND London EC3A 7JB COVID-19 Tel: 0207 283 0931 [email protected] | www.alm.ltd.uk John Francis, Research Director, Hampden Agencies 45 Produced and Printed by Eximia 2020 JAPANESE RENEWALS Malvern House, Chandon Bleackley, ALM 54 200 Pentonville Road, London N1 9JP Tel: 0207 420 1984 LLOYD'S UPDATE 60 [email protected] | www.eximiacomms.co.uk
2 ASSOCIATION OF LLOYD’S MEMBERS This is an advertisement by Alpha Insurance Analysts Limited
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For more information on our market leading performance, please contact us: [email protected]; 020 7767 3428 | [email protected]; 020 7767 3425 www.aianalysts.com | 107 Fenchurch Street, London EC3M 5JF Registered in England and Wales No. 2915929 | Regulated and Authorised by the Financial Conduct Authority Past performance is not a guide to future performance ALM NEWS EDITORIAL Lockdown I hope that this Newsletter finds you safe and well. The Covid-19 lockdown imposed upon us is entering its fourth week as I write. I sincerely hope that you are all coping with the somewhat surreal isolation. Little did I think, when I referred in the February News to Belinda Schofield, Chief Executive Covid-19 as not being the most of auspicious of starts [email protected] to 2020 for the world economy, that the global stock market would have gone into a freefall worse than ALM Webinars in 2008, nor how much pressure this would put on Likewise, the ALM has had a steep learning curve. Hats Lloyd’s and its Members. I did not anticipate that the off to our PA and Administrator, Nicole Salvo. In three ALM would need to cancel its summer conference nor weeks, Nicole has turned the ALM from its reliance did I expect to be writing this editorial from the spare on physical events for our members, to an association bedroom, now the control centre of the ALM. that can communicate and reach out to more of our members via webinars and digital recordings. The rippling consequences of the pandemic are far reaching and complex. This Newsletter carries a number On 7 April we participated in our first webinar for our of articles that I hope will assist in shedding some light on Overseas Names Group, kindly hosted by Beazley. the consequences relevant to our members, including an Adrian Cox gave a very good talk, with the clearest article examining whether, and which, policies are likely explanation I have heard yet on the social inflation to respond to Covid-19 by a couple of my former legal of claims and the impact on reserves and reserve colleagues at CMS law firm, and an article by Richard releases. With Nicole’s coaching assistance we were Carter of Quilter Cheviot on how the Covid-19 pandemic able to have 30 of our members participate on the call. has caused turbulence in the financial markets. The latter The feedback was very positive, and at the suggestion is a useful insight into why Lloyd’s will be adopting a of one of our members we will be organising more different approach to the valuation of assets in Members’ informal web-based discussion events to enable our Funds at Lloyd’s for the mid-year coming-into-line (CIL). I members to debate key market issues. refer to this further below. On 16 April, we are holding our first ALM hosted webinar The impact of Covid-19 on both the financial markets on the Lloyd’s results. As this was our first attempt at and on the insurance market has brought more hosting a webinar we limited the numbers to 90 (plus our bad news. There are some silver linings however to panel of speakers); we received more than 90 acceptances the lockdown: the Lloyd’s market has proved to be to our invitation within 48 hours of sending it out. resilient. Underwriters and brokers are continuing to do business; the March and April renewals proceeded Clearly there is a demand, and the ALM will be working with some positive news on rates. Lloyd’s aim of hard to meet that demand. We will therefore be increasing the take up of PPL is being realised by dint approaching the speakers scheduled to speak at our of the market having no option but to go digital. There previously arranged summer conference, which we have has been a steep learning curve for some, but it is sadly had to cancel, and we will be seeking to arrange a essential for the Future at Lloyd’s that it can operate number of webinars for all our members to participate. effectively and efficiently via electronic placement. The Zoom facility we are using allows us to record
4 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS these seminars and members will be able to access the HPG conference for our combined membership. I will be recordings if they are unable to attend the webinars. I working with Lady Rona Delves Broughton, Chairman have been really thrilled at the take up of these webinars of the HPG, to ensure that together we can collectively and whilst going digital may have been forced upon us, deliver an excellent panel of speakers, covering topical the end result is that we will be in greater communication issues, including the Lloyd’s 2020 auctions. with more of our members than ever before. Report and Accounts and AGM Lloyd’s Results Andrew Armitage, the ALM’s Company Secretary, has The Lloyd’s 2019 results were announced on 26 March. been working hard to complete the ALM’s Report and Whilst Lloyd’s at last moved back into profit it did so by Accounts and these are to be circulated shortly. Although dint of its investment income. With a combined ratio of the ALM made a loss in 2019, due to all the additional 102% it is clear that there is still work to do. Chandon activity throughout the year, the reserves are good and Bleackley, the editor of the ALM News, has contributed the ALM continues as a going concern. We will be keeping an article to this Newsletter, with his analysis of the a careful eye however on expenses in 2020 and we will 2019 performance. The closure of the 2017 year and be looking for additional income through more members, forecasts for 2018 have been much awaited by third more sponsors and advertising in our publications. party Members. Andrew Colcomb, Head of Syndicate Research at Argenta Private Capital, has provided a The AGM for the ALM will be held at the end of the very good insight into the 2017 results, including a joint ALM/HPG conference on 22 October 2020. detailed analysis of the outperformance by non-aligned syndicates supported by third party Members as against Covid-19 - implications on mid-year CIL the rest of the market. Andrew also very kindly agreed to Lloyd’s referred in the announcement of its 2019 be a speaker at our inaugural ALM webinar on 16 April results to the significant reduction in value of its capital and covered this very topic. Not only were the results base, removing (as at 19 March) £1.8bn of assets. This, between aligned and non-aligned syndicates disparate, combined with the insured losses that the pandemic will but one Members’ agent, Alpha, produced an improved generate, will inevitably reduce Lloyd’s solvency ratios. average performance from its portfolio selection. Emily Lloyd’s asked all syndicates to complete a major claims Apple, a director and senior syndicate analyst at Alpha, return with estimates of the Coronavirus losses by 30 has provided a short article with an explanation of the March, and has advised that further estimates will be cautious approach in a soft market which inured for the sought. Regulators have asked all insurers to review their benefit of their Members for the 2017 year. solvency positions and the rating agencies are watching carefully to see how markets react (with Fitch having Joint ALM/HPG Conference already put Lloyd’s on watch). Lloyd’s has considered 22 October 2020 what steps it should take at the 2020 mid-year coming- The cancellation of the summer conference is clearly a into-line (CIL) date to ensure that it continues to work disappointment. The ALM recognises the importance of from a base of financial strength and stability. Lloyd’s has our conferences in our calendar which so many of you determined that, in assessing Members’ capital position attend, with many of our overseas members also joining for the mid-year CIL, the solvency surplus/deficit will us for these occasions. We have therefore re-scheduled reflect the Members’ share of the syndicates’ audited Q4 our summer conference and this year will combine it with 2019 annual solvency returns plus the Members’ share our autumn conference to be held at Haberdashers’ Hall of the Q1 Covid-19 loss estimates reported to Lloyd’s in order to accommodate as many of our members as on 30 March. In addition, and significantly, Lloyd’s has possible. Most importantly, this year we are joining forces advised that the valuation date for Members’ Funds at with the High Premium Group (HPG) and the conference, Lloyd’s will be 31 March (when the markets were at least now being held on 22 October, will be a joint ALM/ better than at 19 March). Lloyd’s has proposed staggered
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deadlines, with Members with large shortfalls (that is that you will all be concerned about this development, both greater than £1 million and greater than 10% of but we urge you to await hearing from your Members' their ECA) having to provide any additional funds by 5 agent how this impacts upon your own position. The June, and all other Members by 30 June. Members' agents will have a lot of work to do to get the information to each Member, so please give them This is likely to impose on Members an unwelcome the time to do so as soon as possible. additional financial burden on top of the 2017 losses. The Working Group of the Members’ agents, together Stay safe with the ALM and the HPG, has already met to discuss I hope that you find this Newsletter and our e-Bulletins a joint response to Lloyd’s to seek some amelioration for informative, in terms of keeping you up-to-date with Members. As we go to press, this Working Group is in market developments. Please let me have any ideas you discussions with Lloyd’s and we will report further on what may have for any further steps the ALM should be taking. relief can be secured for Members as soon as this is known. We will continue to keep you informed of all the latest Until the Members’ capital test and the resulting news and developments at Lloyd’s. Stay safe and keep shortfall together with the Members’ solvency well. statements are issued to the Members' agents, due to be by 24 April, your Members’ agent will not know Belinda Schofield what the position is for each Member. We appreciate 16 April 2020
Overview of 2019 Lloyd’s Result REVIEW OF The Lloyd’s market has reported a commendable pre-tax profit of £2.5 billion in 2019 (2018: a loss LLOYD’S 2019 of £1 billion) and an improved combined ratio of 102.1% (2018: 104.5%). This result represents a £3.5 ANNUAL RESULTS billion improvement over the 2018 result. The fact that Lloyd’s has produced this profit in 2019 is very Lloyd’s released its good news, especially as it is the first time that it 2019 annual result on has produced a profit since 2016. The overall results 26 March 2020, and achieved by the Lloyd’s market in 2019 (compared to reported a pre-tax profit those of 2018) are shown in Figure 1, and the numbers of £2.5 billion. This are discussed in more detail in the individual sections compares to its loss of following below. However, perhaps the two most just over £1 billion in striking things about the result are the fact that the 2018. In this article, market still produced an overall underwriting loss in the ALM Publications 2019, and that the investment return was by far the Editor, Chandon greatest contributor the production of the overall pre- Chandon Bleackley, Bleackley, examines tax profit. Indeed, had it not been for the investment Publications Editor, ALM the 2019 annual result return, Lloyd’s would have made an overall loss. in more detail, and highlights and discusses its component parts, as For comparative purposes, Figure 2 shows the results well as the main factors that have influenced the produced by Lloyd’s between 2012 and 2019; and it overall result. clearly shows how the 2019 result has been be the best
6 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS
Figure 1: Lloyd’s Financial Highlights 2019
2019 2018
Overall profit/(loss) £2.5 bn (£1.0 bn)
Gross premiums £35.9 bn £35.5 bn
Combined ratio 102.1% 104.5%
Underwriting result (538 m) (£1.1 bn)
Investment return £3.5 bn £504 m
Return on capital 8.8% (3.7%)
Source: Lloyd’s 2019 Annual Report & Accounts
Figure 2: Lloyd’s profits/(losses) 2012 to 2019
Year of account Result before tax (£m)
2012 2,771
2013 3,205
2014 3,016
2015 2,122
2016 2,107
2017 (2,001)
2018 (1,001)
2019 2,532
Source: Lloyd’s Annual Report & Accounts 2012 to 2019
result that Lloyd’s has produced since 2014. What is that it was not exposed to any really serious, or costly also interesting about Figure 2 is the way in which most catastrophe losses between 2011 and 2017. It was of these results, especially those in the years 2014 to only in the latter half of 2017 that the market began to 2017, were produced against a background where rates increase rates in any meaningful way, and the underlying were falling. The fact that the market managed to keep profitability of business began to improve. Ironically, 2017 producing profits, against this background, was largely was the first of two consecutive years that was hit by a attributable to its reliance on releases from its reserves, series of very severe catastrophe losses. These losses led the contribution of investment income, and the fact to both years of account making overall trading losses.
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Lloyd's ratings in 2019 One of Jon Hancock’s greatest legacies, from his Most importantly, Lloyd’s maintained its ratings of A time as the Performance Management Director (excellent) by A.M. Best, AA- (very strong) by Fitch and from November 2016 onwards, may be the way A+ (strong) by Standard & Poor’s (S&P). Furthermore, in which he managed to stabilise and reduce the S&P also revised their outlook for the market from market’s growth. By 2018, Lloyd's was shedding “negative” to “stable”. However, on 3 April, Fitch underperforming business and improving the overall announced that it was placing Lloyd's on negative watch quality of its remaining book. During the autumn of ratings as its underwriting performance and earnings 2018, the Performance Management Directorate could be threatened by claims from COVID-19. (PMD) introduced its Decile 10 Review system, which put syndicates under pressure to review and refine Another positive development was that Lloyd’s capital, the quality of their business, and discard substandard reserves and subordinated debt rose from £28.2 billion business. This business review process was an integral to £30.6 billion, which gives the market added security part of the 2019 business planning process, and it can and provides a great measure of reassurance for its now be reported that it led to a reduction of 8% in the policyholders. overall amount of premium income written in 2019, as several syndicates ceased underwriting entirely, and Gross written premium income in 2019 many others ceased underwriting certain lines of poor Lloyd’s wrote £35.9 billion of gross written premium performing business. income in 2019, which was a 1% increase over the £35.5 billion that it underwrote in 2018. The recent As it now transpires, the 8% reduction in income evolution of the Lloyd’s gross written premium can be was offset by the rating increases that were imposed seen in Figure 3. What is striking about this table is across the remainder of the portfolio. Lloyd’s reported that it shows how the gross written premium income a weighted average increase in prices on renewal grew from £25.1 billion in 2012 to £33.5 billion against business of approximately 5.4% in 2019 (2018: 3.6%). the background of a weakening market. In the final analysis, 2019 gross written premium
Figure 3: Lloyd’s gross written premium 2012 to 2019
Year of account Gross written premium (£m)
2012 25,173
2013 25,615
2014 25,259
2015 26,690
2016 29,862
2017 33,591
2018 35, 527
2019 35,905
Source: Lloyd’s 2019 Annual Report & Accounts
8 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS increased by 1.1% over 2018. Stable or increased which reflects the overall high quality of the reinsurers pricing levels continued with favourable pricing being used. movements experienced across all lines of business. The largest increases were seen in the catastrophe- Reinsurers’ share of claims outstanding remains a impacted classes. Rates increased quarter by quarter material consideration for Lloyd’s (equivalent to 55.4% in 2019, and these increases exceeded the business of gross written premium). There was an increase in the plan targets. Although rates improved overall, they still overall reinsurance recoverable due to the catastrophe remained inadequate in some lines of business, and this losses experienced during 2019 (as well as due to has been reflected in the class by class underwriting an increase in the use of retrospective reinsurance figures (which are discussed below). protections). This increase reflected the reinsurance risk transfer strategy of the Lloyd’s market, the nature of When analysed together, these pricing increases loss events experienced during 2019, as well as the risk (5.4%) and premium volume reductions (8%), led to an mitigation actions taken to assist in the management of underlying reduction in premium volumes of 2.6% on legacy exposures. No negative settlement trends have like-for-like business. Foreign exchange movements been witnessed to date. Lloyd’s will be monitoring this and growth from new syndicates then contributed an closely in 2020 as part of its normal, ongoing market additional 3.7% growth, resulting in an overall premium oversight procedures. growth of 1.1% (to £35.9 billion) for the market in 2019. Most importantly, and largely thanks to the Lloyd’s Claims experience in 2019 relentless efforts of Jon Hancock and the PMD team, Major claims in 2019 amounted to just over £1.8 billion the market had managed to discard a good number (2018: £2.9 billion), net of reinsurance and including of under-performing lines of business that had been reinstatements payable and receivable. Total industry dragging down its overall underwriting performance. insured losses for the catastrophe events of 2019 are currently estimated to be in the region of about US$56 The US dollar denominated business still continued billion (although this figure may well change). Members to account for the largest share of premium volume at will recall that the first half of 2019 experienced a low Lloyd’s in 2019. The average exchange rate in 2019 level of catastrophe loss activity. In the second half of was US$1.28: £1 (2018: US$1.34: £1). The US dollar 2019, the largest insured natural catastrophe event and other currency movements increased premiums, to impact Lloyd’s result was Typhoon Hagibis, which as reported in converted sterling, by 3.5%. struck Japan and caused extensive flood and wind damage. This event was the second major typhoon loss Reinsurance cover and recoveries in 2019 event to impact Japan during 2019, as Typhoon Faxai Lloyd’s spent 29.4% of its 2019 gross written premium had caused extensive damage only one month earlier. income on reinsurance protection (2018: 28.2%) Lloyd’s was also exposed to claims from Hurricane which reflected a slight increase over the amounts Dorian (an extremely destructive Category 5 hurricane, that have been spent in recent years. Underwriters which devastated parts of the Bahamas). Other notable took the opportunity to exploit pricing weakness events to affect Lloyd’s included the US and Australian in some sectors of the reinsurance market to their wildfires and the Chilean riots. Figure 4 shows how the advantage. The overall credit quality of the reinsurance losses sustained by Lloyd’s in 2019 compare to those protection remained extremely high, with more than of previous years. 98.6% of all recoveries and reinsurance premium ceded being with reinsurers rated “A-“ and above, As can seen in Figure 4, the losses sustained by Lloyd's or supported by high quality collateral assets. It is in 2019 were less than those sustained by Lloyd’s in also worth recording that there have not been any 2016, 2017 or 2018, but were actually far higher than reported issues with regard to reinsurance bad debt, those of the three years preceding 2016. This now
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Figure 4: Lloyd’s major losses 2003 to 2019 – net ultimate claims (£m)
Indexed for inflation to 2019. Claims in foreign currency translated at the exchange rates prevailing at the date of loss. Source: Lloyd’s 2019 Annual Report & Accounts
Figure 5: Major claims as a percentage of net earned premium 2015 to 2019
Year of account % of net premium income
2015 3.5
2016 9.0
2017 18.5
2018 11.1
2019 6.8
5 year average 10.0
10 year average 10.4
Source: Lloyd’s 2019 Annual Report & Accounts
10 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS means that the 5 year average for losses is £2.2 billion, year that it has improved, following its peak in the and the 15 year average is £2.1 billion. Figure 5, shows catastrophe-exposed year of 2017, at 98.4%. the major claims expressed as a percentage of net earned premium between 2015 and 2019, and it can The attritional loss ratio showed a marginal clearly be seen that 2019 is showing the lowest figure improvement in 2019. It fell to 57.3% (2018: 57.6%). of any year since 2015. What was most notable was that 2019 has seen a major performance improvement as a result of the effects Lloyd’s underwriting performance of the imposition of better underwriting discipline by in 2019 the PMD and a sustained period of rating increases Figure 6 shows the way in which the combined ratios being imposed on renewal business. However, this of both 2018 and 2019 break down and compare to improvement has, to some extent, been offset by one another. deterioration that has affected the attritional loss ratio on the more recent underwriting years of 2017 The combined ratio improved by 2.4% in 2019, to and 2018. 102.1% (2018:104.5%). As can be seen in Figure 6, there has been a very welcome improvement in the The expense ratio improved by 0.5% between 2018 underwriting performance of the market in 2019. and 2019, as a result of the decrease in the administrative expense ratio, although, at the same time, there was a The loss ratio, which improved by 1.9% in 2019, very marginal increase in the acquisition cost ratio of was the major driver of this improvement. It fell to 0.2%. The reduction in administrative expenses reflects 63.4% (2018: 65.3%). The largest component in the the continued effort by Lloyd’s to reduce expenses improvement was the reduction in the level of major through a range of cost management initiatives, as well claims sustained by the market (from £2.9 billion, or as the impact of some of the class of business closures 11% of net earned premium, to £1.8 billion, or 7% of from the 2019 business planning exercise. net earned premium), which was discussed above (see Figure 4). Reserve releases in 2019 were disappointing by historical standards (see Figure 7). Indeed, there has The accident year combined ratio improved to 96.0% been a steady and continuous decline in the amounts in 2019 (2018: 96.6%). This is the second successive that have been released from reserves in recent years.
Figure 6: Combined ratio breakdown in 2018 and 2019
2018 2019 Change
Loss ratio 65.3% 63.4% (1.9%)
Expense ratio 39.2% 38.7% (0.5%)
- Acquisition cost ratio 27.3% 27.5% 0.2%
- Admin expenses ratio 11.9% 11.2% (0.7%)
Combined ratio 104.5% 102.1% (2.4%)
Source: Lloyd’s 2019 analysts presentation on results
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Figure 7: Prior year reserve releases
Year of account Percentage release (%)
2014 (8.1)
2015 (7.9)
2016 (5.1)
2017 (2.9)
2018 (3.9)
2019 (0.9)
Source: Lloyd’s data from Annual Report & Accounts (2014 to 2019)
Although 2019 was the fifteenth year in a row in which being achieved on government bonds. Corporate bond Lloyd’s released money from the prior years’ reserves, returns were enhanced by credit spread narrowing. the 2019 release only amounted to £232 million, or In terms of foreign exchange movements, sterling 0.9% (2018: £976 million, or 3.9%). Unfortunately, was volatile versus most other major currencies, but there was some deterioration on the 2017 and 2018 strengthened versus the US dollar by the end of the underwriting years, especially in respect of the 2018 year. In total contrast, 2018 was a much more difficult Japanese typhoon loss, Jebi. Its cost has deteriorated year for investors. In contrast, in 2018 financial markets from £600 million to £900 million between 2018 and suffered a volatile last quarter of the year, which was 2019. Also worthy of note, is that it was necessary to largely caused and exacerbated by trade disputes, fears strengthen reserves in respect of both the US casualty of a global slowdown, an increased level of geopolitical and aviation classes. This is discussed in greater risks and far less accommodative financial conditions. detail below. Developed markets’ monetary policies continued to be tightened with central banks in the US, Canada and UK 2019 Lloyd’s investment return all raising interest rates. Despite this, core government The investment return was the main reason that the bonds still outperformed in the fourth quarter of 2018. market was able to transform what was an underwriting loss into an overall pre-tax profit of £2.5 billion in In terms of analysing the key drivers of the excellent 2019. The market’s investments generated a return 2019 investment return, there was no doubt that the of £3.5 billion (2018: £504 million), or 4.8% (2018: Lloyd’s portfolio’s major allocation to corporate bond 0.7%), which was not only a considerable improvement investments benefitted from the strong performance on the previous year’s investment return, but was produced by this asset class. Likewise, the equity risk also well above the five-year average. Indeed, Lloyd’s assets (which accounted for 15% of the portfolio) also benefitted from the fact that 2019 was a very positive made a notable contribution to the investment return. year for investments in general. Equities generated a particularly strong level of return, whilst other risk Syndicate premium trust fund assets still formed assets also performed well. In the fixed interest markets, the largest element of investment assets at Lloyd’s the easing of monetary policy drove a reduction in risk- in 2019. Managing agents have responsibility for free yields which resulted in substantial capital gains the investment of these assets, which are used to
12 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS meet insurance claims as they become payable. The investment return on Members’ capital of £1.6 billion aggregate asset disposition reflects the balanced but or 5.9% (2018: £178 million, 0.7%) has been included conservative investment policy pursued by agents. in the Pro Forma Financial Statements (PFFS). This is Cash and high quality, shorter duration, fixed interest based on the investment disposition of the relevant investments constitute a majority core share while assets and market index returns. The return on this return-seeking equity and growth assets account for a pool of assets was significantly higher than that of moderate allocation at less than 10%. previous years, as a result of its allocation to equity and growth assets. The investment return on Lloyd’s Overall, syndicate investments returned £1.6 billion, Central Assets is also included in the PFFS. This was a or 4.0% in 2019 (2018: £333 million, 0.8%). The gain of £213 million or 5.6% in 2019 (2018: loss of £7 2019 investment return was materially higher than million, -0.2%). that of 2018, as a result of the strong performance of corporate bonds, as well as that of the equity Lloyd’s 2019 combined ratios and growth assets. Investments are valued at mark As shown in Figure 1, the overall calendar year to market prices and unrealised gains and losses are combined ratio for the Lloyd’s market improved to included within reported investment returns. 102.1.% in 2019, from its level of 104.5% in 2018. Whilst this improvement is commendable, it is still Members’ capital is generally held centrally at Lloyd’s. an overall loss. Given this, it is worth examining the A proportion of this capital is maintained in investment performance of each of the major classes of business assets and managed at Members’ discretion. A notional in 2018 and 2019, as this is a always a good indication
Figure 8: Lloyd’s 2018 and 2019 combined ratios by class of business
2018 2018 prior 2018 2019 2018 prior 2019 Accident Year year release Calendar year Accident year year release Calendar year (%) (%) (%) (%) (%) (%)
Reinsurance Property 121.1 4.9 116.2 106.5 0.3 106.2 Casualty 99.7 3.7 96.1 102.4 1.7 104.1 Specialty 101.9 11.0 90.9 108.6 2.8 105.8 Property 114.0 3.6 110.4 101.5 1.7 99.8 Casualty 103.9 1.0 102.9 103.8 1.9 105.7 Marine/aviation 116.2 0.9 115.3 113.3 4.8 108.5 transport Energy 105.6 18.2 87.4 107.5 10.2 97.3 Motor 101.8 3.1 98.7 100.6 1.8 98.8
*Note: for 2019, Lloyd’s has reclassified the business classes, and the aviation and marine classes are now part of a “new” marine, aviation and transport class. 2018 figures have been restated as part of the “new” class. Source: table produced by the ALM, based on data extracted from Lloyd’s 2018 and 2019 Annual Report & Accounts
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of the overall trading health of the market in a given 2019 accident year ratios are a bit better than those year, and it may serve to give Members a better idea as produced in 2018. Whilst this is a positive development, to the way in which the 2019 year of account is likely what is less positive, however, is that both the casualty to develop on a three year of account basis. reinsurance and the casualty insurance classes needed to top-up their old year reserves in 2019. Despite the Figure 8 compares the accident year and calendar fact that releases from reserves were made by all of the year combined ratios for the 2018 and 2019 years of other classes of business, only three classes of business account. It shows the accident year percentages, the (property insurance, energy and motor) actually releases (or top-ups) made from (or to) the prior years managed to produce a calendar year combined ratio of and then the final calendar year combined ratios for under 100%, or, in simple terms, a profit. Three classes each of the main classes of business underwritten of business (casualty reinsurance, specialty reinsurance at Lloyd’s in 2018 and 2019. Figures over 100% and casualty insurance) all produced calendar year represent a loss, and these, along with any topping up combined ratios that were worse than those that were of the prior years’ reserves are shown in red in Figure produced in 2018. Given this, it is worthwhile looking 8. As can be seen, every single class of business, with at the factors that drove the results of each of the main the exception of the casualty reinsurance class, made business classes in 2019 in more detail. a loss on an accident year basis in 2018. Thankfully, every single class of business was able to release Analysis of the results of the individual money from reserves. However, even after the releases classes of business in 2019 from reserves have been taken into account, only four classes of business were able to produce a calendar Reinsurance classes year combined ratio of under 100% in 2018. For reporting purposes, Lloyd’s has divided the reinsurance class into the property, casualty and In some ways, Figure 8 shows a worse picture of results specialty reinsurance sectors. in 2019. The most striking thing about the table is that in 2019, every single class of business has produced Property reinsurance an accident year combined ratio in excess of 100%. As can be seen in Figure 9, the gross written premium in However, with the exception of three classes (casualty the property reinsurance sector for 2019 fell to £6,405 reinsurance, specialty reinsurance and energy) the million (2018: £6,440 million); a decrease of 0.5%.
Figure 9: Property reinsurance figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 4,627 76.3 794
2016 5,022 91.8 299
2017 5,991 130.3 (1,260)
2018 6,440 116.2 (672)
2019 6,405 106.2 (258)
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
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Despite the improved pricing adequacy on property across most lines of business. While US Workers’ treaty and facultative contracts, there was much Compensation business remained competitive, the greater scrutiny around risk selection given recent same was not true of many other lines of business. In consecutive years of higher than average loss activity the case of motor excess of loss business, syndicates and the worse than forecast, adverse development of had largely expected some relief as a result of expected some prior year losses. 2019 was another year in which changes to the Ogden discount rate during 2019. Most natural disasters at times dominated the headlines. syndicates had expected this to increase to at least 0% Many of these events resulted in meaningful losses with some hoping it could increase to 1%. However, to the reinsurance market, but in aggregate the losses the shift from -0.75% to just -0.25% meant that the were not to the same scale of those experienced in impact was not as significant as had been hoped. As either 2017 or 2018 (see Figure 4). most treaty business renews at the start of the calendar year, syndicates were not able to react in time and may The Lloyd’s property reinsurance sector reported an have had to wait until the 2020 renewals. accident year ratio of 106.5% in 2019 (2018: 121.1%). The prior year movement was a release of 0.3% (2018: The casualty reinsurance class reported an accident year 4.9%). The market made releases of reserves for the ratio of 102.4% in 2019 (2018: 99.7%). To compound 2017 hurricane events (in particular, Hurricanes Harvey a bad result, the prior years needed to be strengthened and Maria) as well as in respect of the 2017 and 2018 by 1.7%. This was in complete contrast to 2018, where Californian wildfires. The main reason that the total a release of 3.6% was made. Despite 2019 being a year 2019 release was lower than in previous years was the of relatively benign prior years’ claims experience for deterioration that has been experienced in respect of casualty reinsurance business, emerging trends, such the Typhoon Jebi loss on the 2018 year. as social inflation, had the effect of driving increased uncertainty on this line. Furthermore, the global Casualty reinsurance casualty treaty market performed worse than had The gross written premium in the casualty reinsurance been forecast, with the US experiencing the heaviest class for 2019 increased to £2,960 million (2018: claims experience. £2,541 million); an increase of 16.5% (see figure 10). 2019 saw the casualty treaty market begin to In its 2019 Annual Report and Accounts Lloyd’s wrote restrict capacity and achieve some price strengthening that it “continues to monitor casualty lines to ensure
Figure 10: Casualty reinsurance figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 1,797 100.0 0
2016 2,096 98.1 33
2017 2,223 102.1 (39)
2018 2,541 96.1 78
2019 2,960 104.1 (94)
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
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adequate provisions remain over all prior years. The £2,053 million (2018: £2,089 million), which was a strengthening for this line is within expectations, reflecting reduction of 1.7% over that of 2018. As can be seen in the increased level of oversight and the additional work Figure 11, by far the largest reduction in gross premium being done by the market to monitor the robustness of income took place in the life sector, as a result of the reserves for this line. Given the high level of margin held closure of some of the Lloyd’s life syndicates. The whole to cover the uncertain, long-term nature of the underlying specialty reinsurance sector remained very competitive in policies, we would generally expect some offsetting 2019. Following the Lürssen Shipyard loss in 2018, which releases to come through on the older years. During 2019, was heavily reinsured within the marine excess of loss there has been growing concern around social inflation market, the expectation was that prices would measurably and the impact this may have on reserve adequacy in prior increase. However, the segment continued to attract a years. This is likely to result in significant reassessment high level of capital and competitive pressure, and the of appetite, particularly in the US and other litigious price increases that were achieved were relatively modest. jurisdictions. Increasingly high jury awards are being seen in the US, Canada and Australia and there are signs that The marine reinsurance book had a mixed experience the market is starting to tighten capacity as a result. There of claims development on its prior years; with some is continued concern that these increases are unlikely to be favourable movement in respect of the Lürssen Shipyard sufficient to keep up with claims inflation, but it appears loss being offset by the increased incidence of large that greater scrutiny is being undertaken during renewal losses from the Typhoon Jebi loss in 2018. Likewise, negotiations resulting in tighter controls around limits.” the aviation sector saw increased loss activity in more recent old years, with further major losses arising from Specialty reinsurance the grounding of the Boeing 737 MAX fleet. In contrast, As can be seen in Figure 11, the specialty reinsurance the motor reinsurance book generally performed better sector splits into three distinct sub-classes of business. than had been expected. The greatest beneficiary was The table shows the amount of income that was its UK business component, mainly as a result of the underwritten in each class in both the 2019 and changes that were made to the Ogden discount rate 2018 years. (where a rate of -0.25% was used from July 2019).
Marine reinsurance was the largest sector of the Lloyd’s The specialty reinsurance sector reported a specialty reinsurance sector, followed by energy and disappointingly high accident year ratio of 108.6% in aviation. The 2019 gross written premium overall was 2019, which was considerably worse than the 101.9%
Figure 11: Spilt of specialty reinsurance gross income in 2019 and 2018
Class of business 2019(£m) 2018 (£m)
Marine, aviation and transport 1,414 1,541
Energy 633 624
Life 6 14
Totals 2,053 2,089
Source: Lloyd’s 2019 Annual Report & Accounts
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Figure 12: Specialty reinsurance figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 2,169 93.9 110
2016 2,290 87.7 216
2017 2,346 101.8 (31)
2018 2,089 90.9 138
2019 2,053 105.8 (32)
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
Figure 13: Property figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 6,893 90.1 501
2016 7,988 103.4 (202)
2017 8,965 127.6 (1,757)
2018 9,687 110.4 (700)
2019 9,586 99.8 12
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
it produced in 2018. A release of 2.8% was made from binding authority business comprising non-standard the old years. Although this was welcome, it was much commercial and residential risks and specialist sectors, less than the release of 11.0% that was made in 2018. including terrorism, power (electricity) generation, As a result of this, there has been a marked deterioration engineering and nuclear risks. Business is mostly in the result produced by the class in 2019 (see Figure written through the broker network with a significant 12). The class has produced a worse overall result than proportion using the framework of coverholders (or was the case in 2018, and has returned to loss. managing general agencies - MGAs) and other similar delegated authority arrangements. Property insurance The property insurance class consists of a broad range of What is very interesting to note is how the property risks written worldwide. It is made up of predominantly book’s gross written premium fell by 1% for 2019, to excess and surplus lines business with a weighting £9,586 million (2018: £9,687 million), despite the fact in favour of the industrial and commercial sectors, that this was a market where rates, terms and general
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market conditions were improving throughout the year the largest single market for Lloyd’s casualty business, (see Figure 13). One of the main reasons for this fall in followed by the UK, Canada and Australia. gross premium income was that underwriters were being more selective about the business that they underwrote. Gross written premium for 2019 rose by 4%, to £9,459 This, combined with the rating increases, and the lower million (2018: £9,094 million) (see Figure 14). This incidence of major losses, was the main reason that the increase was largely driven by further growth in cyber, class managed to return to profitability in 2019. Whilst warranty and indemnity business and US directors and the 2019 loss experience was more benign than that officers’ liability. The growth in cyber insurance products observed in recent years, the year still suffered from gained further momentum in 2019, as both existing a number of natural catastrophe losses. The largest of and new customers attempted to either, respond more these were Hurricane Dorian, and Typhoons Faxai and effectively to high-profile cyber breaches, or purchase Hagibis. Additionally, there were a significant number of cover to protect themselves against a wide variety of US hailstorm and thunderstorm losses in the spring of potential cyber-related losses. Many casualty classes 2019, and the market was also adversely affected by saw premium growth during the year as a result of rates losses emanating from the Chilean riots. increasing towards the end of the year, particularly in some of the professional lines’ sectors. The property class reported a much improved accident year ratio of 101.5% in 2019 (2018: 114.0%). This While there was still substantial capacity available in was augmented by a prior year release of 1.7% (2018: the casualty market, there was some evidence that release of 3.6%), which had the result of pushing the this had started to become more restricted as 2019 account back into profit, which is very positive result in went on. Most lines saw rating increases being applied, the wake of three consecutive years’ of loss. especially towards the end of the year. However, years of suppressed price increases, often below claims Casualty insurance inflation assumptions, meant that there still remained The casualty market at Lloyd’s comprises a broad range uncertainty around whether these were sufficient to of sectors. The most significant are general liability and achieve pricing adequacy, and return the class to profit. professional liability. Although shorter tail in nature than most casualty lines, accident and health business As can be seen in Figure 14, the casualty class has is also included within this sector. The US market is performed poorly in 2019, and has recorded its fifth
Figure 14: Casualty figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 5,764 100.1 (5)
2016 7,131 102.7 (146)
2017 8,464 103.1 (189)
2018 9,094 102.9 (183)
2019 9,459 105.7 (390)
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
18 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS consecutive year of loss. Indeed, the 2019 loss is twice take many years to confirm whether any adjustments to the size of that of 2018. The casualty class reported these reserves are sufficient. Given the long-term nature of an accident year ratio of 103.8%, which was virtually the underlying policies and macro view on concerns such the same as that of 2018: 103.9%. However, it was as social inflation, we would generally expect a greater also necessary to top-up the old years’ reserves by level of uncertainty in this line being included within the 1.9% (2018: a release of 1.0%), which caused further reserves. As with casualty reinsurance, there has been a deterioration in the bottom-line result. In particular, growing focus on social inflation. While a lot of the focus there were concerns over the estimation of claims has been in the US, other territories such as Australia reserves for the directors & officers, general liability and Canada are starting to see similar trends across all and medical malpractice lines of business. In addition casualty lines. These territories and jurisdictions have all to the above lines, cyber has also seen a rise in claims seen trends of increasing regulation and litigation. This on recent years, especially related to ransomware and has been accompanied by increased capacity for litigation other cyber attacks. funding. A general public desensitisation to litigation and jury awards has led to ever increasing severity of The adequacy of reserves in the Lloyd’s casualty claims. While the primary market has already started to market has been an issue that has been highlighted see restrictions in appetite and demand for increased in ALM publications for some years now. Whilst 2019 deductibles, in 2020 there is likely to be an increased is the first year in which the market has had to top- focus on excess placements.” up the old years, the level of releases made has been going down for some years. Back in 2015, the market Marine, aviation and transport made a release of 4.4%, but by 2018, the release was This is a “new” class for 2019, in that Lloyd’s has only 1%. Lloyd’s has been aware of this, and has stated combined the marine and aviation sectors into one that it has been monitoring this situation closely. In the “new” class, now reporting as marine, aviation and latest 2019 Annual Report and Accounts it wrote, “In transport. Members will recall that in the past, the 2020, Lloyd’s will continue to monitor the adequacy of marine and aviation classes reported on an individual market-wide casualty reserves, ensuring that we engage basis. In terms of its business composition, the largest with managing agents writing material casualty business. component parts of the marine book are the hull, This increased level of oversight is warranted given the cargo and marine liability classes, but the book also current tough market conditions and the fact that it will includes smaller amounts of marine war, yacht, fine
Figure 15: Marine, aviation and transport figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 2,832 94.5 127
2016 3,097 102.3 (58)
2017 3,193 118.5 (480)
2018 3,152 115.3 (392)
2019 2,802 108.5 (199)
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
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art and specie business. On the aviation side, Lloyd’s with the decline in insurance industry capacity levels, still underwrites all of the main business sectors mainly caused by corporate consolidations and market including airlines, aerospace general aviation, space withdrawals, and exacerbated by the sustained poor and war. Airline (hull and liability) business is the largest performance, all led to a slightly more positive pricing component of the book but Lloyd’s is also actively environment in the latter part of 2019. involved in the underwriting of general aviation (e.g. privately-owned light aircraft, helicopters and large The Lloyd’s marine, aviation and transport class private corporate jets), airport liability, aviation product reported its fourth consecutive year of loss in 2019. manufacturers’ liability, aviation, war/terrorism and On a more positive note, the 2019 loss was half the satellite launch and in-orbit risks. size of that of 2018, and the accident year ratio of 113.3% was better than that of the previous year The 2019 gross written premium for the newly (2018: 116.2%). The poor underwriting result was “combined” class was £2,802 million, which represented partly offset by a release of 4.8% from the prior years’ a decrease of 11.1% from the figure of £3,152 million reserves. This was substantially larger than the release that was underwritten last year (after the 2018 figures of 0.9% that was made in 2018. By way of comparison, had been re-stated). Following the poor underwriting the market released 15% from reserves at the closure results that were produced by these business classes of the 2015 account. The old years have performed in 2018, the 2019 business planning season saw the broadly in line with expectations over 2019. Recent PMD address this level of under-performance. This years have seen a higher than average number of was specifically the case in the hull, yacht and cargo short-tail catastrophe losses, which are known to drive lines. As a result of pressure from the PMD, and from property damage claims. However, some of these are some of their own managing agents, a number of relatively short-tail in duration, and the losses have syndicates either ceased, or severely curtailed, their now stabilised, which has enabled underwriters to underwriting of certain under-performing classes release money from reserves. of business in 2019. At the same time, the pricing environment begin to improve, and rates continued to Energy increase as 2019 developed. The cargo market showed The Lloyd’s energy sector includes a variety of onshore the clearest evidence of improvement. The hull market and offshore property and liability classes of business, did not improve to anything like the same extent, and ranging from construction to exploration, production, rates remained inadequate. refining and distribution.
Owing to the ongoing challenging conditions in Gross written premium for the energy market rose the aviation market some insurers elected either by 6.8%, to £1,500 million in 2019 (2018: £1,404 to withdraw, or reduce, their capacity in the sector million). 2019 has witnessed a wholesale improvement in 2019. Although there were fewer large losses in in the pricing environment across all energy lines. 2019 than was the case in 2018, and in comparison Downstream property and liability business have to some previous years, the 2019 book continued benefitted the most, as rates have increased as a result to be impacted by both the frequency and cost of the number of large losses that have continued to hit of attritional claims, which eroded its inadequate the downstream market throughout 2018 and 2019, premium and deductible levels. Whilst airline and and specifically those which have fallen on the US general aviation business have previously been the refining sector. From a whole account perspective, this main lines contributing to the negative results in loss-experience has been balanced by a lack of large or the aviation market, the aviation excess of loss and catastrophic loss activity in the upstream lines, which space markets have also suffered a more challenging form the largest part of the overall energy account (in trading environment in 2019. Loss activity, coupled terms of risk count, written premium and exposure).
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Figure 16: Energy figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m
2015 1,414 76.0 247
2016 1,110 92.6 59
2017 1,253 86.6 105
2018 1,404 87.4 113
2019 1,500 97.3 27
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
Despite its exposure to losses, the energy market has Motor maintained its track record of profitability in 2019. The Lloyd’s motor market primarily covers UK private Although its accident year ratio increased to 107.5% car, commercial and fleet business. Private car business (2018: 105.6%) this was offset by a release of 10.2% represents around 35% of Lloyd’s UK motor premium. from the old years (2018: 18.2%). That said, the calendar Lloyd’s commercial and fleet business is very diverse, year combined ratio ended up 10% worse than that ranging from light commercial vehicles and taxis to buses for 2018. The energy market has a recent, unbroken and heavy haulage. International motor is also written; a track record of making releases from its reserves. It large proportion of this emanates from North America, contains a mix of contracts that give rise to claims that including private auto and risks such as dealers “open lot.” are settled on both a short-term and long-term time horizon. Both the short-term and long-term lines have Gross written premium rose by 1.5% in 2019, to £1,053 performed broadly in line with expectations in 2019, million (2018: £1,037 million). As can be seen in Figure with the short-term lines benefitting from releases 17, this is still below the amount of income that was from the older, more stable catastrophe losses. Given written back in 2015, which is a good indication of just that the energy market is also highly exposed to stand- how competitive the market had become. Underwriting alone, large losses, large margins for uncertainty tend conditions in the UK motor market continued tobe to be held, and then released, in benign years. For long- challenging throughout 2019. Market conditions were term contracts, these margins can be held for a number arguably made all the more difficult and uncertain by of years. What is interesting about the 2019 release is the fact that many market practitioners had hoped that it was much smaller than some of those that have that the 2019 Ogden discount rate review would lead been made in recent years. For example, in 2015, the to a rate of 0% or higher, when, in fact, it was set at release was 21.3%; in 2016 it fell to 13.8%; in 2017 it -0.25%. The international motor market witnessed was 21.1%, and, as discussed above, it was 18.2% in some positive signs during 2019. 2018. This can partly be explained by redundancy in reserves becoming apparent in different losses. The motor market reported an accident year ratio of 100.6% in 2019, which was only a marginal improvement Despite the smaller release made from reserves, the on the 101.8% that was reported last year. The calendar most important point was that the market has produced year combined ratio was returned to profitability by the another profit in 2019. release of 1.8% from reserves. Interestingly, this was less
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Figure 17: Motor figures
Year of account Gross written premium £m Combined ratio % Underwriting result £m 2015 1,120 102.0 (17) 2016 1,047 111.5 (103) 2017 1,057 122.3 (188) 2018 1,037 98.7 12 2019 1,053 98.8 11
Losses are shown in red Source: Lloyd’s 2019 Annual Report & Accounts
than the 3.1% release made in 2018. The 2019 release plans by the PMD, the increase in rates that gathered was driven by favourable claims experience in both the momentum during 2019 and Lloyd’s lower exposure to UK and the overseas motor markets. UK motor business catastrophe losses in 2019. Despite the improvement has benefited from the Lord Chancellor's announcement in the underwriting result in 2019, and the fact that in July 2019 to change the Ogden discount rate, which many of the individual class of business calendar year has reduced the amount insurers pay out for severe combined ratios were better than those of 2018, there bodily injury claims. were still only three classes of business that produced ratios of less than 100%. It would be fair to say that the Conclusion overall underwriting result is still being compromised On one level, it is very positive news that Lloyd’s has by the performance of some of the weaker syndicates. managed to declare a £2.5 billion profit in 2019, especially The PMD has already made great progress in addressing as it follows in the wake of two loss-making years. Equally this under-performance, as there were eight syndicate positive is that not only have the three main rating cessations at the end of 2018. agencies have all maintained their ratings of Lloyd's, but also that Lloyd’s Members' and policyholders can draw Another worrying development in 2019 has been that a measure of added comfort from the fact that Lloyd’s two of the casualty classes had to top up their old years’ central assets have increased. However, what cannot be reserves. Whilst it is understandable that the releases overlooked is that the excellent 2019 investment return made by Lloyd’s have been falling in recent years, it is a was the largest contributor to the overall profit made by much more disturbing development when it becomes Lloyd’s. Indeed, without its contribution, Lloyd’s would necessary to strengthen the old years’ reserves. have made an overall loss for 2019. In the final analysis, it is against this background that On a deeper level, the Lloyd’s 2019 annual result Lloyd’s has embarked on a once in a generation, has highlighted a number of other issues of concern. radical process of market modernisation, the Future at First and foremost is the fact that Lloyd’s still made Lloyd’s, and it remains absolutely imperative that this an underwriting loss in 2019, even though it was is successful. However, its ultimate success must rest a far smaller one than was the case for 2018. The upon the foundations of profitable underwriting. The improved underwriting performance was the result of a improved 2019 underwriting result is proof, not only of combination of factors, among which were the remedial the fact that Lloyd’s has understood this fact, but also work that was undertaken on syndicates’ 2019 business that it had acted decisively to address the issue.
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• Although quantum of reserve releases was down, LLOYD’S but syndicates produced a surplus on closed years; RESULTS: and REVIEW OF THE • A good year for investments. 2017 year of account 2017 RESULT From an underwriting year perspective, the closing year, 2017, is a second consecutive loss for the Lloyd’s AND FORECAST market. Although most individual members were in a (small) profit for 2016, the aligned vehicles performed FOR 2018 poorly in comparison and the overall result was a loss of 2.9%. Although Names’ portfolios again out-performed Andrew Colcomb, Head the market average in 2017 the margin was smaller and of Syndicate Research at the outcome was a loss for Names and the market was Argenta Private Capital, a loss. On average, Names’ loss was 6.5% of capacity, was one of our speakers the market loss was 8.0%. Not since 2008, where at the first ALM hosted the Names’ result was disproportionately impacted webinar on 16 April. His by the very large motor loss on ERS Syndicate 218, talk was based on this have Names in aggregate performed worse than the article and his thorough Lloyd’s market average. Nonetheless, the gap between review and analysis of Names and the average, which had grown to more the 2019 Lloyd’s results than 8 percentage points on capacity in 2016, shrank Andrew Colcomb, announced on 26 March, to just 1.5 points in 2017. A quick word on naming; Head of Syndicate focussing on the 2017 when I refer to the Names or the Names’ portfolio, I Research, Argenta Private and 2018 results of the mean the aggregate of third party Members writing Capital Limited non-aligned syndicates. through the three Members’ agents. I do exclude Andrew started his some capacity where the Members’ agents act for insurance career on the underwriting side in 1985, corporate capital on a “non-advisory” basis, which is moving to capital provision ten years later. All his deep often for aligned capital providers. The Lloyd’s result is knowledge and understanding of Lloyd’s syndicates is the aggregate of all syndicates as published in Lloyd’s brought to bear in this analysis of the 2017 year results annual returns. and the forecast for 2018. For a number of years, many syndicates have been able The overview of 2017 year to deliver pleasant surprises, with actual results being The Names’ results analysed and compared to Lloyd’s much better than the forecasts made at quarter 8 (the averages: end of the second year of the underwriting account) and those made at the end of the 11 quarter (three months • Names’ syndicates overall outperform Lloyd’s before the account is closed). Between the 2008 and averages; 2016 underwriting years, the final result for private capital Members was an average of 4.66 percentage • Names’ portfolios have larger weighting on the points on capacity better at closure than the forecast better syndicates, further increasing the difference after 24 months. For 2017, there was improvement, between market average and the typical third but at 2.6 percentage points it was little better than party member; half that of the recent past. Similarly, comparing the
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Figure 1: Quarterly development of years of account
Source: Syndicate QMAs
actual result with the quarter 11 forecast showed Reserve surplus down but stronger 2017 being 1.3 points better. The average final quarter investment returns improvement over 2008 to 2016 was 2.2 points. Figure Figure 2 shows the split between the various elements 1 shows the development of each year of account by of the result; the pure year (less expenses), the prior quarter for the aggregate names’ portfolio. year and the investment return.
Figure 2: Components of results 2009 to 2017
Source: Syndicate QMAs
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The 2017 account bore the bulk of the cost of an 386, Beazley 623, Meacock 727 and Dale 2525. Note active hurricane season (Hurricanes Harvey, Irma and that all of these syndicates did produce a release, but Maria cost the insurance and reinsurance industries the overall surplus on reserves was smaller than those around $100 billion in claims) with catastrophe costs of the recent past. A handful of syndicates needed to supplemented by some large wildfires in California top-up reserves for their old years. These included and two earthquakes in Mexico. Catastrophe and Argo 1200, Coverys 1991 and Canopius 4444. large losses added around 15 points to the loss ratio (compared to an average of around 7 points between Investment returns 2008 and 2016), while thin rating levels meant that While reserve releases were at their lowest level since attritional loss ratios were also generally poor. Before 2008, investment returns were at their highest since investment income and prior year movements, but 2010. The overall investment return to an underwriting after syndicate expenses and acquisition costs, 2017 year of year of account is complicated, with small was the worst underwriting result of recent times. contributions from years one and two before the bulk of the return is made in the final year before closure In recent years, a large part of the overall result has when the year of account receives the reinsurance emanated from the closed years of account, with some to close premium from the predecessor year. The bumper releases being made from older years. Although overall return on syndicate investments across the these releases have made a significant difference to Lloyd’s market was 4% in 2019, up from 0.8% in 2018. overall profitability, there was evidence that reserve Investments are marked-to-market prices at the year levels for key syndicates have been maintained despite end and so the return includes unrealised gains and the quantum of these releases and that, broadly speaking, losses. reserves releases from older years have been replaced by new, conservative reserving on the younger years. One other aspect for the 2017 year of account is the fact that two syndicates have not been able to close Confidence in the reserving position of key Names’ their accounts after 36 months. Beat Syndicate, 4242 syndicates is as at odds with wider concerns in the UK has a reinsurance arbitration due to be settled this year, general insurance industry. Here there was sufficient which has caused the managing agent to delay closure, concern about diminishing reserves for the UK’s while the last year of the TMK managed life syndicate, Financial Conduct Authority to write to both CEOs 308, has significant longer term policies exposed to and chief actuaries warning them about optimism in cause a delay in closure. estimated loss ratios and weakening case reserves. 2018 account forecasts It is therefore good to note that the 2017 year of The forecasts for the 2018 account have deteriorated account did show a surplus on the closed years. The slightly, and 2018 is currently forecast to be another average release for Names’ portfolios equated to 3.4% loss for Names. Although this is disappointing to report, of capacity, down from an average of 4.6% over the it is worth looking back to Figure 1 to remind ourselves past six closed years. that the forecasts after 8 quarters (before managing agents are able to build in releases from older years) Figure 3 shows the average release over 2010 to have been the nadir of the forecasting cycle for a while. 2016 years of account compared to the 2017 year The forecasts in aggregate have tended to get worse of account. TMK 510 and 557, Atrium 609, Chaucer between quarter 6 and quarter 8 before improving in (nuclear) 1176 and MAP 2791 all produced better prior the final year before closure. Nonetheless, with the year results in 2017 than recent averages, but there midpoint of the range of results for Names now at a were reductions in the levels of releases emanating loss of 4.0% it seems unlikely that the final result will from other core syndicates including Hiscox 33, QBE be positive. The Lloyd’s market average is currently a
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Figure 3: Comparative Syndicate releases
Source: Syndicate QMAs
loss of 5.7%, again reflecting under-performance of the underlying policies incept. This is usually around aligned syndicates. 80% to the current year and around 20% of the total loss to the younger of the two remaining open years. Coronavirus unlikely to impact 2018 The volatility in financial markets may well impact the underwriting result, but could hit investment earnings for the year. Syndicate funds investment earnings typically are invested in short-dated, high quality The Coronavirus crisis began after syndicates reported government and corporate bonds. In normal times, a their latest 2018 forecasts. At the time of writing reduction in interest rates (there have been two already there are no estimates of the cost of this pandemic in the UK this year) increases the value of bonds. This to syndicates, and even initial forecasts due in May is the case for government bonds, but corporate debt, will be heavily caveated. Typically, catastrophe events where the markets are factoring an increased risk of (and we must consider this pandemic as a catastrophic default in the rapid slowdown of economic activity, has event) have only a limited impact on the oldest open reduced in value. The year-end values may recover, but year. Depending on the timing and nature of the event, it seems likely that investment returns for the year will catastrophe losses are allocated to the year in which be down on expectations at the year end.
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Taking the 2017 and 2018 years together, there is were above 100% but better than the Lloyd’s market a very high degree of correlation. Of the 31 private average of 102.1%. Top places went to two reinsurance capital syndicates trading in both years, 21 produced specialists, TMK 557 and MAP 6103, with third place a loss in 2017 and are also forecasting a loss at going to Chaucer nuclear syndicate 1176. Of the more midpoint in 2018. Five of the seven syndicates generalist syndicates, there was strong performance (QBE 386, Atrium 609, Meacock 727, Chaucer 1176 from MAP 2791 and Atrium 609. At the other end of and Asta 2525) that delivered a profit in 2017 are the scale there were disappointing results from Hiscox forecasting another profit in 2018. The two that are SPA 6104, Beat Syndicate 4242 and Beazley SPA 6107. forecasting a slip into loss in 2018 are MAP 2791 and It seems reasonable to ask why some of the reinsurance ERS 218. Only Coverys 1991 is currently forecasting specialist SPAs have done so well and others so a return to profit in 2018 following a loss in 2017. I poorly? Put simply, it is down to the geographical mix have included syndicates with a breakeven forecast of business. MAP 6103 only writes US business, and amongst the loss-makers as a 0% result is a loss there were no significant US catastrophes in 2019. to Names after Members’ agents’ fees and other TMK 557 does write international treaty business, but Lloyd’s charges. with very limited exposures in Japan. Beazley features some Japanese business but is a hybrid of catastrophe GAAP results for third party syndicates. business and cyber risk. Hiscox 6104 wrote some Syndicates provide two sets of accounts; the year of large exposures in Japan, where there were two very account results well understood by Members which, at significant typhoons. The annual accounts incorporate least partially, determine the amount of money due to movements from older years, so the 2019 GAAP or from Members. These days the actual distribution results reflects the first year of 2019, the development is heavily dependent on movements in the solvency of 2018 in its second year, of 2017 in its third year position on open years and in the capital requirements and so on. This means there can often be an impact under Solvency II. on the GAAP results for those syndicates that need to reduce open year forecasts. There are a handful There is no requirement to provide forecasts for the of syndicates where both 2018 and 2019 results are youngest year of account at the twelve month stage significantly better than market average, including and these days Hiscox is the only managing agent that Chaucer 1176, TMK 557, MAP 2791, Atrium 609 and does so. An early indication of syndicate performance Asta 2525. is given by the annual accounted result. Here combined ratio replaces return on capacity as the principal metric Names’ syndicates’ outperformance by which we assess syndicate performance. The In aggregate, Names’ capital trades on syndicates combined ratio simply calculates total incurred claims with an aggregate gross premium income of £11.1 in the year added to administrative and acquisition billion in 2019, which accounts for around 30% of costs, all divided by net premiums in the year. A the entire market. The combined ratio of this subset ratio of 100% means that the insurance entity (in of syndicates was exactly 100%, 2 percentage points our case, syndicate) is making an underwriting profit, better than the Lloyd’s market average. This means less than 100% is better, but even at ratios slightly that the remaining 70% of the market is trading at a in excess of 100%, the syndicate might be declaring combined ratio of around 104%. Furthermore, it is an overall profit depending on the performance of possible to approximate the Names’ average combined syndicate investments. ratio, using the proportion of each of the non-aligned syndicates in Names’ hands. This comes to around Of the 32 syndicates that traded with Names’ capacity 97.8%; further evidence that the Names’ portfolio is in 2019, 14 delivered a combined ratio performance well orientated to the better performing end of the of better than the benchmark 100% and three more Lloyd’s market.
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and provide a new approach to investing in Lloyd’s ANALYSIS by proxy to attract the next generation of Lloyd’s OF LLOYD'S members. Markus and Quentin very kindly agreed to be speakers 2019 RESULTS: at the first ALM hosted webinar on 16 April. The following is the full article on which their presentation HISTORICAL was based.
AND INDUSTRY Review of Lloyds’ 2019 results When Lloyd's released its 2019 pro-forma results for COMPARATIVES the market stating a profit of £2.5bn, it was a huge improvement on the previous year's loss of £1bn, Markus Gesmann but was driven by investment income of £3.5bn, i.e. and Quentin Moore the underwriting side is still running at a loss with a have between them combined ratio of 102.1%, including modest reserve spent over a decade releases of 0.9% and below average major losses of 7% heading up Lloyd’s of Net Earned Premium respectively. internal research and analysis departments The investment profit in 2019 will be challenging to and helped shape replicate given the recent turmoil in the financial Lloyd’s Performance markets and another round of quantitative easing as a Management in the result of the COVID-19, notwithstanding the gyrations Markus Gesmann aftermath of the WTC in USD:GBP exchange rate. However, the major losses of 2001. They portion of this result number was artificial, coming recently founded from the implied return on Funds at Lloyd’s (£1,657m). Insurance Capital Add this to the investment income on Lloyd’s central Markets Research as assets (£213m) and the aggregated results of the a bridge between (re) syndicates themselves was only a reported profit insurance and capital of £690m. markets, where they have spent most of Of course this is not the first time Lloyd's has had to the last decade. The navigate challenging waters, looking back over the last following article on the 70 years the market place had to battle many others, back of the Lloyd’s result such as the asbestos and public liability losses in the Quentin Moore announcement on 26 early eighties, the very soft cycle in the late nineties, March 2020 and before culminating in catastrophic loss of capital in 2001, the detail of each syndicate’s figures are published when Lloyd's reported a combined ratio of 140%. in Lloyd’s Statistics, is a high level analysis of Lloyd’s results, with historical and industry comparatives. By way of context for these results, we noted that Alongside this Markus and Quentin have included a Lloyd’s no longer produces comparatives in its annual new perspective on Lloyd’s value creation and ways results presentations, but in a spirit of continuity (and this can be exploited by Members and non-Members given that we originally constructed the peer groups alike. They conclude with a high level comparison when we were at Lloyd’s) this is the recent trend in of Lloyd’s Private Capital returns versus the market comparatives1:
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Figure 1: Lloyd's Results 1950 - 2019
Source: Lloyd's Statistics 2001, Lloyd's Annual Reports, ICMR Analysis
Trends suggest relatively stable performance, despite create an oversight regime that would review business the anecdotal evidence of rating improvement reported plans and monitor performance throughout the year, across many lines in 2019. However, the elephant in the helping syndicates and the corporation through room is COVID-19. The financial impact of COVID-19 signposting where actual data deviated from planning on Lloyd's and on the wider industry as a whole is assumptions. In insurance, like with a pandemic, taking still unknown. We know that Lloyd’s has already decisive actions early is critical. asked syndicates for specific information on potential impacts and is due to make an announcement in May As part of the original PMD team setup in 2003, we (as disclosed during their results webinar). One item helped establish many of the performance oversight that can already be observed is the cultural impact; tools, such as the relative performance benchmarks, with many of the market’s participants being forced to price monitoring framework and the revamped Lloyd's work from home, it just might accelerate the expansion Statistics publication. Since then, it appears that Lloyd's of the digital Lloyd's platform. has left the boom and bust cycles behind. In the past capital would be stuck in the system following years The last cultural change was forced on Lloyd's in of profit, encouraging its immediate redeployment on the aftermath of the WTC event in 2001, when the underwriting with the consequent negative impact on corporation established the Franchise Performance rate adequacy soon after. Since the establishment of Directorate (now Performance Management PMD, deployed capital has stayed relatively constant, as Directorate) under Rolf Tolle. At its heart was the idea to shown below.
1The peer group comprises 13 companies operating in the US, European & Bermudan markets: AIG, Allianz, Arch, Chubb, CNA Corp, Everest Re, Hannover Re, Munich Re, Partner Re, SCOR, Swiss Re, Axa XL and Zurich
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Figure 2: Lloyd's underwriting performance vs peer group
Source: Lloyd's analysts presentation, companies annual report
Under Tom Bolt's leadership this ratio of capital to This has coincided with the rise, not so much of premium increased a little, but was then brought back Catastrophe Bond issuance, but more of the evolution down under Jon Hancock following the Decile-ten of the Cat Bond/Insurance-Linked Securities market review. Later this year we will see the arrival of the fourth into collateralised reinsurance. PMD director and even with continued momentum in positive premium rate adequacy, the market he or she This has effectively parked the Alternative Asset market’s inherits will be quite different from the post-WTC world tanks on the lawn of the traditional (re)insurance which greeted the first PMD director. industry and they have had to react to it, with Lloyd’s managing agents reacting the fastest. On the basis Two key changes are those to Lloyd’s overall mix that if you can’t beat them, join them, many managing of business and to the way many of Lloyd’s larger agencies have established their own Alternative Asset managing agencies now use the Lloyd’s platform in managers in Bermuda where they have raised these parallel with their access to other platforms. funds to participate in (re)insurance risk sourced through their Lloyd’s businesses. They underwrite through their Lloyd’s mix of business was always described as Specialty, syndicates at Lloyd’s but then reinsure aspects of this but with Marine premium continuing its decline, and business through collateralised reinsurance contracts with Aviation premium now too small to report separately, their managed Alternative Asset funds. This squeezes Lloyd’s continues its evolution towards a Property, some margin out of their syndicates and into the funds, Casualty and Reinsurance market in almost equal measure, from which they derive fees and profit commissions. but now with 39% of premium written via coverholders2. It’s almost like returning to the original agency model of
2Source: Lloyd’s Annual Report 2019, Future at Lloyd’s Prospectus 2018
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Figure 3: Lloyd's Capital and ROC Cycles 1983 - 2019
Source: Lloyd's Statistics 2001, Lloyd's Annual Reports
Figure 4: Alternative market developments
Source: Lloyd's Statistics 2001, Lloyd's Annual Reports
Source: Aon ILS Annual Report 2019
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Lloyd’s, but very specifically not doing this through Lloyd’s. horizontal line in the middle of each box representing Examples are Hiscox, MS Amlin, BRIT, Barbican, Canopius the median and the red dot the mean. The whiskers and Liberty. With Nephila (now part of Markel) we note a show the range of outliers in either direction. The more reverse journey from ILS fund to a Lloyd’s syndicate but spread out the box and whiskers, the greater the range this remains the exception. of book multiples.
Given this evolution in both what and how syndicates Focusing on the mean values in red, these show a clear now underwrite, we undertook work analysing the cycle. They also clearly show the impact of the financial value of insurance businesses. The intention was to crisis in 2008 and the recent impact on stock markets of see how value might translate from liquid publicly COVID-19 as of March 2020. Between the two crises listed companies to the very illiquid world of Lloyd’s we have seen modest but consistent increases in mean syndicates and managing agencies. This was to better price to book, rising to around 1.3x in 2018 and 1.4x in understand the value creation potential at Lloyd’s and 2019 (NB - at the time of writing, not all year 2019 end also how to disaggregate it to, say, the value of capacity. reports & accounts have been received). Recent market turmoil has now pushed this down to 1.0x (so far!). Values of publicly traded (re)insurers The traditional steady-state valuation metric used for So, let us overlook market gyrations momentarily by companies that accept and store risk on balance sheet looking at the 31 March 2020 price to book multiple of is their multiple of book value or so-called Price to Book 1.0x as a sensible place to start when thinking about the (PB) ratio. This information is only readily available for value of Lloyd’s as a whole during the COVID-19 crisis. publicly listed companies3. This value would comprise the individual syndicate Funds at Lloyd’s as well as Lloyd’s tangible Central In order to assess the value of Lloyd’s business we Assets. It’s worth noting that, if we believe this chart started with the parents of the aligned managing illustrates a cycle, an average peak value book multiple of agents that are owned by listed companies. 1.4x to 1.6x is achievable, meaning value creation of up to £16bn for Lloyd’s, based on current book estimates. From 2006 to date, between two-thirds and three- But of course, this value won’t be distributed equally or quarters of Lloyd’s total premium was underwritten even proportionally across the market. through managing agents with publicly listed parent companies. It should be noted that there has been a Value creation by managing agency dynamic in this ownership base, with various takeovers, Figure 6 shows the ICMR outside-in estimates for steady take privates and trade sales, so the gene pool has state value created by each managing agent, starting been renewing itself over time. We think it a sensible with the largest value creation and ending with the place to start when thinking about value at Lloyd’s. smallest on the left hand axis and based on the current 1.0x multiple for the market as a whole. The red line Figure 5 shows the range of prices to book for all the shows our estimate of the price to book for each of the publicly listed companies which owned Lloyd’s managing corresponding managing agencies from our outside-in agencies during the years shown of 2006 to 2020. estimate of individual Funds at Lloyd’s requirements on the right hand axis. We refer to this being steady state The chart shows a box-whisker plot at each year end value as it doesn’t take into account anything that might of the total distribution of book multiples for these skew values, such as M&A activity, and we’ve used the companies, plus the distribution at 31 March 2020. same driver of steady state valuation we extracted from The box denotes the interquartile range, with the the company data, namely the rolling average return on
3PB = market capitalisation (number of shares multiplied by share price) divided by the trailing shareholders’ equity
32 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS
Figure 5: Yearly distribution of price to book multiples for Lloyd's parent companies
Source: ICMR analysis
equity. The higher this rolling average, the higher the agencies as opposed to, say, the owners of capacity on price to book and vice versa. their syndicates? Only those lucky enough to hold share certificates in managing agents can ultimately benefit? What we can see on this chart is a balance between managing agencies creating value and those with book This brings us full circle. If an investor cannot buy value multiples of less than 1.0x, bringing the average shares in managing agencies but can buy shares in their of the market as a whole to 1.0x. The fact that the red publicly listed parent company, what could an investor line zigzags is because biggest isn’t always best over achieve had they done so? the long term and some smaller managing agencies have higher multiples and have therefore created more We call the chart in Figure 7 our Lime Street Value Creation value than larger agencies. Index (LVCI) which shows the growth in weighted total return if an investor had bought shares in the publicly listed Clearly, owning the right managing agency can be a parent companies of managing agencies in proportion to very shrewd investment, notwithstanding the platform the relative premium that company underwrote through optionality it gives a global parent company. Some Lloyd’s each year since 2006. fortunate organisations have acquired managing agencies for less than book value and then gone on to We can see the significant increase in value achieved sell them for a considerable profit. Others, formed by since the 2008 financial crisis, and indeed the significant their own management, have gone on to sell for between drop since the COVID-19 crisis! For comparison, we’ve 2.0x and 3.0x their book value. It’s been good business. shown this against the S&P 500 total return index for But does that mean that the majority of value creation at the same period. Interestingly, the COVID-19 drop Lloyd’s is restricted to the owners of shares in managing is the same in percentage terms for LVCI and for the
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Figure 6: Value creation by Lloyd's managing agency
Source: ICMR analysis
Figure 7: LVCI & S&P 500 cumulative returns from 2006-07-03 to 2020-03-31
Source: ICMR analysis
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Figure 8: Lloyd's Market RoC vs Private Capital vs Index of listed owners of managing agencies
Source: ICMR analysis
S&P 500. Also, with the same start date in 2006, the To illustrate the point, Figure 8 shows the annual LVCI is still higher (just) post the COVID-19 crisis than returns available to investors in Lloyd’s over the last the peak of the S&P 500 pre-crisis. Both indices have 14 years. This shows Lloyd's overall return on capital, recovered in similar percentage terms since the trough our imputed annualised returns for Private Capital, and a few weeks ago. the annual returns for our index of the publicly listed owners of managing agencies. So, in terms of participation in ongoing value creation at Lloyd’s, whilst ostensibly this would appear to Private capital has always tended to outperform the accrue solely to the direct owners of shares in overall Lloyd’s result, although the advantage appears managing agencies, there are clearly ways that literally to be narrowing again. One can clearly see the impact anyone could still participate, for any amount and at of the financial crisis of 2008 on the values of the any time. listed owners of managing agencies, but also their very strong rebound in 2012 and 2013. So what might this mean for investing in Lloyd’s? What this chart shows is that, despite Lloyd’s opacity We firmly believe that the drive to increase and the hurdles to entry as an individual investor, investment opportunity at Lloyd’s, as highlighted in there are simpler and more liquid ways to invest in (re) the recent Blueprint One document, should not simply insurance which can generate positive returns over the encompass existing market participants or ultra- cycle. This may be a way of enticing the next generation sophisticated funds. It should encourage investors to of investors into Lloyd’s; not expecting them to make the see the diversifying benefits and opportunities that a huge jump from a standing start to becoming a Member, strategy for (re)insurance related assets can bring to an but as a first step to better understand the underlying investment portfolio. business and invest in a far more familiar way.
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What might this mean for existing Members? well for existing Members in terms of underwriting profitability. But, particularly after the stock market Applying this modelling and valuation technique to gyrations of the last few weeks, it may also present managing agencies and to individual syndicates offers longer term value opportunities for investors in the a potentially new dimension in valuing capacity which listed parent companies of Lloyd’s managing agencies may help increase liquidity, subject to Lloyd’s rules. as well.
Using the traditional valuation approach of a multiple A bit more about the authors of Book value as detailed above, an individual syndicate During their time at Lloyd’s, of necessity the focus with a multiple above 1.0x is clearly showing a premium of Markus Gesmann and Quentin Moore was on to book value. If the Book value is deemed the underwriting performance, amongst other things through syndicate’s ECA, then logically the premium to Book revamping Lloyd’s Statistics as a benchmarking tool and value should represent the value of the capacity. Whilst creating the quarterly Performance Information class of acknowledging that the capacity auctions are far from business reports which are still sent to every managing a perfect marketplace, it may yet prove illuminating to agent. More recently they have worked with the capital see capacity values derived from this empirical approach markets, specifically in the Alternative Asset arena with using actual public market valuation data and relativities. its focus on insurance-linked securities, mark-to-market If nothing else, such benchmark pricing may provide a valuation and liquidity. Their work across both industries useful starting point when contemplating bids. gives them unique insight into how both markets interact. They have developed class leading forecasting and In conclusion, and whilst Lloyd’s underwriting results modelling products which allow their clients to make appear to remain something of a “work in progress”, better informed capital and underwriting decisions. anecdotal pricing evidence from the market combined with empirical observations suggest continued For more information go to hardening of rating over the near term. This augurs https://insurancecapitalmarkets.com
between the Members’ agents' average results. Whilst COMPARATIVE it has not always been the case, Alpha’s cautious approach to syndicate selection for 2017 has proven PORTFOLIO 2017 to deliver a better than average result for their PERFORMANCES: Members. We asked Emily Apple to tell us ALPHA’S why they think they achieved what was a APPROACH better than average result for their Members TO SYNDICATE in a soft market. Alpha’s Risk SELECTION Emily Apple, Alpha Management The 2017 Lloyd’s results identify a marked disparity in Insurance Analysts With the 2017 year of syndicate performance. There is also some disparity Limited account now closed, we,
36 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS at Alpha Insurance Analysts (Alpha), have reflected them to enjoy greater reserve releases and investment on the significant difference between our Members’ income than their competitors. average result (-2.8%) compared to the Lloyd’s market loss (-8.0%) and the average result for all third party Limited Catastrophe Exposures members (-6.5%). The 2017 year suffered from the Though producing significant profits for Members in major catastrophe losses of US Hurricanes Harvey, previous better-rated and predominantly loss free Irma and Maria together with Mexican earthquakes years, Alpha supported just three pure catastrophe and Californian wildfires. With $144 billion of insured syndicates for 2017 and limited participation to catastrophe losses during the 2017 calendar year such to 4% of the average Member’s portfolio. We (according to Swiss Re), Alpha is pleased to have been did so in recognition that catastrophe syndicates had able to restrict its Members’ losses for that year to a only enjoyed top quartile results during the bottom relatively low level. of the market due to an unusually low incidence of major loss. Further, we understood that the risk- The superior results, driven by Alpha’s risk management, reward outlook had much deteriorated since their are built upon our understanding of the distinctive inception, when they had been aimed to capitalise sectors of the Lloyd’s market and our monitoring of the on the special circumstances of the dramatic underwriting cycle. Unlike some market participants, who uplift in catastrophe rates during the mid-late have publicly stated that the peaks and troughs of past 2000s. market cycles are now largely redundant, Alpha’s approach of continually assessing developments in each class New Opportunities of business allows us to build bespoke client portfolios At the same time, in the latter part of 2016, third which better align risk appetite with the relevant reward, party Members were offered several new underwriting or otherwise, available at each stage of the cycle. opportunities, most notably in the forms of Verto syndicate 2689, Brit syndicate 2988 and Blenheim Retreat and Focus on Core Syndicates syndicate 5886, on top of other previous new Alpha’s view, in the years leading up to 2017, was “opportunities” such as Standard Club syndicate that many classes of business appeared to be under- 1884 in 2015. The business plans were built around priced and that any return to a normal level of major taking shares of underwriting risks already written in natural catastrophes would detrimentally expose those the Lloyd’s market and Alpha had appreciated that with a portfolio over-exposed to such risk. To best Lloyd’s performance had slipped behind its competitor protect against the growing downside risk, our advice peer group just as the down cycle seemed to be to our Members during the bottom of the market rate accelerating. Despite major loss activity remaining cycle was to cut back their underwriting and focus below average throughout the period 2012 to 2016, their portfolios upon core syndicates, which enjoyed the Lloyd’s market had for each year produced a diverse book of business, economies of scale, good annualised combined ratios of over 100% before reserve strength and could demonstrate a proven reserve releases, highlighting the fundamental fact that track record, whilst also reducing their exposure to rates in the majority of classes had been eroded to an pure catastrophe risk. Most third party Members unsustainable level. have holdings of Hiscox syndicate 33, TMK syndicate 510, Atrium syndicate 609, Beazley syndicate 623 Given the weak rating environment and the competitive and MAP syndicate 2791, so there is nothing new pressures of establishing a new book of business here, but Alpha chose to focus significantly more of from scratch, any syndicates seeking to start during its Members’ capital towards these five positions than this period, or indeed any existing syndicates seeking its competitors. These syndicates represented, on growth, were in our view likely to struggle to do so average, 63% of our Members’ portfolios and enabled profitably. The added disadvantage for new syndicates
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is the length of time it takes to build up meaningful 5886 has closed with a loss for 2017 of 26%. Alpha reserves and, as a consequence, their inability to offset did not support Verto syndicate 2689 (-31%) or major losses during their early years. These factors Brit syndicate 2988 (-48%). These three syndicates made support of new ventures at the bottom of the together represented up to 9% of the portfolio at other market always a difficult decision, however good the Members’ agencies. quality. There will, in our view, be a time as we approach Timing and Proportion the top of the next cycle that new syndicates In essence, the issue was a question of timing and become supportable again and that Special Purpose proportion. Although Alpha values the importance of Arrangement syndicates (SPAs) will enhance our providing capital to well managed, start-up syndicates, portfolios, providing those special circumstances are we believe it is sensible to do so cautiously in the first back in play. instance, before growing with them as their books become better established and their reserves build up A Cautious Approach to an adequate level. This approach is doubly important In summary, Alpha took a cautious approach to when the rating environment is weak. underwriting in 2017, with a principal focus on capital preservation, rather than chasing potential high Alpha supported the Blenheim syndicate 5886 (2% of returns, at a time when rates continued to weaken our portfolio), in its first year, having enjoyed the profits from already low levels. We focussed our Members’ generated by the same team over a sixteen year period portfolios primarily on core holdings with fewer at the then Cathedral syndicate 2010. In spite of their additional syndicates than our competitors, whilst proven skill and experience, faced with a heavy year being selective in our support for new initiatives. This for catastrophe losses, the Blenheim team were unable led to our Members producing a far smaller loss than to replicate their “great escape” of 2001, when faced most in 2017 and a profit in aggregate across the 2016 with 9/11 and still producing a tiny profit. Syndicate and 2017 years.
Cheviot clients. His PAINT IT RED – main area of expertise is the global bond THE IMPACT OF market, which includes government, corporate THE PANDEMIC and emerging market debt and Quilter Cheviot ON THE is able to access these areas both through INVESTMENT direct holdings and Richard Carter, Head external funds. As a part MARKET of Fixed Interest of his role, Richard chairs Research, Quilter Cheviot the firm’s Fixed Interest As Head of Fixed Interest Research at Quilter Cheviot Investment Management Committee and he is also Richard Carter provides attractive investment a member of the Asset recommendations that will ultimately benefit Quilter Allocation and Collectives committees. Richard Carter
38 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS wrote an article in the ALM December Newsletter ‘Is across markets and asset classes rather than just the the US facing a recession?’. With Covid-19 having such individual problems. Issues in the US mortgage market an impact on the financial markets in Q1 2020 we seemed to only be an American concern, until you asked Richard if he would let us know what has been realised the consequences for the European financial happening. system. With the global economy interconnected as never before, the potential is for problems to be shared Paint it red? rather than isolated. We have just witnessed one of the more extraordinary six-week periods in market history. US shares saw one This crisis is also having an impact as to how we monitor of the fastest falls from all-time highs, losing around a the crisis from a day to day perspective. The Covid-19 third of their value in the space of a little over a month. pandemic is an outside shock to the economy which Following a late March rally, it was almost possible has forced large parts of it to close – such as the to say that US shares had entered both a new bear restaurant, tourism and leisure industries. Given this, market and a new bull market – all within the space of investors have been looking for data which can reflect six weeks. the new reality quickly. We would never have turned to something like US weekly claims for unemployment In fixed income, investors pulled money out of the US benefits in the past, but this data point has proven government bond market in the middle of the crisis – invaluable with its frequent almost real-time read on almost unheard of for one of the world’s safest and the health of the economy. most defensive asset classes. The pressure to fund redemptions and other demands necessitated a ‘sell The speed of this crisis is not just rooted in its viral everything’ mentality. At one point, investors decided nature. Market movements have also been shaped to bet against US corporate debt to the point where it by the structure of modern finance. Computer-driven became a consensus trade before suddenly changing trading accounts for a much bigger percentage of their minds overnight. market trading than even five years ago, and the number of investment strategies which trade according The ‘extra-ordinariness’ of it all does not stop there. to set rules has grown significantly. Some investment Take Goldman Sachs’ estimate that global demand strategies will have sold stocks purely on the basis that for oil could fall by c. 25% in the short term – an stock markets were falling or to rebalance their risk unprecedented drop, even amidst a severe recession. allocations. That does not mean that the fall in stock Before the suggestion that OPEC, Russia and the US markets was irrational, but what might previously have could cut a deal to restrict production, some were played out over a period of months has occurred in even speculating that oil prices could even turn a matter of weeks. Whether the speed of this crisis negative in some markets, with oil producers paying equates to the quantum of economic damage remains you to take their oil off of them. Bear in mind that to be seen. things only appear to have calmed down because of the exceptional speed at which policymakers Can we avoid the worst economic effects have reacted to these events and the scale of that of the GVC? response. We are undoubtedly going to see a recession across the UK, Europe and the US. This is not so surprising The great reshaping for the UK; the economy was already looking fairly Some are already referring to this period as the Global weak before the crisis, and shutting down large parts Virus Crisis (GVC), adapting the Great Financial Crisis of the services sector will clearly push it over the edge, (GFC) moniker for the events of 2008-09. The great regardless of how quickly the government and Bank of lesson of 2008 was to look at the feedback loops England has reacted.
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Much depends on the progress of the pandemic. Experts are poring over the trajectory of infection and death rates to get a sense of whether these curves are flattening out or not. It would appear that peaks may well be reached within the next few weeks in Europe and the US. By the time you read this, we may well have seen the peak for countries like the UK. It is perhaps more difficult to assess how governments will decide to lift emergency quarantine measures. In China, South Korea and Singapore, for example, some measures have been reintroduced following some minor secondary outbreaks.
However, there is a more interesting question surrounding the US and European economies: can their governments get aid to the economy in time? The impact of the virus is one problem. But we also need to consider the second-round effects. There is plenty of anecdotal evidence that companies are cutting back earnings have clearly been overshadowed by the on their activities or planned production – see Airbus’ pandemic. Earnings per share typically fall by around recent decision to cut its manufacturing operations a third in a recession, though the Global Financial by a third for example. When corporate behaviour Crisis saw earnings per share fall by 50%. As of the changes, recessions ensue. beginning of April, our estimate at Quilter Cheviot was that shares were now discounting a roughly Governments and central banks are therefore racing 30% decline in company earnings this year. But against time. The scale of their support has been be careful of this figure – the outlook for earnings unprecedented. In March, the US Congress approved will be highly contingent on individual businesses. a stimulus package more than three times the size of Airlines might be lucky to get away with a 30% their economic support during the 2008 crisis while the decline in earnings, supermarkets might see bit of Federal Reserve has already backed markets to the tune a bump. of several trillion dollars. However, this money needs to reach people and businesses almost instantaneously. If What makes this downturn unusual is that dividends you don’t have the cash flow to cover your expenses could be postponed or cut in line with profits. This is – or slash them in order to conserve cash – then the potentially a bigger problem in the UK where companies implications from an economy wide perspective could have historically been generous with their pay-outs but be much more severe. have also largely maintained them in a downturn. Bank balance sheets may be much stronger this time around Are there opportunities out there? but political expediency demands they share the pain At this point I can almost hear you rustling the pages by forcing them to suspend their dividends. The good of your ALM newsletter with impatience. Is he going news is that the banks may then have – depending on to get to the point and tell me whether now is a good the severity of any recession – extra cash to return time to invest? to shareholders.
Unfortunately, it is very hard to give an answer based Many companies in other sectors are not in such a on firm fundamentals. Final year results for company favourable position, having seen their businesses
40 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS hit hard over the past month or so. They need to virus as people are forced to go out to work or frustrate conserve cash. The UK stock market has been higher public health efforts because they cannot afford to pay yielding than many others for a number of years. healthcare fees. We are already seeing chief executives This is partly a function of having a larger proportion donating their pay and bonuses to charitable causes – of more mature industries such as oil and gas and particularly in the banking sector which does not want tobacco, and less of the higher growth technology to be pilloried for another ten years – and we may see businesses that tend to reinvest most of their cash demands for a more egalitarian society in the wake of flow. For now, it looks as though these sectors will the crisis. still be able to afford their pay-outs. Like much else however, it depends on how long coronavirus affects There could also be implications in terms of geopolitics. the world. There already was strong support in the US towards disengaging from China economically, with some going Conclusion so far as to say it was the only area of consensus I am a little wary about providing firm conclusions in this between Democrats and Republicans. That may newsletter, particularly as my last article here argued accelerate now, particularly in terms of medical supply that while the US could face a recession in 2020, it chains. At the most extreme end, we may see more seemed unlikely on balance. I must admit I overlooked localised supply chains, with a corresponding rise the possibility of a global pandemic, a mistake I will not in the potential for inflationary shocks. It would be be making again in the short term. ridiculously early to call this yet – we are only eight weeks or so from markets thinking that coronavirus While markets have rallied hard over the fortnight to would remain a China-centric issue – but these are the Easter weekend, it appears too early to call the things that investors need to be thinking about in bottom of the market yet. It may be that this time terms of the bigger picture for the future. is different, and that the rapid nature of the shock results in a correspondingly fast recovery. That relies Investors should remember that the value of investments, on there being little wider economic damage to the and the income from them, can go down as well as up and global economy however. Much will depend on the that past performance is no guarantee of future returns. progress on the fight against coronavirus, and whether You may not recover what you invest. This document is we need to worry about secondary outbreaks (and the not intended to constitute financial advice; investments re-imposition of quarantine measures). referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as For the meantime, we expect markets to remain a solicitation to buy or sell a security. This is a marketing volatile over the next few months. However, we do communication and is not independent investment expect recovery in due course and for longer-term research. Financial Instruments referred to are not subject investors recommend maintaining a marginal bias to to a prohibition on dealing ahead of the dissemination of equities over bonds. At this juncture, however, it is this marketing communication. too early to say that markets have fully priced in the full implications of this crisis and therefore we remain Quilter Cheviot and Quilter Cheviot Investment cautious on adding to equities. Management are trading names of Quilter Cheviot Limited. Quilter Cheviot Limited is registered in England Will there be wider consequences to the GVC? Quite with number 01923571, registered office at One possibly. Society – particularly in the Anglo Saxon Kingsway, London WC2B 6AN. Quilter Cheviot Limited is world – may become more egalitarian as governments a member of the London Stock Exchange and authorised expand welfare and healthcare benefits. Without these and regulated by the UK Financial Conduct Authority. two pillars, it may simply be much harder to tackle the
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article by Simon Kilgour and Diane Jerry of CMS law COVID 19 - firm looks at what are the legal coverage issues to the COVID-19 claims. WHAT IS THE As a result of the COVID-19 pandemic and consequent SCOPE OF THE travel and quarantine restrictions, understandably concerned individuals and businesses are assessing INSURANCE their risk of injury and loss arising from the outbreak, including the recoverability of losses under available COVER FROM insurance cover. For the insurance sector claims are likely to increase across multiple business lines, A UK LEGAL including life, health, travel, contingency (including event cancellation), property and business interruption, PERSPECTIVE? trade credit, political risk, employers’ and public liability, professional indemnity and D&O. Lloyd’s has asked managing agents to In all cases it will be important to check policy wordings provide an estimate carefully as cover for particular losses will depend on of losses arising from the precise terms of the insurance. Key considerations COVID-19 and once include: these responses are assessed by the • Direct trigger of loss? Insurance covers losses Catastrophe Response ‘proximately caused’ by an insured peril. In general Steering Group a terms this means that a claim will be covered if preliminary estimate of the risk insured against is the direct or dominant Simon Kilgour, Partner the losses to the market trigger of the loss. Where COVID-19 falls within at CMS is to be provided in early the description of insured perils under a policy (for May. It is accepted that example if the policy affords cover in the event this estimate will be of disease or notifiable illnesses) and the virus is a moving feast. There the dominant cause of loss or injury suffered, it is have been demands in likely that it will be covered subject to any relevant the US for insurers to exclusions or policy conditions. Obvious examples meet all such claims of insurance cover where COVID-19 could be the regardless of whether direct cause of loss are life and health policies. the policy provides Cover may also be triggered where COVID-19 cover, and the practice itself does not fall within the description of insured of the imposition of perils but the insurance covers events that are a COVID-19 exclusions consequence of the virus, such as government Diane Jerry, Professional on renewal impacting actions in response to the outbreak (for example Support Lawyer on claims-made policies under political risk or trade credit policies). has been questioned in the UK. Lloyd’s Corporation and the Lloyd’s Market • Exclusions Existing policies may contain exclusions Association have formed a working group to look at for epidemics or pandemics and, where they do policy response in order to provide guidance and to not, COVID-19 exclusions may be included at ensure a consistent response to claims. The following renewal. Travel cover (including under key man
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insurance) may also exclude cancellation claims property policies and may provide some cover for where an ‘appropriate authority’s’ advice at the COVID-19 losses, although the terms are likely to time travel was booked was against travel to be restrictive with sub-limits applied. that particular destination, region or country or where circumstances could reasonably have Some BI insurance (typically arranged for larger, been foreseen as giving rise to a claim at the time more sophisticated insureds) may provide cover for of booking. COVID-19 losses under ‘non-damage’ extensions of cover. Under a ‘notifiable disease’ extension, For event cancellation cover, it is also common for example, there may be cover in the event of for policies to exclude losses arising from the compulsory closure of premises or restriction communicable diseases leading to quarantine or of access. The extent to which such cover will restrictions on movement and/or travel advisory respond to COVID-19 claims will depend (among or warnings being issued by national bodies. In other factors) on the relevant date when the such cases the fear or threat of such restrictions virus was deemed a ‘notifiable disease’ and in will usually also be excluded. which location. COVID-19 has been declared a notifiable disease throughout the UK: in Scotland The burden of proving that a loss falls within an on 22 February, Northern Ireland on 29 February, exclusion will normally fall on the insurer although England on 5 March and Wales on 6 March. some policy wordings may seek to reverse the Other factors to be considered when determining usual burden of proof. whether there is cover will include whether the policy wording specifies the notifiable diseases • Property damage Business interruption (BI) that are covered by the insurance. If it does, it insurance typically requires physical loss or is very unlikely that COVID-19 will be included damage to the insured’s property. Where a as it would not have been contemplated when business sustains economic losses because a large policies were drafted, although if there is a general number of its employees fall ill, claims under BI description that includes coronavirus diseases insurance will not usually be covered. If, however, then the policy could arguably respond. For it can be argued that COVID-19 has caused managing agents estimating potential exposures property damage the position may be different. to claims, a key issue will be the length of the The scientific understanding of COVID-19 is period of indemnity. ‘Non-damage’ extensions of still at a relatively early stage, but it seems likely cover (where they respond) are likely to be more that the virus is transmitted not only by airborne valuable to insureds than cover for losses flowing contact but also as a result of the contamination of from temporary contamination of premises. surfaces and materials. This raises an argument that the contamination amounts to physical damage • Loss of attraction insurance, which provides cover to the property (albeit sub-molecular) and that for tourist attractions and hospitality venues for the costs, for example, of deep cleaning premises loss of income following a defined event, would could be recoverable under material damage not normally cover an epidemic or pandemic as cover. This is a difficult area of law so there is no ordinarily physical damage to property in the quick and easy answer and it is one that could well vicinity is required. In recent years cover has been come before the English courts in the context of extended to cover other perils such as terrorism COVID-19 claims. but is in any event geographically specific, usually requiring a defined event to occur within a Disease at the location, contamination and designated radius of the insured’s premises or a pollution may be expressly covered under certain strategic location.
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• Event cancellation It is anticipated that the Some liability insurance (for example professional cancellation of events, in particular high profile indemnity) may exclude deliberate or reckless sporting fixtures, will see significant claims for acts by the insured that could reasonably have insurers. Although communicable diseases are been expected to cause injury or damage. The commonly excluded under event cancellation burden of establishing recklessness will usually insurance, policies – in particular those arranged for be on the insurer and is a higher hurdle than large events - may include communicable disease negligence. Whether an insured has acted extensions. Cover may, however, only apply where recklessly may depend on whether it has complied a government or local authority order has been with government and industry guidance or issued which requires the event to be cancelled (or, requirements and whether actions taken are in line depending on the policy wording, rescheduled or with similar businesses in its sector. postponed) as a matter of law. Whether, and the date on which, such an order has been made will Force Majeure need to be assessed for each jurisdiction. Businesses will also be looking at the terms of their own commercial contracts, including 'force majeure' • Legal liability Where individuals’ infection by clauses. A force majeure clause typically states that the COVID-19 can be traced to a particular place or contract will be cancelled (or the parties’ obligations activity, claims may be brought against businesses suspended) on the happening of certain events that or individuals deemed responsible. These could, are outside the parties’ control. The clause may set for example, include claims against employers, out what events constitute force majeure, for example hospitals and medical staff, schools and universities, outbreak of disease, epidemic and pandemic. airlines, hotels, cruise operators and retail outlets for unreasonably exposing employees, patients, Where the contract does not contain such wording, a students or customers to the risk of contamination. party wishing to rely on a force majeure clause will need Claims by shareholders against directors may also to consider the clause carefully to determine whether been seen in connection with decisions taken in COVID-19 or disruptions resulting from the outbreak response to the outbreak. could be considered a force majeure event under the contract. Clauses may refer to ‘acts of God’, in other In such situations the existence of a duty of words a natural, not man-made, catastrophe, but it is care will often be clear: employers in the UK, for unlikely that COVID-19 is an ‘act of God’. As a matter of example, owe duties under the Health & Safety English law, where a clause suggests that force majeure at Work Act 1974 to protect employees’ health, must arise from an identifiable ‘act’ or ‘event’, there is safety and welfare. Employers’ liability insurance case law that an ‘event’ means an identifiable happening will usually indemnify employers for disease resulting from a specific cause at a specific time and at related claims where the disease arises out of and a specific location. A pandemic is a gradually evolving is in the course of employment and in the UK an state of affairs that may last for a prolonged period and approved policy may not contain terms limiting probably not an ‘act’. In contrast, and depending on the the insurer’s liability where the insured employer wording of the clause, it is possible that an act or order has not exercised reasonable care. In these cases closing premises or imposing restrictions on movement there will, however, be significant causation issues by a governmental authority as a result of COVID-19 in establishing that the infection was caused either could constitute a force majeure event. by a person’s employment or an insured event. To rely on force majeure, a party must also demonstrate Public liability insurance may also respond where it that the force majeure was the sole cause of the failure covers accidental death or injury to non-employees. to perform obligations, that the circumstances were
44 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS unforeseeable and beyond its control, and that it has to COVID-19 claims. Reinsurances may or may not taken steps to mitigate its losses. Finally, 'force majeure' respond depending on the applicable law of the clauses commonly contain strict notice provisions underlying policy/policies. We have identified obvious which must be complied with. key issues: whether there has been physical damage as a result of sub-molecular contamination; when Conclusion was COVID-19 a notifiable disease; what amounts to Aside from any political pressure for the insurance reckless conduct? As the estimates of the potential market to carry any non-contractual burden of the exposure unfold and there is greater clarity and losses, Lloyd’s/LMA working group will have its work understanding of the types of claim so will the debate cut out to provide any simple one-size fits all guidance crystallise. It is anticipated however that certain issues to the market. They will need to ensure that they will need to be tested in the courts before there is any have considered the standard wording across the settled view. 12-14 classes of businesses that potentially respond
A review of the 2019 capacity auctions: MARCH LUNCH: Auction volumes increased by 14.9% to £134.8 million of capacity REVIEW OF The supply of capacity has always been the principal driver of auction prices. Prior to the 2019 auctions, 2019 CAPACITY the pre-emptions, net of de-emptions, offered to third party Members totalled £320 million for 2020, as AUCTIONS; compared with a small reduction (£4 million) in capacity JANUARY offered for the 2019 year. Some of the larger pre-emptions offered to third RENEWALS; AND party Members included £79 million of capacity on Hiscox Syndicate 33, £65 million of capacity on TMK COVID-19 Syndicate 510, £52 million of capacity on Atrium Introduction Syndicate 609 and £51 million of capacity on Beazley In a comprehensive and Syndicate 623. Most of this capacity was absorbed by very well received talk at Members taking up their pre-emption rights but some the spring lunch held in the sold at auction with £12.2 million traded on Hiscox Adam Room, John Francis Syndicate 33 (£5.2 million in 2018), £25.9 million covered three main topics. on TMK Syndicate 510 (£14.5 million in 2018), £7.6 He began by giving a brief million on Atrium Syndicate 609 (£3.2 million in 2018) overview of the 2019 and £8.7 million on Beazley Syndicate 623 (£4.3 million capacity auctions, before in 2018). moving on to examine John Francis, the January 2020 renewal In contrast, MAP Syndicate 2791, which did not Research Director of season, and concluding pre-empt for 2020, saw lower volumes of capacity Hampden Agencies his talk by spending traded than was the case in 2018, with only £5.2 some time discussing the million of capacity trading in 2019 (£7.8 million in potential effects of the Coronavirus pandemic. 2018).
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Figure 1: Capacity traded – Auctions 2007 to 2019
Source: Hampden
Hampden’s expectations prior to the 2019 auctions share, for the prospective year of account. Hampden were that prices would be broadly stable and that believes that their UMAP Index is the most accurate there might be an increase in the volume of capacity gauge of the value of private capital’s average portfolios traded owing to the higher level of pre-emptions being as implied by auction prices. The 2019 UMAP is weighted offered to third party Members. In the event, the total by 2020 capacity offered to Members’ agents. capacity traded increased by 14.9%, to £134.8 million. Figure 1 shows how the capacity traded split between As was the case at the 2018 auctions, prices rose in aligned and non-aligned buyers between 2007 and each successive auction from 40.6p per £ at Auction 2019. Interestingly, £121 million capacity was bought One, to 44.3p per £ at Auction Two and ending Auction by third party Members and only £14 million by aligned Three at 46.7p per £, which is above the all-time high corporate buyers, who purchased far less capacity in price across the three auctions of 44.7p per £ at the 2019 than they had done in either 2017 or 2018. 2015 auctions.
Comments on auction pricing trends: Despite the increase in the UMAP overall Prices rose by 5.8% despite pre-emptions to 43.9p per £ of capacity, there were averaging 10.7% some significant price reductions As can be seen in Figure 2, prices increased in 2019 for Figure 3 shows the change in strike price for each the second year in succession, by 5.8% to 43.9p per £ syndicate between the 2019 and 2018 auctions. of 2020 capacity, as measured by Hampden’s proprietary What is immediately apparent from the chart is how Unaligned Market Average Price (UMAP) Index, which only 10 syndicates actually commanded any real price weights auction prices using only the non-aligned capacity at the auctions (of 10p per £ or higher)! The largest
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Figure 2: Unaligned market average prices (UMAP) 2007 to 2019
Source: Hampden
Figure 3: Change in price by syndicate: 2019 vs 2018 Auctions
Notes: Percentages shown are the applicable pre/de-emptions Source: Hampden
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price rises were on three syndicates which didn’t pre- Measuring Valuations empt. Chaucer’s nuclear syndicate 1176 rose by 14.1p John then described the traditional method of per £ to 196.6p per £, QBE’s liability syndicate 386 measuring valuation of insurance companies which rose by 8.1p per £ to 68.7p per £ and MAP syndicate uses the share price as a ratio to Net Tangible Asset 2791 rose by 8.6p per £ to 73.5p per £. Value. He commented that for a true comparison, adjustments would need to be made for a number The prices of most of the syndicates remained more of factors, such as the potential profit on unearned or less at the levels of 2018, although some, such premiums, the franchise value of the PLC and the as that for Beazley syndicate 623, fell back slightly fact that unaligned Members pay a fee and profit by 3.2p per £ to 61.8p per £ following a 15.6% pre- commission to the managing agent. Nevertheless, emption. However, there were some larger falls in it is instructive to compare the goodwill premium price. For example, the price of Asta’s non-$ liability paid at the Lloyd’s capacity auctions with the Syndicate 2525, fell by 13.1p per £ to 28.2p per £, goodwill premium for a listed insurance company. following announcements that the active underwriter, In the context of Lloyd’s syndicates he compared David Dale, would be taking a sabbatical for six auction prices at the 2018 and 2019 Auctions and months, as well as it adopting a revised approach to syndicate ECAs for 2019 and 2020 (excluding any reserving. The price of the Canopius Syndicate, 4444, diversification credit at Member level) as a ratio to fell by 10.6p per £ to 3.4p per £. Part of the reason the ECA. for this was that its price at the 2018 auctions was set by the Canopius managing agency Mandatory This analysis showed on average that the auction Offer of 14.05p per £ (which it did not repeat premium was stable at 1.36X P/NTAV with the most in 2019). highly valued syndicates remaining Hiscox Syndicate
Figure 4: Average Price + ECA as Ratio to ECA
Source: Hampden
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33 (2.33X), Atrium Syndicate 609 (2.13X), Beazley However, on a more positive note, John was able to Syndicate 623 (1.91X) and MAP Syndicate 2791 report that the growth of alternative capital has now (2.11X). He mentioned Lancashire Syndicate 2010 too, paused; and for the first time since 2008, using figures which was measured at 1.12X. from Aon (shown in Figure 5), alternative capital has actually reduced in the nine months to 30 September By way of comparison, the 1.36X P/NTAV at the 2019 2019 (to $93 billion from $97 billion at year end 2018). Auctions is almost exactly the same as the 30 year Whilst it is heartening to see that some institutional average price to book of 1.35X calculated by Dowling investors are taking a more discerning view of the & Partners for its P/C (re)insurance composite of ILS managers with whom they place capital, as well insurance and reinsurance companies. as reassessing their individual risk appetites, it is less encouraging to see that the overall amount The 1 January 2020 reinsurance renewal of reinsurance capital has increased once again. season remained more competitive than Traditional reinsurers have rebounded, and increased the insurance classes their capital during 2019, mainly as a result of the fact John explained that the reinsurance market has that they have not been exposed to anything like the remained more competitive than the insurance classes, same number of losses in 2019 as in 2017 or 2018, with the major reason for this being the growth and added to which the recovery in asset values in 2019 current level of alternative capital. The growth of boosted their balance sheets. alternative capital over the past decade has not only contributed to the rate reductions between 2013 and The good news is that despite this rebound, the 2017, but its presence has also suppressed the level of 1.1.2020 renewal season has witnessed some rating increases following the losses of 2017 and 2018. meaningful rating increases. According to figures
Figure 5 Global reinsurer capital: 2006 – 2019Q3
Source: Company financial statements, Aon Business Intelligence, Aon Securities Inc.
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Figure 6: Guy Carpenter Global Rate on Line Index: 1990 – 1.1.2020
Source: Guy Carpenter
sourced from Guy Carpenter, shown in Figure 6, their and is a good way of illustrating the progress of this Global Rate on Line Index rose by 5% (1.1% at 1.1. sector of the market. 2019), and their US Rate on Line Index rose by 9% (3% at 1.1.2019). Most importantly, these increases were John discussed pricing in the secondary market for far larger than those seen in 2019. This is especially catastrophe bonds reflected in Lane Financial’s graphic reassuring in the light of the fact that some 40% to (Figure 7) displaying secondary cat bond yields over 50% of US catastrophe business renews in January. expected losses. It shows how secondary yields dipped in Quarter 3 of 2019; in fact, falling to below where it Turning to developments in the alternative market, began the year. The year-end expected excess return John briefly discussed the Insurance Linked Securities above expected loss for investors (in addition to the (ILS) market, with particular reference to recent pricing return on collateral) was 4.31%, lower than the 4.52% at in the catastrophe bond market. Citing data from Lane year-end 2018 but significantly higher than the narrow Financial LLC, he pointed out that catastrophe bond spread of only 1.57% at year-end 2016 highlighting that rates had fallen by 7% in the third quarter of 2019 investors in this market were requiring higher returns coinciding with a low level of new bonds issued but rates after the catastrophe losses of 2017 and 2018. had recovered by 2% in the final quarter of 2019. For those unfamiliar with it, Lane Financial’s synthetic rate- Insurance rating trends remain more on-line Index is constructed using data from catastrophe positive than reinsurance bond, ILS and Industry Loss Warranty markets, in order John went on to report on the much more positive to provide an approximation of premiums being paid (or rating environment in insurance classes where rate rate-on-line) for ILS and catastrophe bond transactions. increases accelerated in the second half of 2019. It is one of the bellwether benchmarks for the sector Figures 8 and 9 show the trend of positive trend of
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Figure 7: Catastrophe Bond Pricing: Dec 2001 to Dec 2019
Source: Lane Financial
Figure 8: AmWINS US E&S pricing Q4 2014 – property rates up by 17.9% in Q4 2019, casualty rates up by 14.5%
Source: Hampden, AmWINS
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rating development that has also been unfolding in John concluded his comments relating to the the insurance classes over the course of 2019. The development of the market and the renewal season recovery in both the insurance and retrocessional by showing a bar chart from Willis Towers Watson, reinsurance markets has been much more pronounced which sets out its predictions for rating changes than that in the reinsurance market, which has been from the spring of 2016 to 2020 (see Figure 10). He burdened by an excessive amount of surplus capital. stressed the importance of psychology measured by According to AmWINS, the largest independent rate expectations of market stakeholders including wholesale distributor of specialty insurance in the US, clients, brokers and underwriters and how trends are E&S property rates rose by 17.9%, and E&S casualty reinforced both in softening and hardening stages of rates rose by 14.5%, in quarter 4 of 2019. As can be the insurance cycle. seen in Figure 8, the percentage of these increases has grown with each successive quarter in 2019, As can be seen on the right hand side of the block which is a very encouraging trend with AmWINS chart, the outlook for rating increases is more positive reporting the same factors behind this trend in 2019 in 2020 than it has been at any time since the Spring remain in play in early 2020. of 2016; out of 27 classes of business measured only 2 were expected to show rate reductions being The Marsh Global Insurance Composite Pricing index international casualty and surety. (Figure 9) shows an increase of 10.6% in the fourth quarter of 2019, which is the largest percentage Coronavirus and risk appetite quarterly increase since the inception of this index in John closed his talk with a brief discussion of the 2012 and compares with rate increases of only 2.4% potential impact of Coronavirus on investors’ risk a year earlier. The Marsh index measures insurance appetite. Whilst he argued that it was very hard, if premium pricing changes at renewal for around 90% not impossible, at this early stage of the pandemic, of Marsh’s premium placed in global insurance markets. to determine the full potential impact of Coronavirus
Figure 9: Marsh Global Insurance Composite Pricing Index: Q4 2015 to Q4 2019 - up by 10.6% in Q4 2019
Source: Marsh
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Figure 10: Outlook for 2020 - Willis Towers Watson Commercial Rate Change Predictions – Spring 2016 Update to 2020*
Source: Willis Towers Watson *The 2020 figures reflect the addition of personal lines and financial institutions — FINEX as separate entries. The 2019 figures reflect the addition of marine, cargo and senior living/long-term care as separate lines of business. The 2018 spring update figures reflect the absence of marine in that issue; the 2017 figures reflect the addition of international coverage as a separate line; and the 2018 figures reflect the addition of product recall and the subtraction of employee benefits, which are no longer covered in this report. Casualty lines are discussed in one combined report but are included in this table as separate items (GL, auto and workers compensation).
Figure 11: Volatility S&P500 Index, 1 Week, TVC “VIX index”
Source: CBOE
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on markets, and investors’ behaviour with any great previous highest level ever recorded was 80 in October degree of certainty, he took the opportunity to show 2008, which was at the peak of the Great Financial the VIX one week volatility index in respect of the Crisis (GFC) .(On 16 March 2020 the VIX set a new S&P 500, as a means of illustrating the current degree record at 82.7). of risk aversion and anxiety on the part of investors (Figure 11). For those unfamiliar with VIX; it is the He pointed out the immediate impact of reduced symbol for the Chicago Board Options Exchange's risk appetite on asset values, which like the GFC will volatility index. It is a measure of the level of implied have an adverse impact on insurers’ asset values and volatility of a wide range of options, based on the S&P ought to contribute to continued momentum for rate 500. It is considered to be the market's best prediction increases. However, more difficult to assess was the of near-term market volatility, and is mostly used by impact on claims activity other than obvious areas market traders to gauge anxiety levels. The sheer such as event cancellation and travel. (Since John’s uncertainty of the Coronavirus pandemic led to the talk this has rapidly developed with economic activity VIX rising to a level of 53.9 on 11 March, the day of reduced by enforced government lockdowns leading John’s talk. By way of a comparison, the average VIX to concerns not only about claims and in particular value is usually around 20, and before Coronavirus, the business interruption but also demand.)
seen on loss-hit catastrophe treaty contracts, which 2020 JAPANESE rose by between 30% and 50% for Japanese wind exposures. Rates on loss-free business also rose by RENEWALS smaller amounts, or renewed as before. Overall, the Japanese renewal was not overly affected by the onset In this article, Chandon of the COVID-19 pandemic; it was also orderly and Bleackley, Publications completed on time. Editor, ALM, examines some the factors that Introduction influenced the main Despite the significant losses sustained by the Japanese Asian market reinsurance market during 2018, many commentators regarded the renewal season that 2019 April renewal season as a disappointment. Rates took place on 1 April, in Japan only increased on accounts that had been focussing on Japan, the directly affected by the losses of 2018. Given that the most important of these loss figures on the two Japanese typhoons in 2018, Chandon Bleackley, markets. Japan remains Jebi and Trami, were still deteriorating at the time of Publications Editor, ALM the largest buyer of the renewal, the increases did not even fully reflect the catastrophe cover full magnitude of the losses. In some cases, the rating outside of the US and the two main risks to renew increases imposed in 2019 were quite substantial, but were the wind and earthquake covers. Both of these these increases were largely off-set by flat renewals markets have had quite different loss experiences over on non-loss affected business. There was nothing like the past two years, and this has been reflected in the the general hardening of the whole market that might renewal rates that have been imposed in 2020. The have been expected in the wake of losses that were rates on wind-exposed business rose substantially. turning out to be as costly as Typhoons Jebi and Trami. The largest risk-adjusted property price increases were The remainder of 2019 then saw the Japanese market
54 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS sustain a number of other serious losses in the autumn, relatively low initial loss estimates, of between $2.3 most notably Typhoons Faxai and Hagibis. In total, billion and $4.5 billion, respectively. As it now turns the Japanese losses for 2018 and 2019 are currently out, these estimates were far too low. Typhoon Jebi estimated to have cost the industry in the region of was a much more complex loss than had been initially $35 billion. thought, that affected a greater number of classes of classes of business, and produced claims from multiple Given these losses, and some of the rating increases perils (not just wind). Typhoon Jebi’s losses therefore that had taken place in January of this year, there rose steadily in the months following the loss. Current was considerable speculation in the early months estimates now put the total cost of the loss at between of 2020 as to what might happen at the Japanese $15 or $16 billion, or over five times as great as the renewals in April. Essentially, opinion was divided; original loss-estimate! some commentators thought that rates in Japan would increase, as reinsurers sought payback for the In addition to Typhoon Jebi, the industry also had to two consecutive years of losses, whereas others took contend with Typhoon Trami in 2018, which struck a more pessimistic view and argued that any rating Japan a month after Jebi (on 30 September). Indeed, increases would be stymied by the fact that the market one of the side-effects of Trami was that it complicated and its pricing was still predominantly dominated by and delayed the initial loss estimates of the damage the large European reinsurance companies (whose inflicted by Jebi. At the outset, Trami was estimated paramount interest has often been maintaining their to have produced insured losses of about $1 billion, market share and portfolio diversification above and but this figure has now grown to about $3 billion. beyond all else), and the inescapable fact that there was To compound matters, Japan was also hit by two still ample reinsurance capacity available. To compound earthquakes in 2018. Collectively, these losses are this uncertainty, the last two months’ negotiations took currently estimated to have cost insurers in the region place against the background of the steadily worsening of $4 billion to $5 billion. When viewed in isolation, the COVID-19 pandemic and its unquantifiable impact on impact of these two earthquakes on the industry would the insurance markets and the world economy. not be that significant, but when their cost is added to that of the typhoon losses that have hit the Japanese The ongoing cost of the 2018 Japanese market in 2018 and 2019, their impact becomes more losses – “loss-creep” significant. As mentioned above, the main problem The Japanese market has now produced insured losses with the April 2019 Japanese renewal was that the full of about $35 billion over the last two years. 2018 cost of some these losses, especially Jebi and Trami, and 2019 have been the worst trading years for the was not recognised, as the losses were still developing. Japanese insurance industry since 2011, and were This meant that the rating increases imposed in April remarkable for the fact that Japan was hit by four large did not reflect their full cost. typhoons (costing $30 billion in total) in the space of only two years; something which had never happened The additional burden of the 2019 losses before. In addition, the reinsurance market had to In the wake of a generally underwhelming April 2019 contend with the fact that these losses were subject renewal season, the Japanese market has had to to considerable deterioration and uncertainty in the contend with another bad loss year in 2019. The two months after they occurred; something that has now largest losses in 2019 were Typhoon Faxai, which hit become known colloquially as “loss-creep”. This “loss- Japan on 19 September, and Typhoon Hagibis, with creep” caught out a lot of (re)insurers, and led to their occurred precisely a month later. Current estimates having to revise their initial loss estimates. In the case are that Faxai may cost the industry in the region of of Typhoon Jebi, which struck on 28 August 2018, $7 billion and that Hagibis may cost in the region of the main risk modelling firms, RMS and AIR, only gave $9 billion. According to figures released by the General
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Insurance Association of Japan, which were updated in Africa (MENA) business accounted for about €3 billion March of this year, some $9.2 billion of claims have now of business in 2019, which is a slightly larger amount been paid in respect of these losses, and the amount than their US business (€2.9 billion). By far the largest of claims paid has increased by about 35% since last single monetary contributor to the Asian and MENA December alone. Part of the reason for this has been income was Japan. Its Japanese income rose from the fact that there were simply not been enough claims €336 billion in 2018 to €425 billion in 2019, mainly professionals, assessors and loss adjusters available as a result of the rating increases that took place in in Japan and this slowed down the cost of claims April 2019. For the record, the cost of the typhoons to evaluation and notification. Munich Re was €1.3 billion, so there was a compelling case for major rating increases in April 2020. Despite this, there has also been some cause for optimism, in that the loss on Hagibis has not It is also important to understand that Japanese deteriorated to anything like the extent that some cedants greatly value their long-standing and ongoing industry commentators had originally feared would be relationship with the global reinsurance companies. the case. In its immediate aftermath, some estimates Whilst there is no doubt that reinsurers, such as had forecast that the loss on Hagibis would reach Munich Re, Swiss Re and Hannover Re, all have the as high as $15 billion. This degree of pessimism can market power to push for price rises in the region, the largely be ascribed to their not wanting to be caught feeling was that they might not have chosen to do so out as they were with Typhoon Jebi the year before. as aggressively as they might, or some would have However, most of the claims on Hagibis were flood- hoped. There is an argument to suggest that Japan is related, but on account of the fact that Japan has seen as providing valuable risk diversification for the some of the best and most advanced flood defences major reinsurance companies. There is evidence to anywhere in the world, the losses have not been as suggest that it has sometimes been the case that some great as had been feared. In contrast, most of the loses reinsurance companies have been prepared to write on Jebi were wind-related. business at rates that remain too low, in areas which provide them with a sufficient level of diversification. The dilemma faced by large reinsurance This is one of the main reasons why rates have remained companies depressed for so many years. Equally, both the main Whilst the prevailing view was that rates had to increase reinsurers and their Japanese cedants have been keen in 2020, in the wake of the losses, other commentators to maintain long-term business relationships and there argued that the situation in Japan was not quite as has therefore been more give and take on the issue simple, or reflexive, as that. Japan is something of a of pricing. That said, it is worth noting that Munich Re unique market, which is not subject to exactly the was prepared to give up some business in 2019 as a same market forces as in the US and elsewhere. The result of its being unable to secure the higher level of feeling in some quarters was that these differentiating rating increases it wanted in some classes. However, as factors may have had the effect of dampening the noted above, the company still managed to increase its overall recovery of the market, despite the desire for overall income in 2019. post-loss payback. Alternative capital has not been so There is no doubt that Japan is still a market where dominant in the Japanese market to date some of the large global reinsurers, such as Swiss Re The two main benefits of the fact that Japanese and Munich Re, not only command a significant market companies continue to place great value on their share, but also have considerable pricing power in the business relationship with the global reinsurers, and market. To cite one example, an analysis of Munich Re’s the associated fact that it suits the global reinsurers to 2019 accounts shows that Asian and Middle East North maintain this relationship, have been that these factors
56 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS have largely kept alternative capital out of the region, “old-fashioned” underwriting. The deterioration that and Japanese business has also provided reinsurers has taken place with these losses has led to a situation with portfolio diversification for their portfolios. As an where capital has been retained by cedants pending aside, it could be argued that one of the reasons that the ultimate development and resolution of the losses. the European renewals have been so disappointing in This is commonly known as “trapped” capital, and is January 2019 and 2020, in relative terms, may have something that all ILS investors are keen to avoid. been the product of the fact that Europe is also a “Trapped” capital leaves ILS managers less leeway to market that is still overly-dominated by some of the deploy capital and inhibits their fully benefitting from same, large reinsurance companies. Indeed, it may also any ensuing increases in rates. It is worth noting that go some way towards explaining why the Insurance one of the potential side-effects of the deteriorating Linked Securities (ILS) market has only managed to COVID-19 pandemic has been that evidence has gain a relatively small share in this market as well. emerged that there has been a move on the part of some ILS investors to redeem their investment as they There are a number of reasons why the ILS market have looked to reduce their exposure to risk across has seen Japan as a difficult market in which to build a their portfolios. significant market presence. Firstly, it is a more complex and relationship-driven market than the US. In some 2020 renewal negotiations ways, it is less competitive and a more of a “closed” Throughout both February and March of this year, market. The large global reinsurers have a history of there were indications that some of the main reinsurers underwriting renewal business at pricing close to were actively pushing to impose some very large rating expected loss levels given their ability to discount increases on Japanese carriers as payback for the losses for the diversification it offers. Japanese cedants of the past two years. As early as 19 February, based on know and trust these companies as a result of their research conducted on a fact-finding mission to Japan, longstanding business relationships with them. There analysts at JMP Securities suggested rates would have been some Japanese cedants that have sought increase by between 40% and 50% in loss-affected to diversify their reinsurance providers to include sectors of the market. Furthermore, they reported ILS providers, but examples of these have been few that this was something that had seemingly been and far between, to date. There is also an argument accepted by most Japanese cedants. The major global to suggest that some brokers’ desire to maintain their reinsurers were also recalibrating their own positions control of the business has been a deterrent to some as regards Japanese business, as they were not only companies’ overtures. In addition, many ILS funds may seeking significant rating increases (as payback for the have been reluctant to write a concentrated book of losses of the past two years), but were also seeking Japanese catastrophe business as they have lacked the to get paid for a more accurate representation of the portfolio diversification of the larger global reinsurance underlying risk. companies, against which to offset the considerable wind and earthquake exposures. On 6 March, Artemis published an article in which it reported that analysts at Keith Bruyette Woods (KBW) Another factor that has undoubtedly deterred some had forecast that reinsurance rates could increase by of the ILS market from attempting to increase their as much as 50% at the forthcoming April renewals market share in Japan, especially in the last two in Japan. KBW also argued that another factor that years, has been the emergence of the Typhoon Jebi might enhance the possibility of some rating payback “loss-creep” and the deleterious effect it has had on for reinsurers that have lost money over the past two loss ratios and capital positions. “Loss-creep” has years was the Japanese market’s perceived focus on certainly shown the shortcomings of an over-reliance the value of longer-term relationships. On 18 March, on risk models, and has highlighted the importance of the Insurance Insider reported that Japanese carriers
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had released indicative pricing to the market containing even the case with those who were looking to buy rate increases of between 35% and 55% on wind- more limit. Client-centric underwriting was very much occurrence business renewals, and that these had at the forefront of their thinking with packages of been “coolly received by reinsurers seeking payback for contracts being offered by buyers to core reinsurers. $30 billion of typhoon losses”. The same article reported Reinsurers reacted well to this approach and, in many that Swiss Re had been pushing for Japanese cedants cases, managed to deepen their relationships with to offer increases on wind cover of between 50% and their key clients across diversifying lines of business. 80%. This was definitely not a meeting of minds. Several buyers also sought to buy additional natural catastrophe capacity. Some were seeking more vertical At the same time, reinsurers were also looking to protection, whilst others were looking to buy out attempt to impose a small rating increase in respect co-insurance participations. For the most part, of Japanese earthquake business. This was despite the traditional reinsurers were able to offer increased fact that there were no major earthquake losses in 2019, capacity (along with some ILS funds), but there were and the two earthquake losses that took place in 2018 examples of some ILS funds reducing their offered were by no means costly. The expectation was that capacity at 1 April as a result of the impact of recent rates on earthquake business would therefore increase redemptions by their investors. by no more than about 10% at the most. Indeed, the more widely held view was that rates would probably What happened to rates in Japan in 2020? remain flat. On 18 March, the Insurance Insider The Japanese renewals saw far more meaningful reported that Zenkurion (the world’s largest purchaser rating increases imposed than was the case last of catastrophe reinsurance) had tested the market year, according to Willis Re’s 1st View report of by issuing flat pricing for its earthquake-focussed April 2020. catastrophe tower, and that it was also seeking to buy extra top-layer cover. Figure 1 shows the property catastrophe pricing trends, on a year-on-year basis, from 1990 to 2020. The large Most Japanese buyers started their April renewal increase seen in 1991/2 was as a direct result of the negotiations well in advance. This organised approach impact of Typhoon Mireille in 1991. 2020 has seen proved to be prescient in light of the COVID-19 rates increase back to roughly where they stood in outbreak, which started to challenge the operational 2012/13. model of the market more in the last two weeks of March. In terms of coverage, 1 April programmes Figure 2 shows the property rate movements in Japan which firm-ordered in good time were fully placed that took place at the 2020 renewals. The fact that well in advance of the due date and were completed rates on earthquake business rose was very good news, without any COVID-19-specific exclusionary language. and the increase may have been aided by the fact that For those programmes that were not completed some mutuals in Japan were seeking to buy new, extra well in advance, several reinsurers sought to impose capacity. Willis Re reported that pro-rata commission on COVID-19 exclusions; in some cases, reinsurers property risk was heavily dependent on results, premium achieved these exclusions, but in other cases, buyers to limit balance and prior year actions. Buyers had spent were able to provide comfort that their original polices the months before the renewal focussing their renewal had no exposure to COVID-19-related losses by discussions most intently on catastrophe, rather than issuing letters of understanding to reinsurers. risk. Rates on loss-hit wind and flood business rose by between 30% and 50%, and, perhaps more significantly, According to Willis Re, Japanese primary insurance rates on loss-free business rose by between 10% and company buyers were confident that enough capacity 35%. Interestingly, Willis commented that the renewal would be available to meet their needs. This was of aggregate covers was “a key struggle for buyers; these
58 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS
Figure 1: Japanese catastrophe property pricing trends
800 Japan 700 600 500 400 300 200 100 0
Source: Willis Re 1st View April 2020
Figure 2: Property rate movements
Pro-rata Risk loss free % Risk loss hit % Catastrophe loss Catastrophe loss Class commission change change free % change hit % change Earthquake 0 N/A N/A 0 to 5% N/A Property risk (10%) to (2.5%) 0 to 5% 5% to 15% N/A N/A Wind and flood N/A N/A N/A 10% to 35% 30% to 50%
Note: movements are risk adjusted | Source: Willis Re 1st View (April 2020)
Figure 3: Casualty rate movements
XL – no loss emergence XL – with loss emergence Class Pro-rata commission % change % change Casualty N/A 0 to 10% 5% to 20% Personal accident N/A (5%) to 0 N/A
Note: movements are risk adjusted | Source: Willis Re 1st View (April 2020)
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renewals saw higher rate increases than occurrence layers.” considers that the global reinsurance market is still Overall, whilst the increases on wind and flood business suffering from having far too much capital available, the may have been less than some reinsurers had wished Japanese renewals have ended up being better than for, they still provided ample evidence of a definitive they might otherwise have been. To end on a positive market turn. note, there were some very positive rating increases imposed on the most loss-affected class of business in Rates also increased by significant amounts on the Japan, and especially on the wind business. That said, casualty side of the business (see Figure 3) in what was the fact there has also been a rating increase imposed generally deemed to have been an orderly renewal. on the earthquake risk is also good news, as this was According to Willis Re, the main issues worrying not a market that suffered any major losses in 2019. insurers in the run-up to the renewal were concerns Rates also increased in the casualty market. Equally, about the adequacy of reserving practices, potential the fact that the overall renewal was not delayed or opioid exposures and US exposures (especially with adversely affected by the encroaching COVID-19 regard to pharmaceutical risks). pandemic, was conducted in an orderly manner and that Japanese cedants have accepted and paid good Conclusion rating increases is very good news for the market as The April renewals should be considered a success a whole. by the standards of recent years. However, when one
of leaders and followers in the class, the number and LLOYD’S concentration of brokers in the class and the method of placement split within the class. On the basis of this UPDATE analysis, Lloyd’s shared its market-wide conclusions with the LMA Board. The LMA Board and Lloyd’s then Lloyd’s modernised syndication pilot jointly agreed that the most suitable classes for the business classes confirmed modernised syndication pilot were marine hull and On 13 January, the board of the Lloyd’s Market international casualty binders. Association (LMA), in conjunction with Lloyd’s, announced that the pilot classes for the modernised Work is now under way on the leader/follower standards syndication pilot, as part of the Future at Lloyd’s within these classes, and market consultation on these strategy, will be marine hull and international casualty standards will commence in the coming weeks, led binders. Ultimately, all classes of business are expected by the LMA. The pilot was due to commence in late to benefit from leader and follower standards, which Q1 / early Q2 and the details of the pilot itself will will improve performance and reduce duplication, be made available in due course. Commenting on the as well as ensure oversight is proportionate. The announcement, Sheila Cameron, Chief Executive of the modernised syndication pilot will help to shape future LMA, said: “We are pleased to have moved forward to the standards for leaders and followers as part of a wider next stage of the modernised syndication initiative by going market consultation led by the LMA. Lloyd’s conducted through a robust analysis of the most appropriate classes extensive analysis on a wide range of possible classes for the pilot. We look forward to continuing to work closely that could form part of the pilot. The factors considered with the market on the creation of the leader and follower included the performance of the class, the materiality standards in the Marine Hull and International Casualty of premium in the class, the number and concentration Binders classes.”
60 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS Julia Tyson appointed as Lloyd’s Chief Angela Crawford-Ingle is appointed to the Human Resources Officer Lloyd’s Board as Chairman of the Audit On 14 January, Lloyd’s announced the appointment Committee of Julia Tyson as Chief Human Resources Officer, with On 22 January, Lloyd’s announced that it had appointed immediate effect. Julia is a highly experienced Human Angela Crawford Ingle as a new Board member with Resources Director (HRD) with proven abilities to immediate effect. She also succeeds Richard Keers develop, lead and deliver people and culture strategies. as Chairman of the Audit Committee. Angela also Julia was HR and Communications Director at = LV becomes Lloyd’s Whistleblowers’ Champion, where from 2013-17, and prior to that, Group HRD at Wates she will oversee the independence and effectiveness Group. She joins Lloyd’s at a crucial time as it continues of Lloyd’s whistleblowing policies and procedures. to work to develop an inclusive and innovative culture that attracts talented people to deliver the Future Angela is currently the Senior Independent Director and at Lloyd’s. Chair of Audit Committee (previously Chair of Audit & Risk Committee) at River & Mercantile Group PLC and Discussing her appointment Julia said: “The Non-Executive Director and Audit Committee Chair at opportunity to join Lloyd’s at this point in its evolution Openwork Ltd. She has over 30 years’ experience as a is utterly compelling: the exciting elements of business Senior Partner at PwC in the financial services industry, transformation, culture change, leadership and talent specialising in insurance and asset management and development are all areas I care deeply about. My was, until recently, a Non-Executive Director and Chair passion is to create a high engagement and high of the Audit & Risk Committees at Beazley plc and at performing culture and I am looking forward to Swinton Insurance. working with John Neal and my new colleagues to take Lloyd’s forward.” Commenting on her appointment, Bruce Carnegie- Brown, Lloyd’s Chairman, said, “At Lloyd’s we are committed Jo Scott is appointed Chief Marketing and to encouraging an open, honest and transparent culture that Communications Officer encourages speaking up – this is crucial to help us build the On the same day, Lloyd’s also announced that high performing culture that the Future at Lloyd’s demands. Jo Scott, currently Head of Brand, Marketing and I am therefore delighted to welcome Angela Crawford-Ingle Communications, has been to promoted to Chief to the Board. Her wealth of boardroom experience as well Marketing and Communications Officer and will as sector specific knowledge will be vital to Lloyd’s and I look become a member of Lloyd’s Executive Committee. forward to working closely with her.” Jo has been with Lloyd’s for 15 years, and her role in developing Lloyd’s reputation as we deliver the Future The Lloyd’s Cultural Advisory Group at Lloyd’s will be vital. The inaugural meeting of the Lloyd’s Cultural Advisory Group took place on 30 January. Regular meetings have Commenting on the appointments of Julia Tyson been scheduled throughout the remainder of this year and Jo Scott, John Neal, Lloyd’s Chief Executive and beyond. The membership of the Group includes Officer, said: “I am thrilled to welcome Julia to Lloyd’s. leading experts with experience of successful cultural Her expertise and experience will be vital as we work transformation including John Amaechi, psychologist towards creating the high performing culture the Future and CEO of APS, Brian Dow, CEO of Mental Health at Lloyd’s will demand. Welcoming Jo to the Executive UK, Dame Jayne-Anne Gadhia, CEO of Salesforce UKI Team recognises the contribution she has made to date. and Debbie Ramsay, Director at GoodCorporation. Together with Julia, we will have increased diversity of skills on the Executive Team that I am sure will Members of the Group representing the Lloyd’s market benefit Lloyd’s.” include the Chief Executives of the Lloyd's Market
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Association (Sheila Cameron), the London Market Group also worked with US policymakers and others in the (Clare Lebecq), the London and International Brokers’ insurance sector to help create the Terrorism Risk Association (Christopher Croft), the International Insurance Act (“TRIA”) in 2002 (which has since been Underwriting Association (Dave Matcham), together renewed four times, most recently in 2019). TRIA with Inclusion@Lloyd’s Chair, Dominic Christian. provides a vital government backstop, which in turn enables the commercial (re)insurance market to provide Chaired by Fiona Luck, a Lloyd’s Board member and Non- terrorism insurance for US policyholders. Joe intends Executive Director responsible for talent and culture, to move into a strategic advisory role in the New York the Group will provide guidance and thought leadership office of the law firm McGlinchey Stafford. to support the programme of actions to address the four key themes that emerged from Lloyd’s 2019 Culture Lloyd’s has now appointed Joe’s former deputy, Survey findings. Commenting on the Group, Fiona Sabrina Miesowitz, as US General Counsel. Sabrina Luck, said: “We are privileged to bring together such an joined Lloyd’s in 2010 from law firm Dewey & LeBoeuf. accomplished group of experts and industry leaders. I believe She has worked closely with US regulators for almost that the combination of their insights and experience along ten years, and has provided legal support, with the aim with the strong commitment from our Senior Leadership of protecting and expanding Lloyd’s access to the US Team at Lloyd’s will drive real cultural change. The Culture (re)insurance market. In her new role, Sabrina will be Advisory Group will help identify measurable outcomes, responsible for developing Lloyd’s regulatory strategy critically assess progress against these outcomes and play in the US and managing government affairs with US a pivotal role in creating the aspirational culture of integrity, regulators at federal and state level. Sabrina will focus respect and inclusion, across the Lloyd’s market.” on finding business-friendly solutions to help the Lloyd’s market meet its US compliance requirements. Speaking Lloyd’s appoints a new US General of her appointment, Hank Watkins, Regional Director Counsel – Sabrina Miesowitz & President, Lloyd’s, Americas region, said: “I would like After completing nearly 20 years at Lloyd’s, Joe to congratulate Sabrina on her well-earned promotion to Gunset, the Lloyd’s US General Counsel, retired at the role of US General Counsel. Her familiarity with the the end of March. Joe joined Lloyd’s in the summer US legal and regulatory system and experience working of 2000, as Lloyd’s first full-time US General Counsel. with Lloyd’s unique structure in that environment position His early years at Lloyd’s were focused on working with Sabrina and her team well for continued success. My lawmakers in the US following the implementation of colleagues and I will continue working closely with her in the Reconstruction and Renewal deal in 1995. Joe was support of growth and innovation opportunities for Lloyd’s instrumental in helping to amend US state and federal in our largest market." laws and in increasing market access for Lloyd’s. He
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As referred to elsewhere in this Newsletter and in previous publications, will all Members please ensure that we have your correct email address so that we may communicate with you on matters which may be of interest to you. This is even more important now in this period of lockdown, especially in the case of our overseas Members as delivery overseas is extremely unreliable and very expensive, so we will not be posting publications to our overseas Members for the time being. However they all will be available on our website.
62 ASSOCIATION OF LLOYD’S MEMBERS ALM NEWS
SAVE THE DATE WE’LL MEET AGAIN!
ALM/HPG JOINT CONFERENCE
THURSDAY 22 OCTOBER 2020
To be held at Haberdashers’ Hall 18 West Smithfield, London, EC1A 9HQ
The Joint Conference will start at 10:00 and finish at 16:00.
Registration over coffee and croissants from 9:30.
Key speakers throughout the day on topical issues - including the impact of a testing year on Lloyd’s and forecast of the 2020 capacity auctions.
The ALM’s AGM will follow at 16:15.
We invite all attendees to join us after the conference for some networking drinks - time to catch up - from 17:00 to 19:00.
More details of the programme and speakers to follow
63 ASSOCIATION OF LLOYD’S MEMBERS NEWSLETTER ISSUE TWO | APRIL 2020