The Lloyd's market enjoyed a successful and prosperous 2004 as the soaring rate environment that began after September 11, 2001 continued to be in evidence Symon Ross considers why many in the market are expecting the good times to continue into 2005 despite early predictions last year that the market would be on the turn.

At the end of December, Lloyd's announced that it expects to have the capacity to underwrite £13.7bn of business in 2005, a reduction of about 9% on the capacity for 2004. The announcement has met with resounding approval from most underwriters of note in the market who view the drop as a reflection of the market's disciplined approach to current market conditions and a more cautious approach than at the end of other hard markets.

Announcing the 2005 capacity figure, Lloyd's chief executive Nick Prettejohn said: "Under the new franchise arrangements, businesses at Lloyd's have to take a hard look at how much business they plan to write in the coming year. Given current market conditions and the focus on delivering underwriting profit, it is a positive sign that there has been a decrease, not an increase in capacity at this point in the insurance cycle."

He said the drop in capacity followed detailed discussion with each business in the market about their plans for 2005, and approval of those plans under the market's franchise arrangements.

"Capacity is a function of planned activity. Just as important will be the amount businesses actually write during the year, taking account of market conditions as the year develops. We will be monitoring this closely."

Managing agents

Lloyd's goes into 2005 with 44 managing agents, instead of the 45 it had at the start of 2004, and 62 syndicates, down from 66, mostly due to managing agents consolidating their own capacity. The number of brokers is unchanged at 169.

For most managing agents the loss levels for the 2002, 2003 and 2004 years of account continued to develop favourably, catastrophe losses in third quarter 2004 aside. The underlying books of business of the major Lloyd's market players developed in similar patterns with low loss levels and good profitability for the most part. The 2002 year is now showing a likely profit of about 12%, slightly down on previous forecasts, and 2003, which still has two years to run, is estimated at 11%.

There have been few instances of agencies getting carried away with recent profit improvements, although some have expanded. Beazley has increased its business in the US market and Ascot, which is backed by AIG, confirmed it will increase its stamp capacity to £410m and revealed plans to expand in France.

But capacity reductions were more common, with leading groups such as Amlin and Ace reining back for next year. Amlin announced that it would cut by about 15% to £850m for the year, while Ace decided on a 23% cut in capacity for the 2005 year, down to £425m.

Some leading agencies, such as Hiscox, upgraded their capacity plans for 2005 (from £725m to £775m) on the basis that rates will stabilise or even climb in some lines because of the third-quarter cat losses, but mostly the capacity is still less than in 2004, in Hiscox's case down from £847m.

Many of the agencies have increased the level of capacity that they own and manage themselves. Beazley was one notable buyer in the latest auction process as it took out £109m of non-aligned capacity on syndicate 623 to raise its own capacity from 54% last year to close to 70%.

Bermudan group Quanta is to set up a new syndicate, 4000, with £80m of capacity this year that will be managed by Chaucer, a move Chaucer's managing director Ewen Gilmour describes as a "Win, win situation."

Kiln announced that, as well as underwriting reinsurance risks from its Lloyd's syndicates 510 and 557, it will now also underwrite those risks through a parallel company operation in the name of WR Berkley (Europe).

The move will allow Kiln to underwrite more business if it chooses to.


One of the major news stories to raise eyebrows in Lloyd's last year was investor Michael Wade's much discussed attempt to get a new company off the ground that would buy up some of the smaller listed Lloyd's insurers.

Mr Wade's Capital Insurance Holdings was seeking a £125m institutional placement backed by Warren Buffett's Berkshire Hathaway, which was to take a 25% stake. The plan was then for Capital to use the proceeds of the float to buy Lloyd's insurer Euclidian and to replace a $77m letter of credit provided by a Berkshire Hathaway unit. Ultimately the venture faltered due to a lack of interest from other investors.

Mr Wade's firm Capital Insurance was subsequently forced to transfer Euclidian's underwriting business to Marlborough Underwriting and place syndicate 1243 into run-off.

Ewen Gilmour of Chaucer comments: "It was the wrong vehicle at the wrong time. The reaction of the listed ILVs (Integrated Lloyd's Vehicles) was telling. We are owned by institutional funds and if they wanted us to (consolidate) we would. But that was the wrong vehicle." However, Mr Gilmour does not rule out similar moves being successful in the future.

Losses and rates

The Indian Ocean tsunami which struck numerous Asian countries in December last year caused terrible devastation and massive loss of lives in coastal areas, but it is not yet known whether there will be major financial repercussions for the insurance markets. While extending its sympathy to the people affected by the disaster, Lloyd's said it was monitoring the claims situation and expected the market's exposure to be limited to holiday resorts, personal accident, travel insurance and marine risks. Lloyd's said it was liaising with businesses in the market to assess the financial impact of the disaster but added that it might take some time.

The key influence on results in 2004 was undoubtedly the trio of hurricanes that hit the US and the Caribbean in quick succession, causing millions in damage and insured loss.

As he announced the 2005 capacity figure, Mr Prettejohn also noted that "the fundamental financial strength and attractiveness" of the market had been underlined by its ability to ride the worst US hurricane season for a century.

That the losses have been absorbed is testament to the underlying rates which had been in place for the year, says Kiln's underwriting director Robert Chase.

"(The hurricanes) have had an effect on the expectation of rates," adds Mr Chase. "We all agreed rates would come off in 2005 - most of us felt it would be gradual, but that it would accentuate in 2005. I don't think the impact is enough to push rates upwards but in a number of classes where rates were moving down this is now not happening. Rates are now static or even looking to edge up in some cases ... (The storms) have served to extend this period of the cycle and it is a good part."

Ewen Gilmour agrees. "Has it put off the turn of the cycle? Definitely.

For a year anyway. Where 2005 we guessed would be a reasonable year, now we think it will be a good to very good year. By 2006 we will be back to where it would have been without them."

Ascot's chief executive Martin Reith feels that the hurricanes acted as something of a wakeup call for underwriters who were considering significant rate cuts. Highlighting the "levelling-out process" that followed the rate hikes and tightening of conditions since 9/11, coupled with a lack of major losses at the start of 2004, Mr Reith said: "As a result, there was much speculation about the way in which the industry would manage this particular part of the cycle and whether it had learned any lessons from the past and grown more sophisticated - or if it would be simply a case of more of the same.

"Generally, the mood was 'more of the same' although certain classes did demonstrate a better technical approach to underwriting. In the main though, it was disappointing to see a return to the 'trader' type market based more on gut feel than determining price adequacy. In fairness, there was (and remains) a better understanding of the need to meet the required return on capital hurdles and a better sense of the security required to deal with such catastrophes. This led to greater stability than might otherwise have been the case."

He notes that by the middle of 2004 the Franchise Performance Board was warning the market that prices would come off and that there was a need to make sure the cycle was managed appropriately. Then came the hurricanes, which he says "undoubtedly re-focussed underwriters' minds that catastrophes can and do occur and reinforced the need of companies to re-examine their own underwriting standards."

He also said that large offshore and onshore losses caused by the hurricanes have "given the industry a get out of jail free card" as they have "reminded underwriters of the need for adequate premium and a sound technical underwriting approach to cope with such losses and move forward. This seems to have (for the time being at least) halted the pace of the cycle."

Mr Reith added: "We have weathered the storm well but it has re-focussed us on pricing levels and the way we write business as well as the type of business we are prepared to write."

Franchise Board

Last year was the first full year of operation for the Lloyd's Franchise Performance Board and its director Rolf Tolle, and the noise emanating from the market about it has been mostly positive. As yet some do not feel it has had any real effect on the way business is conducted in the market, instead seeing its importance to Lloyd's coming in the future when rates turn and underwriters start to break ranks and become undisciplined.

Mr Gilmour explains: "2004 was a boom year, so this year no it hasn't had a huge effect as there has been no need to clamp down on people. Its effect is significant for the future. It is ingrained in the way people are thinking about the down cycle and hopefully the way they are acting."

He feels that the reduction in market capacity is evidence that managing agents are beginning to think the way the Franchise Board would like them to.

"It is very positive for very obvious reasons. In the standard eight-year cycle we tend to go by three very good years, a couple in the middle and three lousy years. The idea is that you don't lose all you've made in the three good ones in the three bad ones. At this point you rein back to your core business. It is easy to say but difficult to do, and it is very positive to see evidence that everyone is doing it," says Mr Gilmour.

"Tolle has been out there banging the drum but people have been doing this by choice themselves. The market has to want to do it itself."

Kiln's Robert Chase also notes that the reduction in market capacity is due to other factors as well as the Franchise Board. "As (the market) turns there are certain types of business that would come to market that now won't as they once did. An example of this would be US surplus lines.

Rates moving down are a sign of the domestic market regaining an interest.

They are not crossing the pond as they would at the height of a hard market.

The drop in market capacity is a sign of preparation for that," he says.

"(The Franchise Board) has undoubtedly helped. But longer term the test of the Franchise will be their general influence in the market's underwriting, above and beyond the obvious problem areas. We have not got to that point yet.

"It will be judged to be really successful if they manage to differentiate in their treatment of underwriting organisations, if they can understand the strengths of one underwriting organisation against another. If they just treat the market as one whole entity they won't make much difference."


The recent catastrophic earthquake and resulting tsunami will potentially add some late losses to the 2004 year-of-account for some Lloyd's syndicates.

But in the medium term these losses, depending on how significant they are, are likely to further bolster rates going into 2005 and serve to harden the market further against a downturn.

The big challenge for the market in 2005 and beyond is maintaining profit levels in the face of falling rates, mediocre investment returns and the tighter regulation by the Franchise Board and the UK's Financial Services Authority.

These factors aside, Lloyd's and the managing agents it consists of go into 2005 with some optimism.

Symon Ross is a freelance contributor to Global Reinsurance.
Lloyd's Managing Agents

Abacus Syndicates Ltd

ACE Underwriting Agencies Ltd

Advent Underwriting Ltd

AEGIS Managing Agency

Amlin Underwriting Ltd

Argenta Syndicate Management Ltd

Ascot Underwriting Ltd

Atrium Underwriters Ltd

Beaufort Underwriting Agency Ltd

Beazley Furlonge Ltd

Brit Syndicates Ltd

Canopius Managing Agents Ltd

Cathedral Underwriting Ltd

Catlin Underwriting Agencies Ltd

Chaucer Syndicates Ltd

Cox Syndicate Management Ltd

Creechurch Underwriting Ltd

Danish Re Syndicates Ltd

Faraday Underwriting Ltd

Gerling at Lloyd's Ltd

Hardy (Underwriting Agencies) Ltd

Heritage Managing Agency Ltd

Hiscox Syndicates Ltd

Illium Managing Agency Ltd

Imagine Underwriting Ltd

Jubilee Managing Agency Ltd

KGM Underwriting Agencies Ltd

Liberty Syndicate Management Ltd

Limit Underwriting Ltd

Managing Agency Partners

Markel Syndicate Management Ltd

Marketform Managing Agency Ltd

Marlborough Underwriting Agency Ltd

Munich Re Underwriting Ltd

Navigators Underwriting Agency Ltd

Newline Underwriting Management Ltd

Omega Underwriting Agents Ltd

RJ Kiln & Co Ltd

SA Meacock & Company Ltd

St Paul Travelers Syndicate Management Ltd

SVB Syndicates Ltd

Talbot Underwriting Ltd

Wellington Underwriting Agencies Ltd

XL London Market Ltd