Lloyd’s Market Briefing

Lloyd’s Market Briefing

March 2004

2

DisclaimerThe information contained in this presentation is being provided on a confidential basis and should not be made available to the general public, the media or any third party without the express prior written consent of Lloyd’s. This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

The content of this presentation does not represent a prospectus or invitation in connection with any solicitation of capital. Nor does it constitute an offer to sell securities or insurance, a solicitation or an offer to buy securities or insurance, or a distribution of securities in the United States or to a U.S. person, or in any other jurisdiction where it is contrary to local law. Such persons should inform themselves about and observe any applicable legal requirement.

It is the responsibility of any person publishing or communicating the contents of this document or communication, or any part thereof, to ensure compliance with all applicable legal and regulatory requirements.

Lloyd’s has provided the material contained in this presentation for general information purposes only. Lloyd’s accepts no responsibility and shall not be liable for any loss which may arise from reliance upon the information provided.

This presentation includes forward-looking statements. These statements reflect Lloyd's current expectations and projections about future events and financial performance, both with respect to Lloyd's in particular and the insurance, reinsurance and financial and services sectors in general. All forward-looking statements address matters that involve risks, uncertainties and assumptions. Based on a number of factors, actual results could vary materially from those anticipated by the forward-looking statements. These factors include, but are not limited to, the following:

(a) rates and terms and conditions of policies may vary from those anticipated;(b) actual claims paid and the timing of such payments may vary from estimated claims and estimated timing of payments, taking into account the

preliminary nature of such estimates;(c) claims and loss activity may be greater or more severe than anticipated, including as a result of natural or man-made catastrophic events;(d) competition on the basis of pricing, capacity, coverage terms or other factors may be greater than anticipated, or Lloyd's products could

become uncompetitive in light of changes in market conditions;(e) reinsurance placed with third parties may not be fully recoverable, or may not be paid on a timely basis, or such reinsurance from creditworthy

reinsurers may not be available or may not be available on commercially attractive terms;(f) developments in the financial and capital markets may adversely affect investments of capital and premiums, or the availability of equity capital

or debt;(g) changes in legal, regulatory, tax or accounting environments in relevant countries may adversely affect (i) Lloyd's ability to offer its products or

attract capital, (ii) claims experience, (iii) financial return, or (iv) competitiveness;(h) mergers, consolidations, divestitures and other transactions by third parties could adversely affect Lloyd's, including but not limited to changes

in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;] or(i) economic contraction or other changes in general economic conditions could adversely affect (i) the market for insurance generally or for

certain products offered by Lloyd's, or (ii) other factors relevant to Lloyd's performance.

The foregoing list of factors is not comprehensive, and should be read in conjunction with other cautionary statements that are included herein or elsewhere. Lloyd's undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

3

Agenda

Market profile in 2004

Financial results

Building capital strength

Lloyd’s market ratings

Franchise performance & risk management

Appendix - Equitas

4


6

The Lloyd’s market in 2004

Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003


FRANCHISEES

45 Managing Agents

66 Syndicates

$26.78bn Capacity

AM Best: A-S&P: A

CLIENTS

BUSINESS FLOW

Reinsureds

Personal

Commercial

165Lloyd’sBrokers

Service Companies

F R A N C H I S O R

4Members’

Agents

MEMBERS

53 Corporate

Groups

2,048 Individuals(Unlimited

Liability Members)

637Conversions

CAPITAL PROVISION

7

Managing Agent

Structure of a Lloyd’s business

Corporate Member 1

NamesCorporate Member 2

Syndicate

Management

Underwriting

Capital Provision


8

Profile of capacity provision: 1993-2004

Source: Lloyd’s, N.B. capacity figures shown at beginning of each yearBased on an exchange rate of £1 sterling: $1.79, as at 31 December 2003


$bn

0

5

10

15

20

25

30

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Cap

acit

y

Other insurance industry

US insurance industry

Bermudian insurance industry

UK listed and other corporate

Names conversion capital

Names (unlimited)

15%

14%

42%

6%

12%

11%15.9

18.219.5

17.9 18.5 17.718.2 18.1

20.2

21.8

25.826.78

9

Profile of capacity remains largely unchanged



(Year End) (Jan 2004)

Mid year pre-emption

$bn

0

5

10

15

20

25

30

2003 2004

Cap

acit

y

Other corporate capital

UK non-listed

UK listed

Trade investors

Conversion capital

Names (unlimited)

2004

5%

7%

30%

40%

6%

12%

26.7826.60

10

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

2003

2004

$m

Major trade investors continue to support the Lloyd’s market

Capacity provided by owned corporate members

(No 1 Stamp)



11

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

2003

2004

$m

Lloyd’s listed companies successfully grow their businesses

Capacity provided by owned corporate members

(No 1 Stamp)



12

Business mix: 2004 year of account

Source: Lloyd’s, Syndicate business plans

Geographical source

Class of business


48%52%

Direct

Reinsurance

29%

11%

9%

8%

7%

36%

Property

Casualty

Marine

Aviation

Motor

Energy

27%

12%

8%

5% 3%

45%

North America

UK

Europe

Asia Pacific

Latin America

Africa/Middle East

Financial results

14

2002 results summary

$1,493m annually accounted profit

Combined ratio of 98.6%

Balance sheet resources +85%

Central Assets +55% (Central Fund +70%)

WTC estimates remain stable:

$8.7bn gross and $3.3bn net

89% of reinsurance asset ‘A-’ or above

US funding requirements met in full

Financial results

Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003

15

* Source: Reinsurance Association of America 2002 Figures** Source: Insurance Information Institute 2002 Figures*** Source: Credit Suisse First Boston 2002 Figures

Lloyd’s vs industry 2002 combined ratios

Financial results

105.1%

107.2%

121.3%

98.6%

0 10 20 30 40 50 60 70 80 90 100 110 120 130

Europeanreinsurers***

US P/C**

US reinsurers*

Lloyd's

%

16

0 10 20 30 40 50 60 70 80 90 100 110 120 130

Amlin

Atrium

Beazley

Brit

Chaucer

Cox

Goshawk

Hardy

Hiscox

Kiln

SVB

Wellington

H1 2003

H1 2002

%

Performance of the Lloyd’s listed companies*(combined ratio – 6 months interims 2003)

Source: 6 month interim results by companies* as at 30 June 2003

Financial results

17

0 10 20 30 40 50 60 70 80 90 100 110 120 130

Kiln

Hardy

Beazley

Amlin

Cox

Brit

Chaucer

Atrium

Wellington

Hiscox

US Reinsurers**

European Reinsurers*

SVB

US P/C***

Goshawk

%

…standing favourable comparison with rest of industry

* Source: Credit Suisse First Boston 2003 Figures** Source: Reinsurance Association of America 2003 Figures*** Source: Insurance Information Institute 2003 Figures

Combined ratio – H1 2003

Source: Lloyd’s analysis of 6 month interim results announced by companies

Financial results

18

Market capitalisation: Lloyd’s vs peersMarket capitalisation (10/09/01 vs 19/02/04)

Source: Reuters, as at 19 February 2004

Financial results

-60

-40

-20

0

20

40

60

80

100

120

140

Lloyd

's lis

ted

ACE

Berks

hire

Hatha

way

Chubb

ZFS

St Pau

lAXA XL

AIG

Swiss R

e

Allianz

Mun

ich R

e

% g

row

th

%


20 Source: Lloyd’s analysis, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

Net resources vs peers2002 net resources*

* as at 31 December 2002 / net resources = total assets – total liabilities

Lloyd’s net resources $15.7bn at H1 2003

Update


0

2

4

6

8

10

12

14

16

18

Mun

ich R

e

Lloyd

's

Swiss R

e

Chubb

XL Cap

ital

Liberty

ACE

St Pau

l

Hanno

ver R

e

Evere

st Re

Partn

er R

e

Trans

atla

ntic

Re

Conve

rium

Mar

kel

$bn

21

Net resources vs peers

Source: Lloyd’s analysis

2002 net resources % growth (YoY)

Lloyd’s net resources grew 115% as at H1 2003 since

12/31/01Update


-40

0

40

80

120

Lloy

d's

Evere

st Re

XL Cap

ital

Partne

r Re

St Pau

l

Conve

rium

Trans

atlan

tic R

e

Libe

rty

Mar

kel

ACE

Chubb

Hanno

ver R

e

Swiss R

e

Mun

ich R

e

%

22

Growth in key components of chain of security


Premiums Trust Funds(PTFs)

Premium Trust Funds(PTFs)

$30,749m(+28%)

Funds at Lloyd’s(set by RBC)

(FAL)

Funds at Lloyd’s (set by RBC)

(FAL)

$16,053m(+16%)

Other Personal Wealth(OPW)

$503m(-14%)

Central Fund Other central assets

Central Fund + Other central assets

$853m $155m

$1,008m (+55%)

Corporate Members Individual MembersEnd 2002

(% change from 2001)

Several assets

Mutual assets

Key:

Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003

23

Lloyd’s risk based capital (RBC) model

The Lloyd’s RBC model was introduced in 1995 for Corporate Members

The model is used to calculate the capital (Funds at Lloyd’s / FAL) required to underwrite a planned book of business, expressed as a percentage of authorised premium

Lloyd’s applies a minimum requirement after the RBC calculation of 40%

The underlying concept of the model is to equalise the potential risk to the Central Fund irrespective of the portfolio underwritten


24

Risk based capital concept

time

MOTOR

Central Fund

RBC + premium

loss

time

loss Central Fund

CAT X/L

RBC + premium


25

Risk based capital: summary

Security

Promote efficient distribution of capital in relation to risk

Aim to minimise loss to Central Fund for given level of market capital

Consistent with optimising policyholder security

Note that capital distribution optimal for risk, not profit

Competitiveness

Ensure policyholders not disadvantaged by paying extra premiums to service unnecessary levels of capital

Reduce possibility of each member being required to mutualise the losses of others

Best practice

To ensure Lloyd’s capital-setting process is in line with industry “best practice” in regulating capital to risk

Equity between members

To support the equitable allocation of capital between capital providers


26

Realistic disaster scenarios

Realistic disaster scenarios (RDS) deployed since 1995 to manage catastrophe exposure at a syndicate and market level

Generic scenarios include:

USA Windstorm ($50bn/Florida-Gulf of Mexico)

Aviation collision (two aircraft over major US city/$3bn liability plus hull & products)

Specific event-based scenarios with theoretical return periods include:

Florida Windstorm / Los Angeles Quake ($60bn/1-in-250-year return period)

Japanese Earthquake ($19bn/Zone 5 epicentre of magnitude MMI IX plus adjacent zones)

Further enhancements underway:

Introduction of terrorism RDS for 2003

Inputs to capital allocation model (risk based capital)

Franchise guidelines

Source: Lloyd’s


27

Market ratings

29

Lloyd’s market ratings Lloyd’s is interactively assessed by the leading two insurance

rating agencies:

Lloyd’s is rated as a market:

All Lloyd’s policies are ultimately backed by the common security of the Central Fund

The Lloyd’s market ratings apply to all business underwritten by all 66 syndicates

AM BestA-

‘Excellent’ Affirmed 17/07/03

Stable outlook

Standard & Poor’sA

‘Strong’ Affirmed 12/02/03

Source: AM Best, Standard & Poor’s


30

Shift in S&P ratings of the world's largest reinsurers since September 11th

Source: Standard & Poor’s


0

1

2

3

4

5

6

7

8

Berks

hire

Hatha

way

Lloyd

's

XL Cap

ital

Conve

rium

Swiss R

e

Hanno

ver R

e

Allianz

Emplo

yers

Re

Mun

ich R

e

SCORGer

ling

Global

Re

S&P notches downgraded

Unchanged since Sept 2001 Downgraded since June 02 Rating withdrawn since June 02

31

Future rating prospects

Franchise Performance team takes a more active role in managing performance at Lloyd’s, particularly into next down cycle

Continued strong support from capital providers

Substantially improved operating performance from 2002

Continuation of ‘hard market’ conditions through 2003-2004

Maintenance of strong niche business position in global insurance and reinsurance

Reduction in exposure to reinsurance receivables, with overall credit quality of asset maintained

No material deterioration in Equitas solvency

Resolution of the Central Fund insurance dispute, with no material impact on Central Fund


Source: Lloyd’s

32

Syndicate-level measurements

The rating agencies apply a range of rankings and measures at a syndicate-level, none of which are endorsed by Lloyd’s

In general, Lloyd’s is not supportive of rating individual syndicates:

Security/solvency is at a member not syndicate level

All members are capitalised by Lloyd’s Risk Based Capital model - independently verified as one of the most technically sophisticated models in the industry

All policies underwritten by all syndicates are backed by the Lloyd’s Chain of Security which is partially mutualised by the Central Fund

Lloyd’s believes that brokers remain best placed to assess client needs based on a wide range of factors placing confidence in the strength of the common security underpinning all Lloyd’s policies on which the Market ratings are predicated


33


35

Focus on franchise performance/risk management

Lloyd’s change programme


Drivers of change Lloyd’s change programme

initiative

Unacceptably poor performance between 1997 and 2001

Huge disparity between the best performing and worst performing businesses (syndicates)

New corporate governance structure to promote more commercial, coordinated approach

Need to provide a competitive trading platform

Business process improvements seek to address inefficient and costly practices

Premium levies for Central Fund eliminated for 2004

Franchise performance controls and RBC model aim tominimise ‘costs of mutuality’ in medium/long term

Complex financial reporting and accounting, lack of transparency; antiquated concept of unlimited liability

Transition to full annual accounting from 1 January 2005

Commitment from HM Treasury to change tax treatment to allow unlimited liability members to convert

Increased policyholder / cedant concern with financial security

Target market rating initiative to determine target IFS ratings and focus on requirements to achieve them

Source: Lloyd’s

36

Lloyd’s Franchise

A new franchise structure with the “centre” taking a more active commercial role

The Corporation of Lloyd’s has become the “franchisor”, the managing agencies, “the franchisees”

A new underwriting byelaw sets out the relationship between “franchisor” and franchisees” including a syndicate business planning process and franchise guidelines

The challenge is now to balance greater scrutiny whilst maintaining the opportunistic and entrepreneurial culture

The ultimate sanction is to remove a franchisee from the franchise

Source: Lloyd’s


37

Franchise implementationKey milestones to date

Key franchise performance and risk management initiatives implemented

New syndicate business planning regime – structured commercial approach

Franchise guidelines - control / manage underwriting exposures

Syndicate risk assessment - provides focus for central risk management effort

Performance benchmarking – identify under performance at the earliest opportunity

Key strategic initiatives well advanced

New underwriting byelaw to provide a clear and transparent relationship between the Franchisor and Franchisees

Comprehensive review of Lloyd’s capital structure commenced

Benchmark profitability measures being established by line of business

On target to achieve conversion to annual accounting 1/1/2005 through changes in EU legislation


Source: Lloyd’s

38

Franchise performance: primary areas of focus

Quarterly internal review of agents by Franchisor executive

Efforts concentrated on agents with underwriting and capital issues

RDS process reviewed for 2003 and 2004

Review of pre-emption application process

Review of new syndicates seeking admission to the market

QQS policy reviewed

Source: Lloyd’s


39

Qualifying quota shares (QQS)

Maximum level of QQS set at 10% for 2004

QQS to be used where exceptional underwriting prospects exist – not to maximise capacity

No longer to be on all business written by the syndicate

Terms should reflect underlying profitability of the business

Applications require specific approval of FPD – an approved business plan stipulating intent to use QQS does not constitute approval of the QQS


Source: Lloyd’s

40

Business planning process

All syndicates are required to submit business plans for the following year in September / October

All business plans reviewed in depth

Strategic plan

Forecast financial performance

Lines of business

Outwards reinsurance

Catastrophe exposure


Close oversight of underwriting – but careful not to stifle opportunistic/entrepreneurial culture


Source: Lloyd’s

41


Gross underwriting profit on each line of business

Catastrophe exposure management using risk management modelling, minimum return periods and maximum gross and net exposures to a single RDS event (gross 75%, net 20% of syndicate capacity)

Approved reinsurer selection process

Maximum gross line size - 10% of capacity

Minimum reinsurance retention - 10% of gross line

Restrictions on multi-year contracts

Source: Lloyd’s


42

Performance benchmarking


Actual syndicate development

0%

20%

40%

60%

80%

100%

120%

1 2 3 4 5 6 7 8 9 10 11 12 13Quarter (13 = ultimate)

Lo

ss r

atio

50%confidenceinterval

Syndicateform 2 data

Marketmedian

Bottom quartile

Top quartile

Actual syndicate development

0%

50%

100%

150%

200%

250%

300%

350%


Lo

ss r

atio


Syndicateform 2 data

Marketmedian

Bottom quartile

Top quartile

Future year “expectation”

0%

20%

40%

60%

80%

100%

120%


Lo

ss r

atio


Marketmedian

Bottom quartile

Top quartile

Source: Lloyd’s

43

Appendix - Equitas

45

Equitas

Appendix

Established as a company independent of Lloyd’s in 1996

Formed as part of Lloyd’s R&R to reinsure the liabilities of Lloyd’s syndicates’ 1992 and prior years of account (excl. life syndicates)

Ahead in the reserving cycle:

Ground-up actuarial reviews conducted mid 90s; further augmented over last 3 years

Gross undiscounted asbestos reserves increased $5.7bn during 2000 - 2001. $716m discounted increase for 2003

Equitas reserves consistent with Schedule F analyses

Survival ratio of 24.6 years1

1 Equitas survival ratio 2003 excludes buyouts and commutations; US Industry survival ratio 2003: Equitas sample incl. buyouts and commutations, if any Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

46

Equitas

Appendix

2001, 2002: Year end data

Solvency margin = (accumulated surplus) / (net claims o/s)Equitas survival ratio excludes commutations; US Industry: AM Best report Oct. 2002

Start up: September 1996

Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

Accumulated Surplus Solvency Margin Survival Ratio

1,053

1,215

931

0

200

400

600

800

1,000

1,200

1,400

Startup 2002 2003

$m

5.6%

10.3%

8.7%

0

2

4

6

8

10

12

Startup 2002 2003

%

11

24.6

0

5

10

15

20

25

30

US Industry Equitas Gross

Yea

rs

47

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