With his managing agency collapsing around him following the surprise flight of his corporate backers, a lifetime Lloyd's man ruminated on what his underwriters would do. “There is a resurgence of syndicates backed by traditional Names,” the managing agent said. “Maybe they will go down that route.”
Even if it had tried, the Council of Lloyd's in the era preceding Reconstruction & Renewal couldn't have drafted a better plan to secure bridge financing to keep Lloyd's afloat until private capital could stage a comeback. In the midst of the market's capacity crunch, it invited corporations to finance the syndicates.
Never mind the famine that lay ahead. Some insurers, mostly from the US, were so anxious to latch on to a piece of the Lloyd's brand that they overlooked the likelihood that Lloyd's would lose millions in a cyclical market turn before the black ink flowed again. Compounding their woes, many of the new insurer-investors did nothing to limit their losses. Some, oblivious to the bottom line, even encouraged the men in the Room to pursue a strategy of growth.
Predictably, their fingers were burned as global insurance markets softened. Many pulled out their investments (Unum, PXRE et al), or were sold (Chartwell Re, Terra Nova). Following their departure, traditional, private capital is experiencing a renaissance, just on the cusp of a hardening market.
Back to reality
Of course the Council of Lloyd's had no such master plan. Market-watchers are more likely to conclude that Lloyd's had no long-term blueprint at all when, in 1994, it took emergency measures to save the market and admitted the first corporate insurer-members. Instead, the re-emergence of large underwriting syndicates backed by private capital (without a stock market quote or third-party corporate control) has occurred through a process of simple evolution – back to the future, in the words of an underwriter at one of the new, large, private-capital syndicates.
Two such syndicates have begun accepting business for the 2001 year of account. They were able to secure ample capital to support their target stamp capacities, much of it from traditional Names, without having to deliver control of their new managing agencies in return.
Cathedral Underwriting, the new vehicle for former deputy chairman of Lloyd's Elvin Patrick, easily amassed sufficient support for a stamp of £82m for its launch syndicate 2010. Its backers range from the strategic (PMA Re, a blue-chip US reinsurer, that has a small holding in the agency and provides a minority share of the stamp) to the traditional (ie, members‚ agents, who represent Names). In the best tradition of Lloyd's, management is putting its own cash on the line, and all the underwriters are principals in the business. No party has a controlling share in the agency.
Cathedral has eschewed the trend towards the formation of an Integrated Lloyd's Vehicle (ILV), where the provider of underwriting capital and the owner of the managing agency are the same. That model creates, in the case of the quoted vehicles, what is essentially an insurance company trading under the Lloyd's brand, or in the case of outright agency acquisitions, the Lloyd's division of a larger insurer.
Cathedral is not alone. Managing Agency Partners, the new vehicle for David Shipley, former underwriter of the Harvey Bowring syndicate (much of which has joined him at the new venture), follows similar principles. No third party has overall control of the agency, and the capital providers are not identical to the agency owners. MAP, by drawing on the resources of both private and corporate capital, has accomplished the largest-ever launch of a new Lloyd's operation. Syndicate 2791 is underwriting for 2001 against a stamp of £140m.
Such mixed bathing leaves underwriters free to set their own agendas, with each preparing and executing his or her own business plan rather than attempting to implement a small slice of a distant agenda decreed from on high. “Underwriters don't have the same freedom of responsibility in a big organisation that they have in a smaller outfit,” says Robert Miller, editor of the ALM News, the newsletter of the Association of Lloyd's Members.
“That is very important indeed. Both Shipley and Patrick came from large organisations, and forming a new business seems a logical development for those that prefer the flexibility of the traditional structure. They have identified opportunities. We will see more like them.”
While underwriters take more responsibility, agencies must do so as well, especially in the new world of composite syndicates. Agency management has the additional task of monitoring cross-class aggregate exposures, and putting the brakes on if necessary, but also of seeing how exposures in one line can balance risk in other areas.
Cathedral, for example, focuses on US property treaty and aviation reinsurance, lines that historically would have been undertaken through separate syndicates. MAP writes everything from medical malpractice to marine excess of loss. However, in sharp contrast to the world of corporate insurers, the process of deciding what to write, when, and how to balance the portfolio is driven very much from the bottom up.
Other syndicates or, in the case of 2004, a nascent syndicate managed by a new agency have taken a monoline approach. Syndicate 2004 was set up for the 2000 year of account to underwrite the business of Admiral, the successful direct motor insurer that split away from Brockbank Syndicates after a management buyout. The deal left Barclays Private Capital, a private venture capital investment fund, with a controlling stake in the underwriter. Agency management and Brockbank, in turn part of Bermudian insurer XL, also have a stake.
When Admiral's new provider of agency services, PXRE Managing Agency, withdrew from the Lloyd's market earlier this year, Admiral opted to form a new ILV by launching a new business, Admiral Syndicate Management, to operate 2004. All of the agency's capital is provided by a dedicated corporate capital vehicle, Admiral Syndicate. “That vehicle, together with a quota share reinsurance, provides 100% of 2004's syndicate capacity. Members' agents do not participate,” says Admiral's David Stevens.
Similarly, John Neal, active underwriter of Syndicate 980, Ensign Motor, has with his colleagues completed a management buyout of Ensign from Limit. The latter had been accumulating capacity on 980 in its effort to build Limit into an ILV. But following the MBO a new managing agency has been established under Ensign Holdings to run the business, and Names are back in the frame. “Syndicate 980 expects to have a total capacity for the 2001 underwriting year of £142m, supported by Names and through capacity provided by five leading reinsurers,” Neal said in late November, when the completion of the MBO was announced.
The two motor syndicates illustrate the spectrum of possibilities for funding a Lloyd's operation: complete control of both underwriting and capital by a single entity, or a distinct division between the two, usually with capital from an array of sources. Both structures have merits and disadvantages.
Miller of ALM News believes the evolving mix of capital provision structures is “absolutely” a good thing. “I think the future of Lloyd's is a forum, where lots of different entities come and write London market business.” He predicts the balance of different financing and management structures will not be stable, and that the amount of private capital backing the market will fluctuate from year to year.
He believes that consolidation among members' agencies is good news for syndicates seeking capital. “Having a single capital source is one of the motives often cited for the formation of ILVs,” he says. “It was alleged to be much more difficult to manage the business when dozens of members' agencies were providing capital, but through consolidation, the confidence in members' agencies has been greatly enhanced. There has been a ruthless Darwinian cull [among the members' agents], which makes it much easier for managing agencies to deal with private capital.”
Robert Hiscox, chairman of ILV Hiscox agrees with Miller's premise, but debates his conclusion. “The point of the ILV is to have one shareholder block backing the venture so you can run an ongoing business, since the shares of the syndicate do not change every year, instead of being forced to run annual ventures,” he says. “Individual investors go in and out of the ILV, instead of in and out of the syndicate.”
But Miller sees a flexibility advantage in fluctuating capital. “These new syndicates use third-party capital and the managing agents' own. That provides a base they can be certain of, and the third-party capital which can flex as needs be throughout the cycle. The system is more flexible, but with a solid base of support.”
Hiscox is not convinced. “Anyone who wants to run their syndicate with a myriad of direct investors who can come and go at will, forcing them to do extraordinarily complicated accounting for a mass of different investors in different currencies on three open years, in an annual venture which has no existence beyond the end of the year, instead of one continuous shareholder base like the rest of the insurance industry, needs their head examining,” he says.