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May 2015
Inside This Issue
2. Market Conditions – by
sector
8. Results
13. Merger Frenzy
14. AIRL Forecasts
Quarterly Review Argenta Insurance Research Limited
Welcome to the latest Quarterly Review
Results reported this year, both on a GAAP basis for the 2014 calendar year and for the
closing 2012 underwriting year of account, were better than expected.
We provide further detail in the Results section of this edition, where the encouraging
prospects for the 2013 and 2014 underwriting years of account are also reviewed.
However, there is no escaping the current very tough underwriting environment, which we
comment upon in the Market Conditions section.
Michael Meacock, who is approaching his 50th year as active underwriter of Syndicate
727, comments in his underwriter’s report in the 2014 Syndicate Report & Accounts in the
following measured and somewhat resigned terms:
‘In some areas of the business rate integrity is now completely absent and if and when the
claims experience returns to normal, as it surely will, the underwriting results will be most
unattractive in those areas. As the underwriting cycle softens further it is preferable to be
patient and trade to a lower premium volume.’
As an experienced operator, and there are many experienced underwriters in the Market,
one has a greater degree of confidence that he will be able to deal with difficult conditions
that underwriters face and maintain the potential to make profits for his capital providers.
The extract below, from another underwriter’s report, is revealing:
‘Undoubtedly 2015 will be a testing year… We shall continue with our proven strategy of
being nimble, and writing a highly selective portfolio that is not heavily dependent on any
one subclass. We continue to be driven by strong underwriting technical results
emanating from our niche areas, particularly where we have leadership control.
Furthermore, we recognise the need to proactively monitor alternative areas of cover that
would complement our portfolio and enhance our product lines.’
Contact Details
Jeremy Bray
T +44 (0)20 7825 7174
Andrew Colcomb
T +44 (0)20 7825 7176
Robert Flach
T +44 (0)20 7825 7179
Argenta Insurance Research Ltd
Fountain House
130 Fenchurch Street
London EC3M 5DJ
www.argentaplc.com
2
Pressure on reinsurance rates
and terms is likely to continue
through 2015
In three sentences, we have a remarkable concentration of the insurance jargon and
clichés that CEO’s frequently use to describe the current market and how they are coping
with it. The way in which the strategy is expressed may cause us to wonder if the author
is telling us what he thinks we want to hear, but once deconstructed it is a sensible
strategy and one that many are trying to pursue. Not all will be successful, but as noted
above, experience will count.
Market Conditions
In this section we review current conditions in each major class of business. The pie
charts show (in pink) the proportion of the total Lloyd’s market that is written in each class
and the small line charts show the combined ratio for the Lloyd’s market for each line of
business since 2010. The combined ratio is defined as the sum of claims incurred plus
operating expenses (including acquisition costs), divided by net earned premiums. Hence,
the lower the ratio, the more profitable the class of business is (see also the Results
section).
Reinsurance
The exceptionally low interest rate environment in the global economy has meant that
hedge funds and pension funds have been highly motivated to find ways of accessing a
class of business that has produced some excellent results in recent years - reinsurance.
A variety of instruments is used – principally catastrophe bonds, insured linked securities
(ILS) and collateralised reinsurance.
This type of investor in reinsurance is believed to have a lower return threshold than
traditional reinsurers because a smaller proportion of overall assets is being put at risk, so
there is no risk of ruin, as there is for a traditional reinsurer.
The emergence of these non-traditional instruments has occurred at a time when
reinsurers have enjoyed good results and it has coincided with a cyclical downturn in the
world’s economies, both of which factors suppress demand for reinsurance. Traditional
reinsurers have been forced to compete in order to retain market share, often under
pressure to give concessions on terms and conditions – broader cover for the same or
less premium.
Most underwriters we speak to report rate decreases that exceed 10% year on year,
together with a gradual erosion of terms and conditions, with the hours clause (defining
the period during which losses arising out of a single proximate cause, for example a
3
windstorm, can be aggregated together) being one of the prime examples. It seems
unlikely that there will be any meaningful change in the rating environment for so long as
there continues to be a surfeit of capital to support the available business.
The traditional view that a major loss will drive out capital and restore rating levels is
undermined by the fact that surplus capital in the reinsurance sector now is a multiple of
any historic loss, even when inflated to today’s purchasing parity and insurance
penetration - insurance penetration being the propensity of businesses and individuals to
buy insurance, which tends to increase over time.
Brokers and reinsurance buyers have begun to reverse the stance they took in the
aftermath of the global financial crisis when they actively sought to broaden the range of
reinsurers used on a placement, and are now using smaller panels of reinsurers, and
restricting access to business to those reinsurers seen to be “relevant”. Relevant seems
have a variety of meanings, including an ability to write across most lines of reinsurance
purchased by a cedant, and perhaps more cynically, an ability to meet the clients’ pricing
expectations.
Although the largest part of the reinsurance sector is property reinsurance, including
catastrophe, per risk excess and pro-rata reinsurances, reinsurance of casualty and
specialty lines are also included here. These areas have proved more difficult to
penetrate on the part of the non-insurance investors, such as ILS, but rates have
nonetheless been under pressure as insurers retain risk in house and as reinsurers look to
replace income lost from the property arena.
One particular issue is the emergence of Periodic Payment Orders (PPOs) as a
mechanism to compensate victims of accident bodily injury - most notably, but not
exclusively, in respect of UK motor business. PPOs impose a great deal of long tail
exposure, including inflation, mortality and interest rate risks, on reinsurers.
Although reinsurance is a major part of many syndicates’ inward business, it is also in
many cases the single largest expense. More syndicates are buyers of reinsurance than
are sellers. With the exception of a few loss hit renewals, syndicates have been able to
improve the breadth and depth of cover they have bought, typically at a lower price.
Property
The property book is divided into two main sections: larger industrial and commercial
risks written in the open market to the broker network (typically on large placements
involving layered placements and a number of different insurance markets) and smaller
Reinsurers strive to be
‘relevant’
4
Smaller premium property
business is under less
pressure
The cyber market continues
to expand
Marine hull and cargo remain
marginal but specialist areas
offer better returns
business (for both commercial and personal policyholders) written on Lloyd’s behalf by a
large number of coverholders. The former business has been under rating pressure for a
number of years and this is not expected to abate.
There was a moment of opportunity for terrorism business over the New Year, due to
uncertainty concerning the renewal of the Terrorism Risk Insurance Act (TRIA) in the US.
TRIA is a federal ‘backstop’ for insurance claims relating to acts of terrorism in the US.
The renewal was however signed into law during the opening weeks of 2015.
Greater optimism surrounds the smaller premium business, with syndicates reporting
growth in the US excess and surplus lines business (non-standard business that falls
outside US domestic insurers, a market worth $34 billion in 2013, with Lloyd’s having a
20% market share). Rates have started to come under pressure, although some areas of
the book were reporting rate increases throughout 2013 and the first half of 2014.
Casualty
Although ‘Casualty’ includes many sub-categories of business, meaning that the overall
result masks a wide variety of performance, results in the sector are only marginally
profitable. Syndicates must therefore ensure that they are both reserving adequately for
past liabilities and that new business is properly rated, given expected levels of claims
inflation and an increasingly litigious global environment. The cyber market continues to
expand, helped by high profile losses, and the fact that western governments are keen to
ensure that security standards are increased, with insurance seen as having a role to play
in achieving this.
Marine
The larger classes, hull and cargo, continue to be marginal, although there are areas of
specialism where some syndicates can make attractive returns. Although the wreck of
the Costa Concordia was successfully re-floated and removed for salvage, loss costs
have continued to escalate. For most Lloyd’s underwriters, the loss had exceeded
5
reinsurance retentions and the deterioration is contained within reinsurance programmes,
meaning that the net impact was limited to increased reinstatement costs. The loss raises
issues for insurers as to the difficulties of removing wreckage in environmentally sensitive
areas.
Energy
Energy business will be profoundly challenged by the fall in the oil price, as investment in
exploration and extraction becomes less viable at current energy prices. Some wells will
be capped and equipment mothballed, reducing the premium base in an already
competitive arena. Underwriters need to select risk very carefully, as maintenance
budgets can be cut and loss experience deteriorates in response to lower profitability for
the operators.
Aviation
There has been a series of large losses in both the hull & liability and aviation war markets,
following a period largely free from major loss which masked some inadequate rating.
Losses included the two Malaysia Airlines passenger jets: MH370 flying from Kuala
Lumpur to Beijing in March 2014 and MH17, shot down over the Ukraine en route from
Amsterdam to Kuala Lumpur in July. The two losses caused the deaths of 537
passengers and crew. The exact cause of the loss of MH370 remains unclear, and while
aviation war insurers have paid half the loss, the hull loss will fall to the all risks insurers if
proximate cause cannot be verified.
In addition, Air Algerie, TransAsia and AirAsia all suffered losses, and in the aviation war
market, factional fighting at Tripoli airport caused heavy losses. There were also losses in
the satellite market.
Although rate increases were imposed for impacted lines and clients, no widespread
withdrawal of capacity has taken place. As the losses were unevenly distributed, those
disproportionately affected have been able to convince their management that it was just
The fall in the price of oil
creates difficulties for the
energy market
In spite of several aviation
war losses, excess capital
persists
6
UK motor operating
environment continues to be
tough
ill-fortune, and those largely unaffected have been unable to leverage their positions to
secure rate increases. The destruction of the Germanwings Airbus A-320 in March 2015
is a significant loss for the European market, again with a portion falling on the aviation
war market, although it seems unlikely that this will change rating levels, given the
continuing over-supply of capital to the sector.
Motor
Lloyd’s data in the pie chart above, in addition to UK motor, includes international
business, which encompasses fire, theft and collision (FTC), motor truck cargo and
dealers’ open lot business written to coverholders and in the open market in the US.
Such risks are written by a number of syndicates, often within their property division. The
number of syndicates writing UK motor business continues to fall; two-thirds of Lloyd’s
motor business is written by three syndicates, one of which (Chaucer) has recently
announced the sale of its UK motor book to Gibraltarian insurer Markerstudy Group. One
smaller syndicate (Canopius 260) was merged into composite Syndicate 958/4444 for
2015.
For members underwriting through Argenta, UK motor business is almost exclusively
written by ERS Syndicate 218. ERS does not write the full gamut of UK motor business,
which is now dominated by internet based aggregator sites such as confused.com and
comparethemarket.com, but writes a specialist book of commercial motor, agricultural
vehicles, modified and collectors cars and non-standard risks sourced through the broker
network. It is nonetheless subject to some of the wider challenges facing the industry.
The market remains fiercely competitive, with rates falling during the year, but reaching a
plateau (according to the AA index) by the end of the first quarter of this year.
The legal landscape has changed rapidly, with the introduction of more restrictive
payments of legal fees under Ministry of Justice reforms, the Road Traffic Accident Portal
(a streamlined process for dealing with low valued motor related personal injury claims),
as well as increased scrutiny by the Financial Conduct Authority of add-on products such
as breakdown, personal accident and warranty, along with interest charges on monthly
payment instalment options. Insurers were disappointed that the UK Competitions and
Markets Authority report, delivered in September 2014, took no action against credit hire
7
operators and did not elect to ban the payment of referral fees by law firms looking to act
for alleged accident victims.
Loss Activity in 2015
For the first quarter of 2015, insurers and reinsurers reported benign loss experiences and
no significant insured catastrophe activity. The tragic earthquake that struck Nepal on 25
April has caused considerable economic loss (currently estimated at $5 billion) but only a
fraction will be incurred by insurers due to low insurance penetration. The aviation
market, however, continues to suffer losses. Germanwings flight 9525 from Barcelona to
Dusseldorf crashed into the French Alps, 100km north of Nice, on 24 March 2015. All 144
passengers and six crew were killed. It quickly emerged that the co-pilot, who was later
reported as having been treated for suicidal tendencies, had locked the captain out of the
cockpit before he started the fatal descent into the mountain. Although Germanwings is
described as a low cost airline, it is owned by Lufthansa, and is insured under the
Lufthansa insurance programme. The deliberate act of the part of the co-pilot means that
the war policy responds for the hull loss - an Airbus A320-200 insured for $13m - written
mostly in the Lloyd’s market, and led, we understand, by Cathedral Syndicate 3010. The
liability element of the loss will be by far the larger part, with a pay-out likely to be around
€1 million per passenger for EU residents. Our understanding is that Lufthansa’s ‘all risks’
policy is led by Allianz, but that parts of the programme are placed in the London
company and Lloyd’s market. Assuming a loss of around €150 million, the loss could also
make its way into lower levels of reinsurance programmes.
Hurricane forecasters predict another quiet year
Tropical Storm Risk (TSR) is predicting another below-average Atlantic hurricane season
for 2015.
In TSR's April forecast, Professor Mark Saunders and Dr Adam Lea have forecast eleven
named storms, five hurricanes and two major hurricanes of category three or above. This
is 45% below the 1950 to 2014 long-term norm and about 50% below the 2005 to 2014
ten year norm for hurricane activity.
Predictions were down slightly from TSR's initial forecast in December, when it predicted
thirteen named storms and six hurricanes. However, TSR has increased its forecast of
major hurricanes by one.
"The TSR forecast has reduced since early December 2014 due to updated climate
signals indicating the tropical north Atlantic and Caribbean Sea in August-September
2015 will likely be cooler than norm and cooler than thought previously" , it said in a
report.
Another quiet Atlantic
hurricane season?
8
Lloyd’s 2014 GAAP result
very similar to 2013 – both
helped by absence of natural
catastrophe losses
The Atlantic hurricane season runs from 1 June to 30 November.
Last year, the Atlantic season saw a quiet year with activity lower than the already below-
average predictions.
The 2014 season saw eight named storms, six of which became hurricanes and two major
hurricanes of category three or higher.
Results
Lloyd’s declared its global results for 2014 at the end of March. The results were very
similar to those declared for the previous 12 months.
Even after ten years of Lloyd’s reporting its results on a GAAP basis, there is still scope
for confusion between annual accounting (GAAP) and the traditional underwriting year of
account basis. To avoid exacerbating any confusion, we have separated our comments
into two sections in this Review. First, we consider the GAAP accounts (which are given
greater prominence as they are more directly comparable with all other insurers); second
we look at the 2012 underwriting year of account, which closed at 31 December 2014.
Lloyd’s Annual Results (GAAP)
2014 2013 2012 2011 2010 2009
Gross written premiums £m 25,628 26,103 25,500 23,477 22,592 21,973
Net earned premiums £m 19,575 19,725 18,685 18,100 17,111 16,725
Result for the year before tax £m 3,161 3,205 2,771 -516 2,195 3,868
Ratios
Loss ratio % 49.0 48.6 54.0 71.2 58.6 51.5
Expense ratio % 39.1 38.2 37.1 35.6 34.7 34.6
Combined ratio % 88.1 86.8 91.1 106.8 93.3 86.1
Return on capital % 14.7 16.2 14.8 -2.8 12.1 23.9
A combined ratio provides a helpful shorthand for the profitability of an insurer. It is
calculated as the sum of claims incurred, plus operating expenses (including acquisition
costs), divided by net earned premiums. The lower the ratio, the more profitable the
enterprise. At a benchmark 100%, the insurer is not making any money out of
underwriting. It may nevertheless be making a profit from the investment return being
generated from claims’ reserves and the underlying capital of the insurer. In times of
higher investment returns, insurers have been able to declare profits with combined ratios
as high as 104%. However, in the current climate of very low interest rates, insurers will
need to deliver combined ratios well below 100% in order to provide the returns to
investors that their cost of capital requires.
Lloyd’s results were very similar to those of 2013; gross premium income was down by
2% and overall profitability was down by 1.5%. Both years benefited from a release from
reserves that reduced the combined ratio by 8%. The continued absence of natural
catastrophes has flattered the results for both years. The most severe catastrophe losses
9
were in the aviation sector, including the two Malaysia Airlines passenger jets and a
number of aircraft destroyed in fighting at Tripoli airport. Total catastrophe losses added
just 3% to the combined ratio. A repeat of the loss experience of 2011 would have seen
the Market record a combined ratio closer to 110%, compared with the 88.1% achieved
for 2014. At the five year average catastrophe experience, the combined ratio would have
been more than 95%.
Lloyd’s reported combined ratio
Source: Lloyd’s
Combined ratio restated using five year average cat. loss ratio
Source: Lloyd’s, AIRL analysis
This analysis leads to two observations. The first is that although the results for the 2013
and 2014 years have, as noted above, been better than expected due to the absence of
catastrophe losses, if we apply a normal level of catastrophe experience (as in the chart
above showing the five year average catastrophe loss ratio), there is still profit margin in
the business. However, it is an inescapable reality that a single major catastrophic event
or a run of more modest events would push the current year into loss.
Using a five year average
catastrophe loss ratio, there
is still a profit margin
10
Syndicates supported by
private capital continue to
outperform
All syndicates recommended
for support by APCL in 2012
made a profit (and some non-
recommended made a loss)
The second is the steady increase in the expense ratio, up from under 35% in 2009 to
more than 39% in 2014. There are a number of reasons for this: the proportion of
reinsurance business is falling, down from 36% in 2010 to 33%. Brokerage costs, which
form part of administrative costs, are typically much lower for reinsurance business, but
more significant is the increasing cost of employment and regulation.
It is encouraging to see that those syndicates supported by private capital again
outperformed those with a wholly aligned capital base, despite the perceived cost
benefits of the latter structure. Syndicates with third party capital have produced a lower
aggregate combined ratio than the Lloyd’s market as a whole in five of the past six years.
Source: Lloyd’s, syndicate reports & accounts, AIRL analysis
Underwriting Year Accounts
Syndicates report to their members on a traditional underwriting year of account basis,
distributing profits three years in arrears.
The 2012 account produced a highly satisfactory average result of in excess of 12% of
capacity to our members. It is pleasing to note that all syndicates recommended for
support by Argenta Private Capital delivered a profit. This result is approximately twice
the forecast made at the 18 month stage, 60% higher than the forecast made after 24
months and more than 20% better than the 33 month forecasts. This was despite the
2012 account bearing the lion’s share of Lloyd’s involvement in a US$20 billion insured
event in the form of Superstorm Sandy, which brought high winds and flooding to New
Jersey, New York and other parts of the North Eastern US in late October 2012.
Unusually, we have been asked by clients “what went right ?”, which we examine in the
next few paragraphs.
11
The chart below shows the development of the managing agents’ forecasts between the
initial forecasts at 15 months and the closure of the account after 36 months.
2012 Year of Account – Development of forecasts by quarter
Source Syndicate QMA Form 120, from March 2013 to December 2014.
This chart shows the progression of the mid-point forecast as a solid line, with the various
components (positive and negative) that make up the overall result shown as different
coloured bars.
The fall in the value of Sterling, in particular against the main trading currency for Lloyd’s,
the US Dollar, meant that premium volumes calculated at year end rates of exchange
were higher than previously expected. There were also some improvements in the total
investment return as bond markets began to be more worried about incipient deflation in
the Eurozone than they were about impending interest rate increases in the US. This
increased bond prices and is recorded in the profit and loss account as an unrealised gain
on investments. Investment returns continue to be very thin and the difference this made
was limited, with the investment return coming only very slightly higher than the low point
that was achieved for the 2011 year of account. Investment returns for the 2011 and 2012
underwriting years of account are less than a third of those achieved for the 2007 year of
account.
The chart above also shows the impact of the continuing reserve releases, which become
apparent only in the final twelve months of the account (i.e. quarters, 9, 10, 11 and 12,
when the predecessor year has closed). Third party syndicates have, in aggregate,
produced a release from reserves every year since 2003, and these have contributed an
average of more than 4% of capacity to the final result over this period. We continue to
be sanguine about the overall level of reserves held by syndicates. The safety margin of
provisions for claims incurred but not reported (IBNR) continues to improve. We measure
this by reference to the ratio of IBNR to reserves held for known claims (net IBNR divided
by net outstanding claims), and we can see in the chart below that this ratio has climbed
to a new high on the closure of 2012.
2012 underwriting year of
account helped by a stronger
US Dollar, a better
investment return than
expected and prior year
releases
12
Expect releases from
reserves to continue in future
years, but probably at a lower
percentage of capacity
IBNR as a percentage of net outstanding claims
Source: Syndicate reports & accounts, AIRL analysis
A caveat here is that the low frequency of loss reduces syndicates’ ability to post loss
reserves and in turn to make IBNR provisions. One of the reasons that the ratio has been
increasing is because there has been little claims activity. This can be seen in the charts
below, which tracks the total quantum of the reinsurance to close (RITC) paid from one
year to the next. This total amount has been almost static since the close of the 2009
account.
Arguably exposure has grown over this period, as the RITC has assumed liability for
additional years (albeit that some of the older liabilities have been extinguished). It seems
reasonable to expect releases from reserves to be lower in Sterling terms than they have
been over the past few years. As syndicate capacity has increased over the same period
- aggregate capacity for members’ syndicates was almost 30% higher in 2013 than it was
for 2009 - it also seems reasonable that this will translate into lower releases from
reserves, producing a much smaller surplus when expressed as a percentage of capacity,
than we have seen over the past five or six closed years.
13
Lloyd’s Statistics
Lloyd’s publishes an annual compendium of syndicate results and other valuable analyses
of market trends. Although the content could be seen as slightly ‘geeky’ i.e. more
interesting to analysts than the average member of Lloyd’s, it does contain a full listing of
all Lloyd’s syndicates (on a GAAP basis) as well as data on premium, claims and
membership trends within the Market. The 2015 edition is due to be published on 15
May. In order to be able to download the file you will need a relatively speedy internet
connection (file size is around 40Mb) and to have registered at
http://www.lloyds.com/the-market/tools-and-resources/resources/statistics-relating-to-
lloyds/request-subscription-pre-print (subscription for market participants is free, but
£2,500 to non-participants).
APCL will be publishing the 2015 edition of the Lloyd’s Syndicate Profiles in late August
Merger Frenzy
XL Group and Catlin
By far the most significant development of the year to date has been a succession of
major mergers amongst insurers and reinsurers. For Lloyd’s watchers, the most
interesting is the combination of Catlin, the largest of the London market listed vehicles,
with XL. XL, based in Ireland but with its roots in the Bermudian market, was formed in
1986 and has total premium revenues of $6.6 billion and total assets of $45 billion; Catlin
by comparison has annual premiums of $6 billion and assets of $15 billion. The combined
business will be known as XL Catlin. Catlin has had a historically stronger Lloyd’s
presence, writing $3.3 billion into Syndicate 2003 in 2014.
XL also has substantial interests at Lloyd’s, having acquired two businesses that owned
Lloyd’s managing agents. These were Mid Ocean, former owner of the Brockbank
agency which managed Syndicates 588, 861 and 1209, and Nac Re, which acquired the
old Morgan Fentiman and Barber business, managing agent to Syndicate 990. In recent
years, the Lloyd’s business has become a smaller part of the group, with premium
volumes accounting for less than 6% of its reinsurance premium. The combined capacity
at Lloyd’s of the two businesses is £1.6 billion, or 6% of Lloyd’s total capacity in 2015.
The merger creates uncertainty as to whether the combined group will wish to continue
with SPS 6111, in which many APCL clients participate. As the individual appointed to be
head of reinsurance buying for XL Catlin is a former Catlin executive, there are perhaps
grounds for optimism that the SPS will continue to form part of XL Catlin’s reinsurance
arrangements.
Brit Insurance and Fairfax
Brit Insurance was formed by the acquisition of the Wren managing agency business by
one of the original Lloyd’s corporate capital vehicles, Benfield & Rea Investment Trust, in
2015 edition of ‘Statistics
Relating to Lloyd’s’ now
available
14
1999. For a number of years it traded as a listed vehicle with a Lloyd’s and a non-Lloyd’s
platform, and enjoyed a high profile as the principal sponsor of the England cricket team
and the Oval cricket ground in South London. In 2011, the company was taken private,
acquired by Achilles Netherlands Holdings, a consortium made up of two funds,
Luxembourg based CVC and, Apollo, a New York based private equity business.
The business was restructured and simplified under the new ownership with the disposal
of non-Lloyd’s interests, before being relisted on the London Stock Exchange in 2014.
CVC and Apollo continued to own 75% of the business.
In February 2015, it was announced that Canada’s Fairfax Financial Holdings had agreed
to buy the business at a price of $1.88 billion, allowing CVC and Apollo to exit their
investment. Fairfax is an established Lloyd’s player, having owned Advent Underwriting
Limited (itself formerly a listed insurance vehicle at Lloyd’s) since 2009, as well as Newline
Underwriting Management Limited. Advent and Newline are managing agents to
Syndicates 780 and 1218, with capacities of £200m and £100m respectively. The
acquisition of Brit increases Fairfax’s total capacity at Lloyd’s to £1.25 billion (or just
under 5% of Lloyd’s total 2015 capacity).
Montpelier and Endurance
It was announced in March 2015 that Bermuda based Endurance Specialty Holdings was
to acquire its smaller rival Montpelier Re in a deal valued at $1.8 billion. The two
companies have a combined premium income of $3.6 billion in 2014. Endurance does
not currently own a Lloyd’s business, but Montpelier formed Syndicate 5151 in 2007. Its
current capacity is £180m, although Endurance CEO, John Charman, described the
Lloyd’s presence as “scalable”, suggesting that the new management may seek to
increase the business volumes over time.
AIRL forecasts
Our analysis on reserving adequacy give us comfort that a number of the syndicates that
feature prominently in our clients’ portfolios are likely to continue to be able to make
reserve releases, assuming that their current reserving strategies remain unchanged.
The absence of natural catastrophes means that loss ratios on the open years are
amongst the best in recent times. At the same time, it is apparent that the rate softening
over the past few renewal seasons is beginning to have an impact on attritional loss
ratios.
On the tables on pages 16 and 17 we have adjusted our forecasts for a few syndicates:
QBE Syndicate 386 declared its first prior year loss since the 2002 year of account,
attributed to worse than expected experience from the general liability and professional
indemnity classes, after a number of years of bumper releases. This has caused us to
revise our expectations for the syndicate slightly downwards. We are also relatively
15
pessimistic about the levels of interest rates, and hence the investment income, on what
is one of the largest funds in the Market.
R&Q Syndicate 1991, which commenced trading for the 2013 year of account, has taken
longer than projected to develop the coverholder relationships on which the syndicate
relies. Loss ratios to date validate the approach in what are very tough market
conditions, but current indications are that, given the low business volumes and start-up
costs, the syndicate may not deliver positive returns to its capital backers before it fourth
year of operation – 2016.
Similar considerations apply to Asta Syndicate 1729, which commenced underwriting in
2014. Income is projected to be well below plan, and the impact of fixed costs means
the syndicate is likely to record a loss in its first year, but it should improve into the
second year.
Disappointingly Apollo Syndicate 1969 is now forecasting a breakeven result for the
2013 year of account. This is attributed to individual large losses on the property and
cargo & specie accounts, which were not large enough to make a reinsurance recovery.
We are now more optimistic on Nuclear Syndicate 1176. The proportion of liability
business has increased in recent years, and we have gradually improved our projections
for the release from the reserves the syndicate is providing for the class.
We have made one important change to the tables below. The row designated ‘Market’
at the bottom of both tables now refers to the aggregate of Argenta clients’ capacity,
whereas it previously referred to 100% of the capacity of the syndicates where Argenta
clients had a share. As Argenta clients tend to have bigger shares on better performing
syndicates, the Market row under-estimated the overall result for our clients.
You will spot that our forecast for the Market for the 2015 year of account has
deteriorated by 1% of capacity. This is due to two factors: first we have now included
the new syndicate, 1884, which commenced underwriting on 1 April 2015 and which we
anticipate will lose money in its first year. Second, the aggregate position has only
changed very marginally, from just above 5.5% to just under, so this movement does not
represent a radical change in our view for the year.
16
Results for 2012 and updated 2013 forecasts
2012 2013 Managing
Agent AIRL Managing
Agent AIRL
Q3 14 Result Q3 14 Q3 14 Q4 14 Q3 14 Q4 14
33 Hiscox 14% 17% 15% 5% 5% 12% 12%
218 ERS 0% 0% 2% -1% -1% 0% -1%
260 Canopius 1% 4% 1% -12% -13% -9% -9%
308 Tokio Marine Kiln 5% 6% 5% -1% -1% -1% -1%
318 Beaufort 11% 12% 11% 7% 7% 8% 9%
386 QBE 11% 10% 14% 8% 9% 11% 9%
510 Tokio Marine Kiln 7% 9% 8% 7% 8% 9% 10%
557 Tokio Marine Kiln 5% 6% 9% 12% 12% 14% 15%
609 Atrium 13% 18% 13% 5% 5% 9% 9%
623 Beazley 10% 14% 12% 4% 4% 8% 9%
727 Meacock 9% 12% 12% 6% 6% 10% 10%
779 ANV 0% -2% 0% 0% 1% 0% 2%
958 Canopius -3% 0% -3% 6% 5% 6% 5%
1176 Chaucer 58% 62% 57% 25% 30% 25% 35%
1200 Argo 5% 7% 4% 4% 4% 4% 4%
1969 ANV 9% 9% 9% 3% 0% 3% 0%
1991 R&Q -3% -6% -3% -6%
2010 Cathedral 13% 18% 13% 10% 10% 11% 11%
2121 Argenta 12% 14% 11% 8% 9% 10% 10%
2525 Asta 13% 23% 15% -4% -1% 6% 9%
2526 AmTrust -19% -38% -19% 0% -8% 0% -15%
2791 MAP 10% 12% 11% 9% 10% 10% 12%
4020 Ark 12% 17% 12%
5820 ANV 0% 0% 0% 3% -2% 3% -4%
6103 MAP 21% 25% 21% 30% 33% 30% 32%
6104 Hiscox 35% 39% 42% 40% 40% 41% 41%
6105 Ark 12% 17% 12% 6% 7% 6% 7%
6106 Amlin 45% 47% 46% 37% 37% 37% 37%
6107 Beazley 28% 33% 28% 8% 8% 8% 8%
6110 Pembroke 8% 8% 8% -1% 0% -1% 0%
6111 Catlin 8% 10% 8% 10% 10% 10% 10%
6113 Barbican 21% 22% 22% 22%
Market (Argenta Clients) 10% 12% 11% 7% 8% 10% 10%
17
AIRL Forecasts for 2014 and 2015 accounts
2014 2015
AIRL AIRL
Q3 14 Q4 14 Q3 14 Q4 14
33 Hiscox 8% 9% 5% 5%
218 ERS 1% 1% 2% 3%
260 Canopius -6% -6%
308 Tokio Marine Kiln 2% 3% 4% 3%
318 Beaufort 6% 5% 4% 4%
386 QBE 8% 5% 7% 8%
510 Tokio Marine Kiln 8% 8% 7% 7%
557 Tokio Marine Kiln 8% 18% 11% 11%
609 Atrium 8% 9% 6% 6%
623 Beazley 7% 7% 6% 6%
727 Meacock 8% 8% 7% 7%
779 ANV -3% -3% 2% 1%
958 Canopius 5% 7% 5% 5%
1176 Chaucer 32% 36% 36% 40%
1200 Argo 3% 4% 4% 3%
1969 ANV 5% 5% 4% 4%
1729 Asta -2% -4% 2% 1%
1884 Charles Taylor -9%
1991 R&Q -4% -3% 0% 0%
2010 Cathedral 7% 7% 7% 6%
2014 Pembroke -1% 0% -3% 0%
2121 Argenta 7% 7% 5% 5%
2525 Asta 8% 9% 8% 9%
2526 AmTrust -4% -6% -3% -4%
2791 MAP 6% 9% 6% 7%
4020 Ark 4% 6% 5% 5%
5820 ANV 1% 0% 4% 2%
6103 MAP 16% 16% 7% 7%
6104 Hiscox 20% 26% 9% 10%
6105 Ark 7% 6% 6% 5%
6107 Beazley 25% 24% 15% 15%
6111 Catlin 7% 8% 5% 5%
6113 Barbican 9% 9% 0% 0%
Market (Argenta Clients) 7% 7% 6% 5%
18
Your Notes
19
Your Notes
Caveats
This Quarterly Review publication is issued for general information purposes only and should not be construed as an
invitation or inducement to engage in underwriting activity, nor investment advice. The document has nevertheless
been prepared in accordance with the general principles of the Financial Conduct Authority (FCA) financial promotion
rules, in addition to those stipulated by the Code for Members’ Agents: Responsibilities to Members.
Whilst all reasonable care has been taken to ensure that the information contained in this document is accurate at the
time of publication, Argenta does not make any representations as to the accuracy or completeness of such
information. Further, Argenta does not represent, warrant or promise (whether express or implied) that any information
is or remains accurate, complete and up-to-date, or fit or suitable for any purpose. This document provides
information about syndicates' past performance. Past performance is not a guarantee for future performance. The
forward-looking statements (including, but not limited to, the AIRL forecasts) in this document are subject to
uncertainties and inherent risks that could cause actual results to differ materially from those contained in any forward-
looking statement. Whilst it intends to publish future Quarterly Reviews, Argenta undertakes no duty to update publicly
any forward-looking statements contained herein, in light of new information.
Unauthorised use, disclosure or copying of the document is strictly prohibited and may be unlawful.
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Argenta Insurance Research Limited is a wholly owned subsidiary of Argenta Private Capital Limited.