Syndicate results 2021 #43 MAP 2791

The Lloyd’s syndicates have now published their results for 2021 and, in some cases, added detail and an outlook for 2022. Some have stuck to the bare bones. As last year, IMN is summarizing the results from all syndicates that have a marine interest, which have provided some information on the marine side.

Active Underwriter   R K Trubshaw

Richard Trubshaw consistently provides one of the most perceptive and readable summaries of the main issues covering the market.

MAP analyzes in terms of Years Of Account.

2019 Year of Account

Although Covid-19 manifested itself in the international consciousness early in 2020, MAP estimated that most of the (re)insurance impacts were weighted towards the 2019 year of account, at least as far as MAP was concerned.

There were three broad areas of analysis:

  • Firstly, those accounts where there was either explicit indemnity, or a reasonable expectation that cover would be deemed to have been triggered, with an appropriate margin of uncertainty.
  • Secondly, an estimation of defence costs and claims handling expense involved in rebutting those claimants who MAP felt did not have valid coverage.
  • Thirdly, a contingent provision against policy leakage or legal interpretations thereof, which could potentially result in claims – on MAP’s US reinsurance book in particular. MAP does not write cancellation, trade credit, travel or political risk, and has minimal involvement in property re(insurance) in Europe, Australasia or the UK.

At year end the gross ultimate provision for Covid-19 across all years of account was $27.3m, (previous year, $29.0m) of which $5.0m was incurred at year end (previous year $2.5m). Of these, the specific amounts pertaining to the 2019 year of account were $19.2m and $3.4m respectively.

Despite these provisions, the pure year generated a £28.1m net underwriting result. Although investment performance in the past year had been poor (the gross calendar year yield was a negative 0.5% compared with the +4.0% achieved in 2020), culminating in only a £2.7m return for the 2019 year of account, the £18.5m back year release was sufficient to offset syndicate expense and generate a positive bottom-line £29.4m or 7.4% return to Members.

2020 Year of Account Forecast

The market was already changing in 2019, in response to poor attritional performance, elevated catastrophic experience and depressed investment yields. The extent to which this was exacerbated by the impact of Covid-19 was difficult to judge, but Trubshaw saw three main issues.

  • Firstly was the effect on the liability side of the industry balance-sheet, with claimants in particular attempting to trigger business interruption coverage. “Whatever the ultimate quantum, we are very likely relatively underweight”, Trubshaw said. Few coverage issues had been finalized and he felt that this was “highly likely to be a long-term tax on the industry, whether it be litigation expense, defence costs, reinsurance recoverables and/or management time in addition to ultimate indemnity”.
  • The second impact was on the asset side of the balance-sheet, certainly in terms of reduced investment yields, and potentially in increased pressures on solvency as certain asset classes are re-based in a post pandemic world. Trubshaw said that “it should be easier for small, independent entrepreneurial businesses like MAP to compete in an increasingly risk-averse environment, given we are not reliant on investment yield to underpin a mediocre risk-return”.
  • The third impact was the logistics of remote working. “MAP was born 21 years ago, working from home, so in a way we have simply come full circle”, Trubshaw said, noting that “it is certainly relatively easier to operate if you have a small number of like-minded people, all of whom are principals in the business and are used to operating without branch offices or extended management reporting lines”.

Trubshaw said that it was pleasing to report that MAP had written 45% more gross premium than in 2019, slightly exceeding its original business plan forecast. “On the other hand, this merely gets us back to where we were back in 2012/13, and is only a little more than half our peak in 2006”, he admitted.

MAP estimated that the 2020 year of account had been impacted by nearly $60bn of catastrophic events in the US (Covid-19 apart), plus elevated tornado/hail incidence. $40bn emanated from four major events: hurricanes Laura ($12bn Louisiana) and Sally ($4bn Alabama/Florida), the Midwest Derecho ($9bn Iowa) and Winterstorm Uri, which hit in February 2021 but mainly affected 2020 accounts ($15bn Texas). Additionally, there were some modest Covid-19 provisions and some fall-back from Hurricane Ida, which struck Louisiana in August 2021.

In total MAP was holding $117.3m of ultimate gross loss for these six events against the 2020 year of account (net of cessions to Syndicate 6103), of which $92.9m had been incurred at year end. There were only modest reinsurance recoveries to help offset this burden. Consequently, the forecast profitability for the year was marginal, reflected in MAP’s stated forecast range of minus 5% to plus 2.5% bottom line return.

2021 Overview

Gross premium was up just under 20% to £301m. Market rates generally improved, although the impact of claims cost inflation meant that true rate change was much more muted. The year (once again) experienced elevated catastrophic activity. Although MAP had minimal exposure to the European Floods, Hurricane Ida in Louisiana caused $35bn-$40bn of insured loss. Although the levees in New Orleans largely held, the wind damage in Louisiana was somewhat similar to Hurricane Katrina, and there were significant impacts right the way up to the north-eastern States. MAP was projecting ultimate gross losses (net of cessions to syndicate 6103) of $116.3m to the 2021 year of account, of which $80.1m had been incurred at year end. Unlike in 2020 the outwards reinsurance programme would meaningfully come into play, such that the net impact was likely be no more than $50m.

2022 Trading Conditions

The September 2021 business plan forecast for 2022 envisaged gross volume rising a little over 20% to £366m (at year-end rates of exchange)

“We were certainly less bullish than many of our peers, given that the forecast growth rate is similar to that achieved in 2021”, said Trubshaw.

Early indications from the January renewal season suggested that MAP was “broadly on course, albeit a little light at this early stage”.

He noted that there were “certain key themes that most practitioners are facing in 2022”. The primary concern was claims cost inflation, which has a compound effect on severity over time. “Note that it isn’t just a future pricing consideration: assuming it starts to leak into liability awards it also has a potentially significant impact on back year reserve adequacy”, Trubshaw said.

Secondly, the observed heightened catastrophic activity over the last five years has caused MAP to increase its frequency loads, particularly pertaining to hurricane incidence in the Gulf of Mexico.

At the same time, embedded investment yields were likely to fall short of this inflationary cocktail “for some time to come”.

Trubshaw observed that, as a result, there was a lot more volatility in the marketplace as opinions naturally differed as to how much rate adequacy would be required to keep pace with these increased variables.

MAP noted that capital providers quite rightly expected MAP underwriters to embed existing pricing variables into its exposure analysis and pricing models before taking any risk onto the books. “It’s no good waiting until a claim manifests itself to point out these factors – by definition that’s too late!”

He said that “until such time as the proprietary models are recalculated to truly reflect current reality we continue to compete with a handicap”.

He noted that one of the large modelling firms came up with a very considered analysis of the likely increased claims burden from Hurricane Ida, citing inflation in both parts and labour, supply-chain issues, time-lags due to demand surge, increased loss adjustment expense, extraneous perils (notably flood from excess rainfall) and general difficulties in a post-pandemic environment. “All of which are eminently reasonable, but the key observation I would make is that these were stated to be additive, rather than the current expected norm”.

Trubshaw said that “in the meantime, most branch underwriters are charged by management with simply improving the risk metrics on a deal by deal basis. To counteract this, the brokers have developed a whole cottage industry designed to tick that particular box”.

While any positive rate movement for a seller was a good thing, Trubshaw said that the point was how much was really required to keep pace with the true risk characteristics, and was the underwriter adequately covering the gap.

“Consequently, we are seeing a bifurcated market, where opportunities are increasing on new exposures requiring bespoke underwriting, whereas vast swathes of policies remain locked into relative year on year analysis – much of which is to our minds grossly inadequate”, Trubshaw said

He felt that most European business fell into this category.

“In summary there is a lot more volatility than I’ve seen for many years – which means there will likely be a broader range of outcomes. It certainly makes it more interesting than the moribund years of the soft market, but it is challenging”, he concluded.

The 2021 calendar year produced an annually accounted profit of £15.9m (2020: £22.8m) on gross earned premiums of £348.9m (2020: £289.8m) gross of acquisition and reinsurance costs. The net combined ratio was 93.0% (2020: 94.0%).

Segmental Analysis

2019 YOA £000s GPW GPE GCI Op Exps Reins Bal Total
Direct MAT 10,158 (3,738) (4,767) (353) 1,300 (8,114)
Total Direct 94,270 (43,368) (34,155) (9,198) 7,549 (68,252)
Reinsurance 132,042 (47,339) (32,312) (32,141) 20,250 (116,458)
Grand Total 226,312 (90,707) (66,467) (41,339) 27,799 (184,710)
Calendar Year 2021 £000s GWP NWP NEP P/L
Marine 17,912 17,708 18,560 4,551
Total 366,510 262,894 248,776 17,313
Calendar Year 2020 £000s GWP NWP NEP P/L
Marine 21,400 21,154 15,854 1,910
Total 313,513 237,731 219,359 13,075

Referring to 2021 calendar year, Trubshaw said that “we continued the climb back out of the depths of the soft market, such that net earned premium volume was up 13% over 2020. The back years, 2018 and prior, contributed £20.6m to the annual result, following better than expected reserve utilisation in the calendar year. The three open years had a combined negative year on year performance, in particular 2020 which was heavily impacted by Winterstorm Uri, centred on Texas in February 2021, causing around $15bn of market loss. This was followed in August by Hurricane Ida $35bn – $40bn, largely affecting the 2021 year, although our outwards reinsurance programme should limit the net impact to around $50m.

At year end the ultimate gross loss estimate for Uri is $46.8m, and for Ida $123.2m (both net of cessions to Syndicate 6103).

There was a negative investment yield of -£1.7m (previous year +£11.0m).

Segmental Analysis Calendar Year

2021 £000s GPW GPE GCI Op Exps Reins Bal Total
Direct MAT 12,116 11,820 (5,326) (3,759) 111 2,846
Total Direct 115,980 107,349 (50,027) (32,560) (5,376) 19,386
Reinsurance 250,530 241,598 (225,808) (48,665) 30,802 (2,073)
Grand Total 366,510 348,947 (275,835) (81,225) 25,426 17,313
2020 £000s GPW GPE GCI Op Exps Reins Bal Total
Direct MAT 12,443 11,322 (5,955) (4,714) 8 661
Total Direct 103,528 98,691 (62,792) (29,987) (9,104) (3,192)
Reinsurance 209,985 191,062 (110,786) (41,357) (22,652) 16,267
Grand Total 313,513 289,753 (173,578) (71,344) (31,756) 13,075

The active underwriter received the following remuneration charged as a syndicate expense:

£000s 2021 2020
Emoluments 324 314

https://assets.lloyds.com/media/3150190c-53a6-4a45-818d-115292b066a5/SRA2791c.pdf