With eight new start-ups in the year so far, and ten more in the pipeline, Elliot Lane looks at the competitive new edge to the Lloyd's versus the rest of the world debate
Lord Levene's inclusion in the Chancellor's strategic group on competitiveness in the City indicates Lloyd's is still central to the Exchequer's long-term checks and balances. In his recent speech to the Lloyd's City dinner, Levene said: "I can assure [the market] that the question of taxation is already an item of serious discussion between us."
Hiscox's decision last week to decamp to Bermuda gave fuel to Lloyd's detractors, compounded by its chairman Robert Hiscox saying the insurer would hope to see its eventual tax rate fall to 11%.
However in the great debate on Lloyd's versus the rest of the world, the number of start-ups and new capital raised in 2006 has been competitive, according to Lloyd's finance director Luke Savage (see box).
He says at least ten new entrants are in the pipeline, which excludes the approval last week of Syndicate 1919, which will be managed by Marlborough Underwriting Agency and capitalised by CV Starr.
"This is the healthiest the market has been for a long time. The diversity of the lines of business managing agents can write within Lloyd's always gives a better opportunity to achieve good margins compared to Bermuda or Europe," says Savage.
In June, Morgan Stanley analyst David Collins stated in a report comparing Lloyd's to Bermuda and other domiciles that the central assets of £1.8bn at Lloyd's acted as a "buffer for the Lloyd's market".
"Also the high level of diversification of the Lloyd's book ultimately results in low capital requirements for Lloyd's syndicates. As a general rule, they are only required to hold capital [funds at Lloyd's] of around 40% to 45% of premiums, compared with a diversified Bermuda/European that would tend to hold closer to 100%," he said.
Savage admits the zero corporation tax in Bermuda is difficult to compete with. "This is where our discussions with the Treasury on competitiveness will really be important.
The Treasury must look at the corporation tax issues because zero tax is hard to fight.
We must also explain the areas that make London not attractive, such as high start-up costs.
"We have had £2bn of new capital come into the market in the past year to 18 months. Convert that to dollars it is roughly $4.5bn in US terms, compared to $8bn dollars in Bermuda. The argument is not that Lloyd's has zero new capital versus $8bn. In relative terms we are equal," he says.
Lloyd's hopes that the competitiveness review will reinforce the work both Lloyd's and the FSA have instigated to make it easier for start-ups to raise capital, set up operations and achieve regulatory approval at a low cost.
According to the Treasury's consultation paper, Financial services in London: global opportunities and challenges, London's strengths are flexibility, innovation, strong business services and supportive public policy. However the Treasury is worried that offshore locations are putting pressure on the insurance industry.
Standard and Poor's, in its The rise of the global (re)insurance nomad report published last week, named Dublin as yet another threat to London and Lloyd's.
It blamed the EU Reinsurance Directive, which is an interim measure ahead of Solvency II, for allowing reinsurers to "conduct business all over the EU under the freedom of establishment and the freedom to supply services".
"As a result, the potential exists for businesses to redomicile in Ireland, operate in London via a representative office or branch, and benefit from a lower tax rate (corporation tax of 12.5% compared with 30% in the UK) and a lighter regulatory touch," said S&P.
Savage admits insurers are flirting with the idea of moving to Dublin but is stoical towards its impact: "Dublin is hot at the moment but in 12 months it could be Dubai."
With the protean ability of domiciles, such as Bermuda and the Cayman Islands, to adapt and widen their scope to establish side-car opportunities for insurers and reinsurers, Lloyd's, and the City's attractiveness, needs a boost.
Let's hope Lord Levene can win the argument. IT
Lloyd's new entrants: market is palatable for some
3 May: Heritage starts a new, mid-year syndicate to underwrite personal accident lines. The new syndicate has a capacity of £50m, and will write business alongside existing Syndicate 1200. On 17 July, Heritage also announced its intention to float on AIM.
The group will take the opportunity to raise new capital in order to support planned growth in underwriting (increasing managed capacity from £230m to about £265m, due to favourable market conditions brought about by the 2005 hurricane season).
9 June: Chaucer signed an agreement with Quanta and the senior underwriting team of Syndicate 4000 to establish a new managing agency, Pembroke Managing Agency Limited (Pembroke). The new agency will manage Syndicate 4000, which has an underwriting capacity of £82m for 2006, and underwrites a portfolio of specialist lines products including financial institutions, management liability, professional liability, fine arts and kidnap and ransom.
15 June: Omni Whittington sells Asian syndicate Alba to Australian insurer IAG, bringing money into the Lloyd's market from a leading player in Australia for the first time. Moray Martin, based in Singapore, was appointed as chief executive and chief underwriter (Syndicate 4455) of the Alba Group and will oversee the development of a portfolio of commercial non-life reinsurance business.
21 June: Hardy intends to capitalise a new syndicate to underwrite for the 2007 year of account, with Patrick Gage as active underwriter. It is expected that the syndicate will have a capacity of up to £75m and will write across a range of non-marine classes.
Hardy is recruiting a team of underwriters to support Gage in underwriting for the new syndicate, which will operate independently from Hardy Syndicate 382.
26 June: Kiln increases its overall capacity in the Lloyd's market to over £1bn for 2007, an increase of 25% on 2006. The company intends to increase the capacity of its flagship Syndicate 510 by 17.6% and its catastrophe Syndicate 557 is planned to more than double. Kiln's director of underwriting Robert Chase said in the Kiln announcement: "We are seeing strong rating conditions and increased discipline in the market, and the planned pre-emptions on our syndicate capacities reflect our sense that, on the assumption that 2007 will be a year of moderate catastrophe activity, it will be one offering excellent underwriting opportunities."
3 July: Mitsui receives approval from franchise board to break away from Chaucer to form its own managing agency, Mitsui Sumitomo Insurance Underwriting. It will manage Syndicate 3210 from the third quarter of this year. The syndicate writes the following lines of business: property; casualty; motor; professional lines; marine cargo and specie; and marine hull. The syndicate capacity for the 2006 year of account is £300m.
11 July: CBS Insurance Holdings is to float an innovative new spread capital vehicle on AIM, raising £100m. The new company, ICP Ltd, will be the first spread capital vehicle to be launched at Lloyd's for more than a decade. Spread capital vehicles offer a more flexible structure and greater investment freedom than listed Lloyd's insurers, since the funds are not tied to specific insurance underwriters and syndicates.
ICP will provide capital to selected Lloyd's syndicates and agree other financing options with underwriters. The company will earn interest on the capital it provides and also participate in underwriting profits.
8 September: Lloyd's approved a new syndicate, Syndicate 1919, which will be managed by Marlborough Underwriting Agency Limited (MUAL), a wholly owned subsidiary of Berkshire Hathaway. This is subject to the necessary regulatory approval. The syndicate will be wholly capitalised by CV Starr (25%) and Starr International Investments (75%) and aims to start underwriting on 1 October 2006 with a capacity of £50m in 2007. The classes of business it will write are aviation, energy and marine. The active underwriter will be Chris Hancock, who was previously at Faraday.