But Lloyd’s would be concerned by a proliferation of similar deals, says finance chief
The controversial Aon/Berkshire Hathaway deal pays a “backhanded compliment” to the underwriting discipline at Lloyd’s, according to the market’s finance and operations director Luke Savage.
However, he added that a proliferation of similar deals could be a concern for Lloyd’s.
Speaking to GR following the release of Lloyd’s first-half results this morning, Savage said: “The fact that the likes of [Berkshire chairman] Warren Buffett is willing to put up money to blindly follow what Lloyd’s is doing is actually a backhanded compliment.
“It demonstrates that Berkshire Hathaway has a great deal of confidence in how disciplined this place is as a market.”
The deal, which Aon announced in March, guarantees Berkshire Hathaway a 7.5% share of any business Aon places into Lloyd’s.
The arrangement sparked concerns that Berkshire would take business from smaller Lloyd’s underwriters, which would damage the market’s diversity.
Aon, on the other hand, argued that Berkshire’s participation would attract more business to Lloyd’s.
Savage acknowledged the concerns, but said recently released figures from Aon show that the broker increased the amount of business it places into Lloyd’s by 17% in the first half of 2013 compared with the same period last year.
He said: “What I don’t know is whether that 17% is because of the facility or in spite of it. But to the extent people are saying: ‘If this facility gets put in place Lloyd’s will lose 7.5% of its Aon business to Berkshire,’ that is quite clearly not happening.”
Cause for concern
While Lloyd’s is not worried about the Aon/Berkshire deal itself, Savage suggested that more similar deals could spark concern.
He said: “If these facilities were to proliferate across multiple brokers and in bigger size there will come a point when it will become a concern.”
The challenge Lloyd’s now faces, Savage said. Is to ensure Lloyd’s remains an attractive place to bring business. He said: “We can’t just sit back and assume the way business has flowed into Lloyd’s for 325 years will continue in perpetuity.”
One element that may help is if Lloyd’s is upgraded to the double-A rating range by Standard & Poor’s, AM Best and Fitch. This is the same rating range as Berkshire Hathaway.
Lloyd’s currently has a high single-A rating from all three of its agencies, so on the cusp of the double-A rating range. All three of the ratings have positive outlooks, indicating an upgrade is likely.
Savage said: “Would an AA- rating take away the attractiveness of something like a Berkshire facility? It certainly wouldn’t hurt.”
Lloyd’s reported a 9.9% drop in profit in the first half of 2013 as a 60% drop in investment returns offset improving underwriting.
The result also comes as competition is intensifying across the globe and capacity is abundant.
Savage said: “Despite the difficult conditions we have put in a good performance.”