Insider In Full: AIG to leverage Lloyd’s syndication for ultra-HNW growth
AIG’s $1bn Syndicate 2019 signals a move by the global giant to leverage the syndication of the Lloyd’s market to grow its high-net-worth (HNW) portfolio further, while managing the associated increase in exposure...
The syndicate, which will target US HNW business and launch on 1 January 2020, was announced by AIG and Lloyd’s last week.
It moved swiftly through the syndicate approval process as Lloyd’s sought to demonstrate its more streamlined approval framework implemented as part of Blueprint One, which targets an application-to-approval timeframe of around four months.
Last week, a market source told this publication that writing the high-volatility class of business at Lloyd’s would allow AIG to segment this type of risk onto one balance sheet.
The new syndicate will allow the insurer to write the class of business more efficiently by accessing new forms of capital and reinsurance, the source added.
Since then, further detail has come to light on the venture, following an interview between Lloyd’s CEO John Neal and The Insurance Insider.
Syndicate 2019 will house a book of US ultra-HNW business which is said typically to be better risk-managed and tends to perform better than the smaller end of this class. It will share this book 50-50 with the rest of the Lloyd’s market via consortium arrangements.
It benefited from reduced start-up costs akin to the Lloyd’s syndicate in a box (SIAB) initiative, but Neal said, in that same vein, that Syndicate 2019 must abide by other SIAB criteria. These include ensuring that it is profitable in its first year of operation and that it keeps its acquisition costs lower than a typical Lloyd’s syndicate.
In addition, it must operate with a common account excess of loss (XoL) reinsurance treaty – providing protection to the 1-in-200 year return period to minimise the additional cat exposure to the market.
AIG Private Clients is one of the top three HNW writers globally, Neal said, “and ordinarily a lot of this business would never have found its way to Lloyd’s”.
“We are trying to develop Lloyd's as the marketplace to come to for corporate and specialty (re)insurance,” he said. “Whether this is Munich Re’s SIAB or AIG Private Clients, this is exactly the type of business we should be looking to attract.”
He concluded: “I think, all things being equal, the view we have is that this is a $500mn book growing to a $1bn book, and if it is performing in line with expectation there is no reason we wouldn’t support further growth.”
For AIG, Syndicate 2019 looks as if it provides a means of facilitating growth in HNW without the associated volatility being retained on its own balance sheet.
Lloyd’s syndication provides a means of doing this, but it is not immediately clear why this structure – given its scope to add cost – would be preferred to the increased use of reinsurance given the preference AIG has shown elsewhere for this route.
The question also needs to be asked why AIG would want to open this business up for substantial syndication if it is the high-performing book that has been suggested.
On AIG’s fourth-quarter conference call AIG CEO Brian Duperreault noted aggregation issues in HNW and called the class “an unexpected trouble area that started to emerge in early 2018 but really manifested itself in the second half of the year”.
“Problem areas that were discovered included geographic zones with disproportionately large and dense accumulations of total insured values in cat-prone areas and inadequate pricing of the book,” he explained.
He went on to say that in 2019, AIG would look to aggregate exposures and right-size risks in this business.
Should AIG Syndicate 2019 stay at Lloyd’s for the medium term, it could be an early beneficiary of some of the capital initiatives outlined in the Corporation’s Future at Lloyd’s strategy, and bring ILS money to bear on some of this peak risk.
Meanwhile, for Lloyd’s, this is a ringing endorsement of the Future at Lloyd’s strategy as it prepares for its execution phase – with two major global players choosing to increase their presence at 1 Lime Street at this crucial juncture.
However, while it is protected to the level of a 1-in-200 year cat event, this business does bring more tail cat risk to Lloyd’s at a time when it has been tough on others during business planning on cat exposure – and the Corporation will need to manage that message with the market.
AIG and HNW
The size of the US HNW market varies by estimate, but Tokio Marine in its presentation material for the $3bn acquisition of HNW specialist Pure pegged the market at $20bn-$40bn in premium.
AIG is estimated to hold 5 percent market share, equivalent to $1.5bn – meaning that it would transfer around a third of this book to Lloyd’s Syndicate 2019.
As sister publication Insider P&C explained following the Tokio Marine-Pure deal, conservative calculations put the industry at around $10bn for the ultra-HNW business dominated by specialty carriers like AIG, Chubb, and Pure.
HNW business comes with high aggregations of insured values, and large gross lines are needed to cover not only expensive real estate but also the value of the contents within.
Additionally, these properties are often agglomerated in highly concentrated geographic areas, typically in major urban areas or on the coast.
AIG’s choice to launch a syndicate and use the wider Lloyd’s market implies that management believes that it can achieve better returns with this method than with a straightforward reinsurance purchase, or even by setting up a reinsurance sidecar in Bermuda or similar, even with the well-known cost burden that currently comes with operating at Lloyd’s.
Neal also suggested to this publication that AIG will benefit from the Lloyd’s brand with this venture, which would particularly resonate with ultra-HNW clients.
“There is a value proposition with the Lloyd’s brand, there is a quality hallmark associated with it,” he said.
Syndicate 2019 will have a physical presence with an assigned active underwriter and the necessary finance, actuarial and compliance controls – something that was stipulated by the Corporation given the potential $1bn size of the syndicate.
Most cost at Lloyds is associated with the operating costs of the managing agent – which AIG already shoulders for Talbot Syndicate 1183 – and the cost of distribution, although in this case these costs are similar to writing this business onshore, according to Neal. Direct costs to the Corporation remain at 1 percent of premium.
But it is difficult to believe that there will be no cost disadvantage at all in the structure for AIG, although it may secure some offset from consortium fees.
AIG at Lloyd’s
AIG’s second syndicate at Lloyd’s furthers the involvement of major global insurers at 1 Lime Street.
Using the $1bn ceiling capacity as a proxy, Syndicate 2019 pushes AIG into the top five global insurers at Lloyd’s when using 2019 capacity figures, behind two of the Japanese big three, Fairfax and Axa.
It also leapfrogs AIG into the top five managing agents by managed capacity.
Including Syndicate 2019’s maximum capacity, the 10 largest global insurance groups at Lloyd’s would account for around £11.6bn – or 37 percent – of the enlarged £31.6bn of total capacity at Lloyd’s.
AIG’s ultra-HNW business is a further demonstration of what CEO Neal envisions Lloyd’s to be – a global marketplace writing more depth and breadth of risks from new sources.
Arguably, the oligopolistic nature of the US HNW market means it would have been extremely difficult for Lloyd’s to break into this marketplace. Notably, Tokio Marine had to spend $3bn to gain access via its acquisition of Pure.
He said AIG had provided a “great data set” for Lloyd’s to review ahead of granting approval, and, being AIG, business came with the appropriate statutory governance and regulatory frameworks needed.
When questioned about the additional volatility the HNW business brought to Lloyd’s, Neal said the common account XoL reinsurance treaty would ensure the business was net of 1-in-200 year reinsurance protection.
“We would argue that business is better protected at Lloyd’s, because [AIG] already has a 1-in-200 cat treaty in place and the follow syndicates on any AIG consortia will have their own reinsurance protection to that same standard,” Neal said. “We have no additional nat cat exposure on a 1-in-200 basis.”
This does, however, potentially leave the Lloyd’s Central Fund with the extreme tail risk – which could be one of the attractions of the plan.
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