February 4th, 2010

Lloyd’s: A Resurgent Market, Part II: Capital, Solvency and Outlook for 2010

Posted at 10:00 AM ET

Capital

Well over GBP1 billion of new capital was deposited at Lloyd’s in the first half of 2009, largely to address the movement in exchange rates. Net capital resources rose by 11 percent over the six months to a record high of GBP16.9 billion, represented by severally-held members’ assets of GBP14.9 billion and mutually-held central assets of GBP2.0 billion. Underwriting leverage across the market has declined dramatically since 2001, partly reflecting the increasing sophistication of the risk-based capital-setting regime.

 

Lloyd’s Underwriting Leverage 2000-2009

lloyds-6-underwriting-leverage1

Source: Guy Carpenter

Interest among trade investors and private individuals continues to be strong. Arch Capital Group Ltd, W.R. Berkley Corporation and RenaissanceRe Holdings Ltd set up at Lloyd’s during 2009 and four new syndicates were launched on January 1, 2010.

Syndicates Established Since January 1, 2009

lloyds-9-deals

Source: Guy Carpenter

Post Event Strategy

Lloyd’s has signalled that it is looking to capture the majority of the industry capital in-flows following the next market-changing event. This has prompted some investors to look at establishing a Lloyd’s presence now, in anticipation of greater underwriting opportunities ahead. A general shortage of “turnkey” capacity is a limiting factor, although alternative suppliers are expected to shift into this space.

Solvency

Central assets for solvency purposes were at an all-time high of GBP2.6 billion at June 30, 2009, set against solvency deficits of only GBP105 million. Run-off liabilities continue to decline and the likelihood of future insolvencies waned as a result of increased oversight of syndicates by Lloyd’s. Legacy exposure now effectively only extends back to 1993, a result of a High Court order in June 2009 approving the statutory transfer of prior year non-life liabilities to a Berkshire Hathaway vehicle.

Lloyd’s Solvency Position 2005-2009

lloyds-7-solvency

Source: Lloyd’s

Outlook for 2010

Looking ahead, Lloyd’s will not be exempt from increasing pricing pressure, slowing prior year reserve releases and materially lower investment returns. In this environment, proactive cycle management becomes key and the central risk oversight role of the Franchise Performance Directorate (FPD), now led by Tom Bolt, remains very much in focus.

The FPD found it necessary to “address some optimism” in terms of projected growth rates and loss ratios in the syndicate business planning process for 2010 and capital requirements have been increased to reflect the higher levels of catastrophe exposure within the market. On the plus side, the trend towards syndication of risk via the subscription market will continue to benefit Lloyd’s and underwriting margins still appear attractive in many classes, particularly in catastrophe-exposed lines.

Cat/Non-Cat Pricing 1999-2009

lloyds-8-cat-non-cat

Source: Catlin 2009 Interim report

Lloyd’s has stated that actual claims incurred from the banking sector crisis continue to be “relatively modest”. The market has written significantly less large US financial institutions business since 2000 and, given the “claims-made” nature of most policies, exposure to such losses looks containable.

In January 2010, Lloyd’s is expected to publish a strategic plan for the next three years, after close consultation with stakeholders and with assistance from Deloitte. This is expected to focus on leveraging the market’s currently strong position, adopting electronic messaging, developing new markets and responding to regulatory pressures.

In November 2009, the drive towards electronic trading received a boost with the news that the world’s three largest insurance brokers had agreed to pilot the Lloyd’s Exchange for endorsements. The platform allows the electronic delivery of structured risk information and supporting documentation, while validating message content to ensure it complies with ACORD standards.

Lloyd’s continues to expand its global reach through extension of its license network and local trading platforms. An example is the current restructuring of the direct Japanese platform, which will create a model allowing all managing agencies to access business written locally on a cover-holder basis.

From a regulatory standpoint, 2010 will see a dramatic increase in the extent of the market’s preparatory work for Solvency II. A potentially noteworthy change is the reclassification of letters of credit from Tier One to Tier Two capital under the new regime. The details are still to be finalized, but it appears Lloyd’s syndicates will no longer be able to utilise letters of credit to fund 100 percent of their capital requirements from 2012.

Lloyd’s continues to lobby for changes to the UK tax regime. Two listed groups - Brit Insurance Holdings plc and Beazley plc - re-domiciled overseas in 2009, although they remain committed to the Lloyd’s market.

Click here to read Lloyd’s: A Resurgent Market, Part I: Overview, Underwriting and Operating Performance >>

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