Between 2007 and 2012, Bermuda (re)insurers pushed into the Lloyd's market in succession, with 12 securing platforms via start-ups or M&A.
Four more followed between 2014 and 2017, leaving only the total return reinsurance players in Bermuda without Lloyd's syndicates.
In most of these cases, securing a Lloyd's business was an early move in a strategy of diversification from their core business of property cat reinsurance in the years after KRW.
Lloyd's was perceived as a natural complement to a Bermuda platform, offering access to a range of specialty insurance business, alongside a concentration of underwriting talent, licensing to access the US E&S market, and significant capital leverage.
The post-KRW “Lloyd’s Bermudians” are hard to scope, with Chubb and XL excluded as early joiners, and the decision taken for simplicity to exclude Hamilton (a weaker performer) and Pembroke (a better performer) given ownership shifts – which would be misleading given the former’s acquisition of the latter last year. Other players did not have long enough in the market to be included, with Max Capital and Flagstone among those excluded for this reason.
But regardless of how it is scoped, analysis showed that for a strategy the Bermudians uniformly followed after 2005, it has been almost uniformly unsuccessful.
Of the 12 syndicates examined, 10 substantially underperformed the Lloyd's market over a sustained period of time, with these businesses typically either never bettering the market average or doing so only once or twice over a 10-year time horizon.
The exceptions to this rule are Validus via its acquisition of Talbot (now owned by AIG), and Ariel which was merged into Goldman Sachs' Arrow syndicate in 2012.
The negative spreads to the market average performance for the 10 syndicates in most cases also widened as Lloyd's overall performance deteriorated, with that trend only bucked by Arch and RenaissanceRe among the underperformers. And even these two businesses have only succeeded in converging on market average performance on a five-year trailing basis.
Much attention has focused on the early cohort of Lloyd's exits that often lacked large corporate parents, like the Standard Club, Securis, Vibe and Pioneer.
But the “Lloyd’s Bermudians” have been mostly third- and fourth-quartile stalwarts over the last five years, with the majority of the syndicates examined falling to an underwriting loss as early as 2015 or 2016 as market softening took a toll ahead of the heavy cat years of 2017 and 2018.
These syndicates face a host of challenges that could render a number unsustainable.
Given that Lloyd’s has indicated that it intends to intensify its approach of stratified supervision, it seems likely that some of these businesses will be in line for heightened oversight from the Corporation through the 2021 planning process. Weaker performers are unlikely to be allowed to grow, and it seems highly likely that those facing more intense scrutiny will be asked to shrink as part of a remediation process.
The Lloyd’s market as a whole is also on its way back from a period of highly depressed rates that carried the market to an underlying combined ratio in the region of 105 percent, with the climb back from the nadir to rate adequacy a multi-year journey that is not yet complete.
Expenses also remain a major challenge, with the market’s expense ratio down only 50 basis points year on year to 38.7 percent in 2019.
Alongside such absolute challenges, these syndicates also face relative challenges, as they have to persuade their parents to continue allocating them capital at a time of enhanced opportunity elsewhere.
As a senior executive at a multi-platform player said in private: “Why would I access US property risk in Lloyd’s when I can access the same risk in the US at much lower brokerage?”
And signs are growing that pullbacks from multi-platform players will play a key role in what this publication has called the Great Lloyd’s Cull.
AFG’s Neon, Sompo International’s Lloyd’s business and StarStone 1301 have already been placed into run-off this year.
And as reported yesterday, Argo has placed Ariel Re up for sale, including Syndicate 1910. There are company specific reasons for this move, but it is further evidence that the old Bermuda specialty play of reinsurance, Lloyd’s/London and E&S might be dismantled in places owing to market pressures.
The challenges the Bermudians face at Lloyd’s place these syndicates at a crossroads, with five broad strategic options:
The approach taken by these different Bermuda players to Lloyd’s is likely to owe something to the scale of their Lloyd’s bet, with only around 2 percent of Everest Re’s premium at Lloyd’s and Sirius down at roughly 5 percent. Meanwhile Argo Syndicate 1200 is close to 20 percent of group top line and Pembroke now makes up more than half of Hamilton’s premium base.
Regardless of how they address it, it seems clear from the underwriting results both that Bermuda has a Lloyd’s problem, and that as a corollary effect, Lloyd’s has a Bermuda problem.
Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.
Scan here to download the app