Transcript Standard & Poor’s Quarterly Update Meeting

Lloyd’s Market Briefing
March 2004
Disclaimer
The information contained in this presentation is being provided on a confidential basis and should not be made available to the general public, the
media or any third party without the express prior written consent of Lloyd’s. This information is not intended for distribution to, or use by, any person or
entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
The content of this presentation does not represent a prospectus or invitation in connection with any solicitation of capital. Nor does it constitute an offer
to sell securities or insurance, a solicitation or an offer to buy securities or insurance, or a distribution of securities in the United States or to a U.S.
person, or in any other jurisdiction where it is contrary to local law. Such persons should inform themselves about and observe any applicable legal
requirement.
It is the responsibility of any person publishing or communicating the contents of this document or communication, or any part thereof, to ensure
compliance with all applicable legal and regulatory requirements.
Lloyd’s has provided the material contained in this presentation for general information purposes only. Lloyd’s accepts no responsibility and shall not be
liable for any loss which may arise from reliance upon the information provided.
This presentation includes forward-looking statements. These statements reflect Lloyd's current expectations and projections about future events and
financial performance, both with respect to Lloyd's in particular and the insurance, reinsurance and financial and services sectors in general. All
forward-looking statements address matters that involve risks, uncertainties and assumptions. Based on a number of factors, actual results could vary
materially from those anticipated by the forward-looking statements. These factors include, but are not limited to, the following:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
rates and terms and conditions of policies may vary from those anticipated;
actual claims paid and the timing of such payments may vary from estimated claims and estimated timing of payments, taking into account the
preliminary nature of such estimates;
claims and loss activity may be greater or more severe than anticipated, including as a result of natural or man-made catastrophic events;
competition on the basis of pricing, capacity, coverage terms or other factors may be greater than anticipated, or Lloyd's products could
become uncompetitive in light of changes in market conditions;
reinsurance placed with third parties may not be fully recoverable, or may not be paid on a timely basis, or such reinsurance from creditworthy
reinsurers may not be available or may not be available on commercially attractive terms;
developments in the financial and capital markets may adversely affect investments of capital and premiums, or the availability of equity capital
or debt;
changes in legal, regulatory, tax or accounting environments in relevant countries may adversely affect (i) Lloyd's ability to offer its products or
attract capital, (ii) claims experience, (iii) financial return, or (iv) competitiveness;
mergers, consolidations, divestitures and other transactions by third parties could adversely affect Lloyd's, including but not limited to changes
in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;] or
economic contraction or other changes in general economic conditions could adversely affect (i) the market for insurance generally or for
certain products offered by Lloyd's, or (ii) other factors relevant to Lloyd's performance.
The foregoing list of factors is not comprehensive, and should be read in conjunction with other cautionary statements that are included herein or
elsewhere. Lloyd's undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future
developments or otherwise.
2
Agenda
 Market profile in 2004
 Financial results
 Building capital strength
 Lloyd’s market ratings
 Franchise performance & risk management
 Appendix - Equitas
3
4
Market profile in 2004
Market profile in 2004
The Lloyd’s market in 2004
FRANCHISOR
CLIENTS
Reinsureds
Commercial
MEMBERS
FRANCHISEES
165
Lloyd’s
Brokers
45 Managing Agents
53
Corporate
Groups
66 Syndicates
$26.78bn Capacity
AM Best: AS&P: A
Personal
Service
Companies
BUSINESS FLOW
6
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
4
Members’
Agents
2,048
Individuals
(Unlimited
Liability
Members)
637
Conversions
CAPITAL PROVISION
Market profile in 2004
Structure of a Lloyd’s business
Management
Managing Agent
Underwriting
Syndicate
Capital Provision
7
Corporate
Member 1
Corporate
Member 2
Names
Market profile in 2004
Profile of capacity provision: 1993-2004
$bn
30
25.8
26.78
25
Capacity
21.8
20.2
19.5
20
18.2 17.9 18.5 18.2 17.7 18.1
15.9
15
Other insurance industry
15%
US insurance industry
11%
Bermudian insurance industry
42%
UK listed and other corporate
6%
10
12%
5
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
8
14%
Based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Source: Lloyd’s, N.B. capacity figures shown at beginning of each year
Names conversion capital
Names (unlimited)
Market profile in 2004
Profile of capacity remains largely unchanged
$bn
30
26.60
26.78
25
2004
Capacity
20
15
10
5%
Other corporate capital
7%
UK non-listed
30%
UK listed
40%
6%
Trade investors
12%
Names (unlimited)
Conversion capital
Mid year pre-emption
5
0
9
2003
2004
(Year End)
(Jan 2004)
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
Major trade investors continue
to support the Lloyd’s market
0
200
400
600
800
1,000 1,200 1,400 1,600 1,800
$m
Capacity provided by owned
corporate members
(No 1 Stamp)
2003
2004
10
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
Lloyd’s listed companies
successfully grow their businesses
0
200
400
600
800
1,000 1,200 1,400 1,600 1,800
$m
Capacity provided by owned
corporate members
(No 1 Stamp)
2003
2004
11
Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Market profile in 2004
Business mix: 2004 year of account
Class of business
7%
8%
Property
Casualty
36%
9%
Marine
52%
Motor
11%
Energy
29%
Geographical source
5%
3%
8%
North America
UK
12%
45%
Europe
Asia Pacific
Latin America
Africa/Middle East
27%
12
Source: Lloyd’s, Syndicate business plans
Direct
48%
Aviation
Reinsurance
Financial results
Financial results
2002 results summary

$1,493m annually accounted profit

Combined ratio of 98.6%

Balance sheet resources +85%

Central Assets +55% (Central Fund +70%)

WTC estimates remain stable:
 $8.7bn gross and $3.3bn net
 89% of reinsurance asset ‘A-’ or above
 US funding requirements met in full
14
Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003
Financial results
Lloyd’s vs industry 2002 combined ratios
0
10
20
30
40
50
60
70
80
90 100 110 120 130
%
Lloyd's
98.6%
121.3%
US reinsurers*
US P/C**
European
reinsurers***
15
*
Source: Reinsurance Association of America 2002 Figures
** Source: Insurance Information Institute 2002 Figures
*** Source: Credit Suisse First Boston 2002 Figures
107.2%
105.1%
Financial results
Performance of the Lloyd’s listed companies*
(combined ratio – 6 months interims 2003)
0
10
20
30
40
50
60
70
80
90
100
110
120
130
%
Amlin
Atrium
Beazley
Brit
Chaucer
Cox
Goshawk
Hardy
Hiscox
Kiln
SVB
Wellington
16
* as at 30 June 2003
Source: 6 month interim results by companies
H1 2003
H1 2002
Financial results
…standing favourable comparison
with rest of industry
Combined ratio – H1 2003
0
10
20
30
40
50
60
70
80
90
100 110 120 130
%
Kiln
Hardy
Beazley
Amlin
Cox
Brit
Chaucer
Atrium
Wellington
Hiscox
US Reinsurers**
European Reinsurers*
SVB
US P/C***
Goshawk
17
Source: Lloyd’s analysis of 6 month interim results announced by companies
*
Source: Credit Suisse First Boston 2003 Figures
** Source: Reinsurance Association of America 2003 Figures
*** Source: Insurance Information Institute 2003 Figures
Financial results
Market capitalisation: Lloyd’s vs peers
Market capitalisation (10/09/01 vs 19/02/04)
%
140
120
100
% growth
80
60
40
20
0
-20
-40
-60
18
Source: Reuters, as at 19 February 2004
Building capital strength
Building capital strength
Net resources vs peers
2002 net resources*
$bn
18
Lloyd’s net resources
$15.7bn at H1 2003
Update
16
14
12
10
8
6
4
2
20
* as at 31 December 2002 / net resources = total assets – total liabilities
Source: Lloyd’s analysis, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
ar
ke
l
M
er
Re
Ev
er
es
tR
e
Pa
rtn
Tr
er
an
Re
sa
tla
nt
ic
R
e
C
on
ve
riu
m
Pa
ul
an
no
v
H
St
AC
E
Ca
pi
ta
l
Li
be
rty
XL
hu
bb
C
Ll
oy
d'
s
Sw
is
s
R
e
M
un
ic
h
Re
0
Building capital strength
Net resources vs peers
2002 net resources % growth (YoY)
%
120
Update
Lloyd’s net resources
grew 115% as at H1 2003 since
12/31/01
80
40
0
21
Source: Lloyd’s analysis
Re
e
un
ic
h
R
M
Sw
is
s
er
Re
an
no
v
hu
bb
H
C
AC
E
ar
ke
l
M
Li
be
rty
on
ve
Tr
riu
an
m
sa
tl a
nt
ic
R
e
C
Pa
ul
St
Ll
oy
d'
s
Ev
er
es
tR
e
XL
Ca
pi
ta
l
Pa
r tn
er
Re
-40
Building capital strength
Growth in key components of chain of security
Corporate Members
Individual Members
End 2002
(% change from 2001)
Premiums Trust Funds
(PTFs)
Premium Trust Funds
(PTFs)
$30,749m
(+28%)
Funds at Lloyd’s
(set by RBC)
(FAL)
Funds at Lloyd’s
(set by RBC)
(FAL)
$16,053m
(+16%)
Other Personal Wealth
(OPW)
$503m
(-14%)
Central Fund
Other central assets
Central Fund + Other central assets
22
$853m
$155m
$1,008m (+55%)
Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003
Key:
Several assets
Mutual assets
Building capital strength
Lloyd’s risk based capital (RBC) model
 The Lloyd’s RBC model was introduced in 1995 for Corporate
Members
 The model is used to calculate the capital (Funds at Lloyd’s / FAL)
required to underwrite a planned book of business, expressed as a
percentage of authorised premium
 Lloyd’s applies a minimum requirement after the RBC calculation
of 40%
 The underlying concept of the model is to equalise the potential
risk to the Central Fund irrespective of the portfolio underwritten
23
Building capital strength
Risk based capital concept
loss
RBC +
premium
loss
Central
Fund
RBC +
premium
MOTOR
CAT X/L
time
24
Central
Fund
time
Building capital strength
Risk based capital: summary
 Security
 Promote efficient distribution of capital in relation to risk
 Aim to minimise loss to Central Fund for given level of market capital
 Consistent with optimising policyholder security
 Note that capital distribution optimal for risk, not profit
 Competitiveness
 Ensure policyholders not disadvantaged by paying extra premiums to service
unnecessary levels of capital
 Reduce possibility of each member being required to mutualise the losses of others
 Best practice
 To ensure Lloyd’s capital-setting process is in line with industry “best practice” in
regulating capital to risk
 Equity between members
 To support the equitable allocation of capital between capital providers
25
Building capital strength
Realistic disaster scenarios
 Realistic disaster scenarios (RDS) deployed since 1995 to manage catastrophe
exposure at a syndicate and market level
 Generic scenarios include:
 USA Windstorm ($50bn/Florida-Gulf of Mexico)
 Aviation collision (two aircraft over major US city/$3bn liability plus hull & products)
 Specific event-based scenarios with theoretical return periods include:
 Florida Windstorm / Los Angeles Quake ($60bn/1-in-250-year return period)
 Japanese Earthquake ($19bn/Zone 5 epicentre of magnitude MMI IX plus
adjacent zones)
 Further enhancements underway:
 Introduction of terrorism RDS for 2003
 Inputs to capital allocation model (risk based capital)
 Franchise guidelines
26
Source: Lloyd’s
27
Market ratings
Lloyd’s market ratings
Lloyd’s market ratings

Lloyd’s is interactively assessed by the leading two insurance
rating agencies:
AM Best
A‘Excellent’
Affirmed 17/07/03
Stable outlook

Standard & Poor’s
A
‘Strong’
Affirmed 12/02/03
Lloyd’s is rated as a market:
 All Lloyd’s policies are ultimately backed by the common
security of the Central Fund
 The Lloyd’s market ratings apply to all business underwritten
by all 66 syndicates
29
Source: AM Best, Standard & Poor’s
Lloyd’s market ratings
Shift in S&P ratings of the world's
largest reinsurers since September 11th
0
1
2
S&P notches
downgraded
3
4
5
6
7
8
Unchanged since Sept 2001
30
Source: Standard & Poor’s
Downgraded since June 02
Rating withdrawn since June 02
Lloyd’s market ratings
Future rating prospects
 Franchise Performance team takes a more active role in
managing performance at Lloyd’s, particularly into next down
cycle
 Continued strong support from capital providers
 Substantially improved operating performance from 2002
 Continuation of ‘hard market’ conditions through 2003-2004
 Maintenance of strong niche business position in global insurance
and reinsurance
 Reduction in exposure to reinsurance receivables, with overall
credit quality of asset maintained
 No material deterioration in Equitas solvency
 Resolution of the Central Fund insurance dispute, with no material
impact on Central Fund
31
Source: Lloyd’s
Lloyd’s market ratings
Syndicate-level measurements
 The rating agencies apply a range of rankings and measures at a
syndicate-level, none of which are endorsed by Lloyd’s
 In general, Lloyd’s is not supportive of rating individual syndicates:
 Security/solvency is at a member not syndicate level
 All members are capitalised by Lloyd’s Risk Based Capital model independently verified as one of the most technically sophisticated
models in the industry
 All policies underwritten by all syndicates are backed by the Lloyd’s
Chain of Security which is partially mutualised by the Central Fund
 Lloyd’s believes that brokers remain best placed to assess client needs
based on a wide range of factors placing confidence in the strength of the
common security underpinning all Lloyd’s policies on which the Market
ratings are predicated
32
33
Franchise performance & risk
management
Franchise performance & risk management
Lloyd’s change programme
Drivers of change
 Unacceptably poor performance between 1997 and
2001
 Huge disparity between the best performing and
worst performing businesses (syndicates)
 Need to provide a competitive trading platform
 Complex financial reporting and accounting, lack of
transparency; antiquated concept of unlimited
liability
 Increased policyholder / cedant concern with
financial security
35
Source: Lloyd’s
Lloyd’s change programme
initiative
 New corporate governance structure to promote
more commercial, coordinated approach
 Focus on franchise performance/risk management
 Business process improvements seek to address
inefficient and costly practices
 Premium levies for Central Fund eliminated for 2004
 Franchise performance controls and RBC model aim to
minimise ‘costs of mutuality’ in medium/long term
 Transition to full annual accounting from 1 January 2005
 Commitment from HM Treasury to change tax
treatment to allow unlimited liability members to
convert
 Target market rating initiative to determine target
IFS ratings and focus on requirements to achieve
them
Franchise performance & risk management
Lloyd’s Franchise
 A new franchise structure with the “centre” taking a more
active commercial role
 The Corporation of Lloyd’s has become the “franchisor”, the
managing agencies, “the franchisees”
 A new underwriting byelaw sets out the relationship
between “franchisor” and franchisees” including a syndicate
business planning process and franchise guidelines
 The challenge is now to balance greater scrutiny whilst
maintaining the opportunistic and entrepreneurial culture
 The ultimate sanction is to remove a franchisee from the
franchise
36
Source: Lloyd’s
Franchise performance & risk management
Franchise implementation
Key milestones to date

Key franchise performance and risk management initiatives implemented
 New syndicate business planning regime – structured commercial approach
 Franchise guidelines - control / manage underwriting exposures
 Syndicate risk assessment - provides focus for central risk management effort
 Performance benchmarking – identify under performance at the earliest
opportunity

Key strategic initiatives well advanced
 New underwriting byelaw to provide a clear and transparent relationship between
the Franchisor and Franchisees
 Comprehensive review of Lloyd’s capital structure commenced
 Benchmark profitability measures being established by line of business
 On target to achieve conversion to annual accounting 1/1/2005 through changes
in EU legislation
37
Source: Lloyd’s
Franchise performance & risk management
Franchise performance: primary areas of focus
 Quarterly internal review of agents by Franchisor
executive
 Efforts concentrated on agents with underwriting and
capital issues
 RDS process reviewed for 2003 and 2004
 Review of pre-emption application process
 Review of new syndicates seeking admission to the
market
 QQS policy reviewed
38
Source: Lloyd’s
Franchise performance & risk management
Qualifying quota shares (QQS)
 Maximum level of QQS set at 10% for 2004
 QQS to be used where exceptional underwriting
prospects exist – not to maximise capacity
 No longer to be on all business written by the
syndicate
 Terms should reflect underlying profitability of the
business
 Applications require specific approval of FPD – an
approved business plan stipulating intent to use QQS
does not constitute approval of the QQS
39
Source: Lloyd’s
Franchise performance & risk management
Business planning process
 All syndicates are required to submit business plans for the
following year in September / October
 All business plans reviewed in depth
 Strategic plan
 Forecast financial performance
 Lines of business
 Outwards reinsurance
 Catastrophe exposure
 Franchise guidelines
 Close oversight of underwriting – but careful not to stifle
opportunistic/entrepreneurial culture
40
Source: Lloyd’s
Franchise performance & risk management
Franchise guidelines
 Gross underwriting profit on each line of business
 Catastrophe exposure management using risk
management modelling, minimum return periods and
maximum gross and net exposures to a single RDS
event (gross 75%, net 20% of syndicate capacity)
 Approved reinsurer selection process
 Maximum gross line size - 10% of capacity
 Minimum reinsurance retention - 10% of gross line
 Restrictions on multi-year contracts
41
Source: Lloyd’s
Franchise performance & risk management
Performance benchmarking
Actual syndicate development
Future year “expectation”
120%
120%
100%
100%
Loss ratio
Bottom quartile
60%
Market
median
80%
Loss ratio
50%
confidence
interval
80%
50%
confidence
interval
Bottom quartile
40%
40%
Top quartile
20%
0%
0%
1
2
3
4
5
6
7
8
9 10
Quarter (13 = ultimate)
11
12
1
13
2
3
4
5
6
7
8
9
Quarter (13 = ultimate)
Actual syndicate development
350%
300%
50%
confidence
interval
Loss ratio
250%
200%
Syndicate
form 2 data
150%
Bottom quartile
100%
Market
median
Top quartile
50%
0%
Source: Lloyd’s
Market
median
Top quartile
20%
42
Syndicate
form 2 data
60%
1
2
3
4
5
6
7
8
9
Quarter (13 = ultimate)
10
11
12
13
10
11
12
13
43
Appendix - Equitas
Appendix
Equitas
 Established as a company independent of Lloyd’s in 1996
 Formed as part of Lloyd’s R&R to reinsure the liabilities of Lloyd’s
syndicates’ 1992 and prior years of account (excl. life syndicates)
 Ahead in the reserving cycle:
 Ground-up actuarial reviews conducted mid 90s; further
augmented over last 3 years
 Gross undiscounted asbestos reserves increased $5.7bn
during 2000 - 2001. $716m discounted increase for 2003
 Equitas reserves consistent with Schedule F analyses
 Survival ratio of 24.6 years1
45
1 Equitas survival ratio 2003 excludes buyouts and commutations;
US Industry survival ratio 2003: Equitas sample incl. buyouts and commutations, if any
Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
Appendix
Equitas
Accumulated Surplus
Solvency Margin
Survival Ratio
%
$m
1,400
30
12
1,215
10.3%
1,200
24.6
25
10
1,053
8.7%
1,000
931
20
8
6
Years
800
5.6%
15
600
11
4
10
2
5
400
200
0
0
Startup
2002
2003
0
Startup
2002
2003
Solvency margin = (accumulated surplus) / (net claims o/s)
Equitas survival ratio excludes commutations; US Industry: AM Best report Oct. 2002
2001, 2002: Year end data
46
Start up: September 1996
Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003
US Industry
Equitas Gross
47
www.lloyds.com