The combination of Bermuda companies and Lloyd's is an increasingly powerful force in the international market. Lee Coppack explains how synergies are developing.
Three Bermuda companies now among them control £1.6 billion of the capacity of the Lloyd's market. All three, ACE, XL Capital and Terra Nova (Bermuda) Holdings, are public companies, and naturally they want to see their Lloyd's operations both profitable in themselves and enhancing the activities of the group as a whole.
They all have reducing, but still material, amounts of capital on their syndicates provided by third parties, particularly individual Names, whose rights are carefully protected by Lloyd's, rather like minority shareholders. For example, about 31% of the capacity across the three syndicates managed by ACE's London subsidiary, ACE Global Markets, still comes from external sources. This affects both the structure of the syndicates and the ability of the owners of the managing agencies to effect business, particularly reinsurance, within their groups. Eventually they would like - with greater or lesser strength - to integrate the underwriting capacity of the syndicates they manage through their subsidiaries in Lloyd's into their overall corporate holdings.
ACE has acquired its interests in Lloyd's in several steps, the most recent of which was the purchase of the Tarquin underwriting agency announced in June 1998. XL's significant presence in Lloyd's resulted from its acquisition last year of 100% of Mid Ocean Re which owned the Brockbank underwriting agency. Terra Nova, with an established presence in the London company market, acquired the business of Octavian Syndicate Management in early 1996.ACE and XL are today following a strategy of consolidating their acquisitions into single managing agencies and they also propose to merge their syndicates starting 1 January 2000. If the syndicate members accept their proposals, ACE Global Markets and Brockbank will then each manage one large, multi-line syndicate, not unlike an insurance company structure.
Terra Nova will, however, retain a spread of syndicates with the exception of the planned merger of its two motor syndicates. Group underwriting director Anthony Hines, himself a former Lloyd's aviation underwriter, believes that the important issue is integrating back offices and that the traditional syndicate structure headed by an individual underwriter contributes significantly to the entrepreneurial quality of the Lloyd's market. The role of the group underwriting director, he explains, is to give the essential wider view.
The advantage of a single syndicate, says Michael Ashton, chief operating officer of ACE Global Markets, is that it allows much more efficient use of capital. Capital can be shifted between lines of business without the slow process that would be required between separate syndicates. In its proposal documents to syndicate members, ACE states: “The resultant syndicate will be better placed to survive the current economic slow down and emerge successfully from unfavourable underwriting conditions.”
Lloyd's has already forecast a profit for the market of only £70 million for 1997 and a loss for 1998 with 1999 “unlikely to show any improvement,” according to chairman Max Taylor, although as he points out this does not mean that all syndicates will perform equally.
Mid Ocean has always had a comfortable relationship with Lloyd's, since its president and ceo Michael Butt had been a Lloyd's broker, and XL Mid Ocean Re has as its president and ceo former Lloyd's underwriter, Henry Keeling. Leading Lloyd's underwriter Mark Brockbank continues as ceo of Brockbank Group, while ACE in contrast brought Bill Loschert from Bermuda to head what is now ACE Global Markets, though he is now a member of the Council of Lloyd's, and following the Tarquin acquisition, leading Lloyd's underwriter John Charman became its ceo. At Terra Nova, group underwriting director Mr Hines was not only a Lloyd's underwriter but served as a member of the Council of Lloyd's for four years.
Areas of changes
Underwriting synergy, insurance and technical support are three obvious areas where ownership by an outside insurance operation is likely to make a significant operational difference to a Lloyd's managing agency, without considering the greater financial disciplines required in groups which are public companies.
Two major factors at the moment affect the development of cross group policies: regulations and market conditions. While Lloyd's has licences to transact business in about 60 countries, it can only write direct business in two US states, Illinois and Kentucky. Business written by the agencies' parent companies has to go through a Bermuda broker, therefore for Brockbank so far it has been easier to work with the group's Dublin subsidiary, XL Europe, and XL Europe can reinsure into Bermuda. One of the projects which has grown out of this structure has been a port cover which is written by the Brockbank syndicates and followed by XL Europe. Through this co-operation, XL is able to increase the limits available on the cover using its own resources up to $150 million combined single limit and $50 million for any one interest.
ACE also has a Dublin office, but it is more recently established than XL's and according to Michael Ashton, so far the syndicates have worked more closely with Bermuda, particularly on energy and property risks. With dispensation from Lloyd's, reinsurance is possible within the group. ACE syndicates are supplying £60 million of capacity to the British Nuclear Pool with the backing of ACE itself to enhance capacity. The programme is split between two ACE managed syndicates, marine 2488/488, and non- marine, 219, and that is split by a quota share reinsurance into Bermuda of £10 million for syndicate 2488/488 and £20 million for syndicate 219. “This is an example of how they can work together,” Mr Ashton says.
Another area where ACE can help the syndicates is in overcoming some of the regulatory constraints in the United Kingdom and Lloyd's to do securitisations and certain cross-border deals. “There are lots of opportunities to work with Bermuda,” Mr Ashton comments. ACE hopes to announce a number of new initiatives later this year.
New group acquisitions are also opening more windows for their Lloyd's interests. For ACE, completion of its purchase of the international business CIGNA means it will have operations in 47 countries and 90 offices in the United States. XL last year acquired 25% of a specialised wholesale US broker, Tri-City Brokerage, to facilitate Brockbank's expansion into the US and more significantly in May this year, it bought Illinois based Intercargo Corporation, which specialises in transport related insurances. This will give the syndicates the access to US admitted paper, Mr Brockbank explains.
Terra Nova has not just its Octavian interests but also its London market company, Terra Nova Insurance, as well as a Paris based reinsurance subsidiary, Corifrance. Thanks to the overview created by having a group underwriting director, Terra Nova can co-ordinate the activities of its Lloyd's syndicates and London company activities. The group took the decision at the end of 1998, for example, that it would confine its marine hull and energy book to its Lloyd's syndicates and concentrate on other marine risks, such as cargo, specie and liability, in its London company. The group will also write consortium business where it participates on a risk through more than one of its operations, says Mr Hines.
Current market conditions, however, are an inhibiting factor. Both Brockbank and XL have large energy majors among their clients. The potential for offering high level combined liability and property package seems obvious, but according to Mr Brockbank it is very difficult because of the soft market conditions. “From that point of view, the result is that we have been working hard to put into place the right platforms so that we can work together when the market is right.” It will take some time before the real advantages of synergy in the group emerge but, he says, the process of developing them is “intellectually very exciting”.The very large resources of the Bermuda companies offer benefits for Lloyd's in technical terms. XL and Brockbank have been working together on modelling, and it adds further information to what was already a good system. Mr Brockbank says there is clearly a lot of scope for co-operation on technology and the port cover is one initiative that has already grown out of that. Space is another area which could be compared across the group.Terra Nova has a large actuarial department, explains Mr Hines, while Octavian had developed a well regarded system of quarterly business reviews. Now the syndicates work with the actuaries, and Terra Nova has adopted the quarterly review process.
Mindful of its history and the interests of outside capital providers, Lloyd's strictly regulates reinsurance transactions with related parties, especially inward reinsurance. However, with authorisation from Lloyd's syndicates do reinsure with other companies in their own group. XL Mid Ocean Re, for example, writes a quota share reinsurance for Brockbank, which began in 1995 through Mid Ocean. It is a way of maximising syndicate capacity while using capital effectively for businesses writing more volatile risks, Mr Brockbank explains. “We believe that we manage capital more effectively than anyone else in the market.”
ACE also has reinsurances between the syndicates and the Bermuda company, which includes among its other subsidiaries the property catastrophe reinsurer Tempest Re. The ratio of reinsurance from Bermuda to London and vice versa is about one third from Bermuda into London and two thirds from London into Bermuda. Both require disclosure and dispensation from Lloyd's, though as Mr Ashton explains it is the inward acceptances by the syndicates where Lloyd's is particularly anxious to protect external capital providers.
Both ACE and XL profess themselves happy to continue with outside capital, as ACE's Mr Ashton explains: “We have made a statement that we are happy to have external capital. It also has to be said, as long as we can work with them. We are looking at an evolving and changing business. The world is moving quickly and we need to be able to meet those challenges.”
Terra Nova, on the other hand, has stated that its aim is 100% ownership of the capital and to that end it has been buying capacity on the Octavian managed syndicates at auction. Once any of the agencies or their parents is providing 90% of the capital on a syndicate, then it has to make an offer for the outstanding capacity still in third party hands.
The ultimate goal for all three must be the integrated Lloyd's vehicle (ILV) in which there is a complete identity of interest between the parent insurance group, the managing agency and the capital provision for the syndicate. That this more closely resembles an insurance company, no one denies. It is also admitted that it would be easier to transform into an authorised insurance company outside Lloyd's, but there are currently no indications that the Bermuda market is doing anything other than strengthening its ties with Lloyd's.
Bermuda's involvement with the Lloyd's market is extensive. In addition to these three companies, Stockton Re has acquired Crowe Insurance Group, which manages six syndicates with a total capacity this year of £239 million, and other companies, such as LaSalle Re, participate in Lloyd's through corporate capital vehicles and shareholdings in managing agencies. Most recently, XL Capital's reinsurance subsidiary XL Mid Ocean Re, became one of six companies participating in the reinsurance of the Lloyd's central guarantee fund.It is a powerful combination.
Lee Coppack is co-editor of Global Reinsurance and editor of the Bermuda edition of the publication.