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CORPORATE CAPITAL CHANGING LLOYD'S DYNAMICS

Business Insurance
November 10, 1998

Business Insurance: In hindsight, it's hardly surprising that Lloyd's of London last year informally started calling itself just plain "Lloyd's."

That's because the increasing influence of overseas corporate investors over the control and supply of Lloyd's capacity suggests the market's internationalism is growing and begs the question, Lloyd's of where?

Both U.S. and Bermuda-based reinsurers have established a place in the market, buying into agencies and their syndicates. In some cases, the relative newcomers to the market have set up new syndicates wholly capitalized by the parent, such as PXRE Corp.'s syndicate 1224, which started underwriting last year against L35 million ($57.9 million) capacity.

Alternatively, the parent organizations have bought out agencies from their management, most recently last week's purchase of D.P. Mann Holdings Ltd. by General Re Corp. of Stamford, Conn., for an undisclosed amount. By buying the D.P. Mann holding company, Gen Re has been able to take over both the managing agency, responsible for syndicate 435, one of the most consistently profitable in the market, and its dedicated corporate capital provider.

Many new investors have used the most recent round of capacity auctions to strengthen and consolidate their positions as increasingly influential players in the Lloyd's market.

Although Lloyd's investors have yet to finalize their 1999 capacity commitments to the market, the indications from the auctions and associated bilateral deals and cash/share offers -- are that the dedicated corporate investors will hold the lion's share of the market next year.

And many of these dedicated investors, which own agencies as well as supply capacity to syndicates, are reinsurers.

Terra Nova (Bermuda) Holdings Ltd. has upped its participation in the eight syndicates managed by its wholly owned subsidiary, Octavian Syndicate Management Ltd., by L63.9 million ($105.7 million) through auctions and other deals. ``These purchases. . .will bring the Terra Nova's share of aggregate capacity. . .to approximately 77% (of the total stamp capacity) for the 1999 underwriting year, up from approximately 60% from the 1998 underwriting year,'' said Nigel Rogers, president and chief executive officer of Terra Nova.

Bermuda-based companies figure highly in the profile of Lloyd's corporate backers, and none more than ACE Ltd. Through its subsidiary, ACE UK Ltd., the Bermuda-based company has progressively increased its influence at Lloyd's, most recently with this year's acquisition of Tarquin Ltd., the U.K. holding company for Charman Underwriting Agencies Ltd. Adding Charman to its three agencies -- ACE London Underwriting Ltd., ACE London Aviation Ltd. and Methuen Underwriting Ltd. -- added two more syndicates to the ACE fold. The Tarquin acquisition also helped raise ACE's profile in the market even further, as former Lloyd's Deputy Chairman John Charman became ACE U.K.'s CEO. In addition, ACE took the opportunity afforded by the auction season to increase its capacity in its own syndicates.

ACE's fellow Bermuda-based insurer, EXEL Ltd., also stepped into the Lloyd's arena with its acquisition of Mid Ocean Ltd., the owner of Brockbank P.L.C., another of Lloyd's highest-profile agencies.

At the same time, EXEL divested its shares in another Lloyd's agency, Venton Underwriting Ltd., when the Trident Partnership sold Venton Holdings Ltd. to Underwriters Reinsurance Co. of Calabasa, Calif., and NAC Reinsurance Corp. bought Denham Syndicate Management Ltd.

But it's not just U.S. and Bermudian reinsurers that have taken a stake in Lloyd's. German reinsurer Bayerische Ruckveersicherung A.G. recently took over a large block of shares in Wellington Underwriting Agencies Ltd.

For all these investors -- and the other reinsurers that have taken a stake in the market -- Lloyd's holds several attractions.

``I suppose it's a cheap way into the London international market,'' said Charles Sturge, director of syndicate analyst Chatset Ltd. ``London is still a major center of reinsurance,'' he said, ``and by buying into Lloyd's syndicates, it's a very cheap way of getting a foothold (in the London market).''

Whether the new entrants will stay if Lloyd's finds itself getting into trouble is another question, said Mr. Sturge. Lloyd's still must pay off the bulk of the almost L300 million ($496.3 million) syndicated loan it received from a consortium of banks as part of its reconstruction and renewal process. Original plans were for this to be funded by a 1.1% levy on all premiums passing through the market. But as premium income has fallen, so has the amount raised by the levy. It is possible, said Mr. Sturge, that corporate investors in Lloyd's could find themselves being asked to fund the debt, and ``I think that when they are tested, they may well exit'' from Lloyd's, he said.

What's more, Lloyd's is an expensive place to do business, said Mr Sturge. But there is a value to Lloyd's global licenses that currently makes it worthwhile for reinsurers.

``Through the Lloyd's market, we are able to take advantage of Lloyd's licensing and distribution,'' said Steven Bensinger, chairman and CEO of Chartwell Managing Agents Ltd., the Lloyd's underwriting subsidiary of U.S. reinsurer Chartwell Re Corp. ``It makes us a key player in the international markets a lot faster than we could be on our own.''

Lloyd's currently holds more than 60 licenses around the world. One of its goals at the moment is to extend its network of licenses and possibly set up local underwriting operations, according to Lloyd's CEO Ron Sandler. Geographically, Lloyd's is particularly intent on extending its reach in Latin America, Asia Pacific and Eastern Europe, he said.

At the same time, Lloyd's has begun working to cut the costs of transacting business in the market, including cutting annual charges from 3.1% to 2.45%. Other measures have included reorganizing the Corporation of Lloyd's, the market's service and regulatory arm, which recently has shed more than 300 jobs. Lloyd's management is ``aware that expenses need to be brought under control,'' said Mr. Bensinger, ``and they are taking steps.''

Lloyd's has been acknowledged as a world center for underwriting talent for many years now, and by buying into agencies, reinsurers are able to tap into that pool of expertise. What's more, the structure of Lloyd's syndicates means they are able to react much faster than an insurance company to changes and opportunities in the marketplace, according to a leading Lloyd's underwriter who did not want to be identified. ``It's not just the skills you buy,'' the underwriter said, ``but you're buying an entity operating syndicates which are incredibly flexible vehicles and are run as very tight ships. . . .The structure lends itself to flexibility.''

``What's going on now is a change from Lloyd's the society to Lloyd's the system,'' said David Mann, active underwriter for D.P. Mann syndicate 435.``Lloyd's is one of the best trading platforms for international reinsurance business in the world,'' so it's little wonder that the world's big reinsurers are attracted to the market.

Many of the new owners of Lloyd's syndicates have cited these qualities as major reasons for getting involved, and they have said that their Lloyd's operations will remain fairly autonomous from other insurance and reinsurance activities to react quickly to market opportunities.

Nevertheless, more and more agencies are merging their syndicates into large pools of capacity, writing numerous classes of business and primary insurance along with reinsurance. Investing in Lloyd's has enabled a number of reinsurers to enter the direct insurance market cheaply and easily, as well as giving them access to new business.

``There is clearly certain business that comes through the (Lloyd's) channel that we wouldn't see elsewhere,'' said Chartwell's Mr. Bensinger. ``There is a type of business that is more specialized from an underwriting standpoint -- the traditional types of risk that Lloyd's made its name in underwriting.''

With the market set to be dominated by insurance-backed corporate entities in the next year of account, some observers are sounding the death knell for traditional capacity and questioning the commitment of the new members.

Mr. Bensinger, however, refutes those who doubt his company's loyalty, as do many other corporate owners. In the current premium rating environment, ``returns are thin, but they are thin everywhere in every line of business,'' he pointed out. ``We are a long-term investor in Lloyd's. We are not looking at an overnight return.''

Business Insurance -- 11-09-98, p. 21

[11-10-98 at 16:03 EST, Copyright 1998, Crain Communications, File:c1110301.7rn]

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