Lloyds Syndicate Results 2017 (35): Strong words from underwriters at Managing Agency Partners Ltd 2791

With the 2017 numbers for the Lloyd’s syndicates now in, IMN over the next few weeks will report on the marine numbers for those syndicates with a significant interest in this area.

MAP syndicate 2791 underwrote GPW of £179.4m in 2017, up from £171.5m the previous year. The 2017 result was an underwriting loss of £16.43m, compared with a gain of £32.1m the previous year.

Marine GPW in 2017 was £5.60m, down from £7.21m in 016. The 2017 marine result was a loss of £1.59m, compared with a gain of £3.58m the previous year.

In its segmental analysis, MAT Direct GPW were £6.85m, up from £6.65m the previous year. The net technical result for MAT Direct in 2017 was a loss of £692,000, compared with a gain of £4.88m the previous year.

DES Shipley, outgoing chairman, issued a somewhat downbeat valedictory address in his executive summary of the syndicate’s results. He wrote: “It is probable therefore that, in spite of all the advances in performance management and central oversight at Lloyd’s, businesses may be inadvertently trading against the Central Fund, just as there were when I came into the market over 40 years ago, a truly dispiriting prospect”.

MAP said in the Underwriter’s Report that capital providers would be well aware of the plethora of catastrophes that occurred in 2017.

In market loss terms MAP 2791 estimated the totality of major events to be around $100bn, compared with $30bn in 2004 and $64bn in 2005, “when the underlying base pricing in other lines of business was much stronger”.

Map 2791 said that “to our minds we have out-performed the market, (particularly in Harvey, the Caribbean and the Californian wildfires), but all other areas of our book were so thinly priced that the calendar year generated a loss.”

Across all years of account the syndicate’s underwriters projected ultimate gross catastrophe losses of £61.0m, with a year-end incurred of £41.0m. Ultimate net losses were projected to be £42.8m, which represents more than 30pp on net earned premium, thus wiping out the expected profit for the year.

The underwriter’s report observed that the previous year the report said  that “only the pain of loss activity will rebalance the risk-reward equation”, and 2017 indeed brought “one of the most active catastrophe seasons in years”. This year’s report said that the good news was that MAP had turned the corner, and many of its underwriters were seeing increasing opportunities to re-price business.

Through January 2018 the syndicate was up nearly 20% in gross volume over the same time in 2017, and at a slightly improved technical margin. The bad news was that “we are still a long way short of historic norms, and at this stage well shy of our anticipated writings as set out in our revised business plan last September”. The underwriter’s report observed that “capital was plentiful, and given the continuing background of low interest rates, and so relatively low risk margins, it was “unlikely we shall see any ‘capacity crunch’ such as in 2002 or 2006”.

For existing players, the report said that 2017 had proved to be an extremely difficult year, with market combined loss ratios likely much worse than that posted in 2005. It said that the first quarter reporting period would be critical: “if enough carriers are forced to admit to significant catastrophic loss, at the same time that many will be experiencing negative cash-flow and poor investment returns, alongside continuing weak performance in most other non-cat lines, then logically behaviour has to change”, he wrote.

The underwriter’s report said that a ‘hard’ (capacity-constrained) market was not necessary to grow from the current low ebb, merely a dislocated one in which nimble businesses like MAP can regain lost ground simply through pricing business properly.

It continued: “The macro risk to our strategy is that we are up against global businesses who not only have a lot of fire-power, they also seemingly have a much higher tolerance of under-performance. It is very difficult to compete with someone who is selling a dollar for 95 cents.”

The report felt that there were “too many Lloyd’s businesses who have been allowed to get away with extremely poor underwriting performance over a long period of time, despite (or perhaps because of) being capitalized appropriately”.

The report said that there needed to be “an explicit recognition that the Lloyd’s franchise depends not just upon policyholder security, but also on underwriting integrity”. It felt that it was becoming evident that certain carriers had been “guilty of massively over-trading their stated catastrophic risk appetite”.

The underwriter’s report felt that, other than capital loads, which were rare and of little consequence at the global level, there were “insufficient disincentives for systematic under-performance”.

The report also noted that, perhaps related to this, was the continuing ‘de-syndication’ of Lloyd’s, the loss of the traditional leadfollow collective. “Partly as an unintended consequence of regulators insisting on minimum standards, businesses have been encouraged to develop lead capabilities in all classes, which not only adds to the expense but then merely means that everyone then competes like crazy on the one thing left – price”.

The report then said that “well-intentioned drives to modernize transactional process” were “playing into the hands of brokers who are encouraged to bundle disparate risks into prepackaged facilities, and transact the whole lot in one electronic placement”.

The underwriter’s report said that “using a time-honoured ‘take it or leave it’ tactic they can then marginalize the malcontents who would quite like to underwrite the risks individually (like ourselves) whilst extracting higher commissions from the willing”.

MAP concluded: “The end result is that Lloyd’s traditional role as a global specialist market for non-standard bespoke business is being deeply compromised.”