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The Insurer In Full: Prices rise at first Lloyd’s capacity auction as pre-emption offers fall

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Topics: MGAs Rates Topical Trends

Expectations of a continued buoyant underwriting environment helped fuel average price increases of traded capacity at the first Lloyd’s syndicate auction last week...

However, the volume of capacity traded was noticeably down on last year in part because syndicates are not preparing to grow as much next year as they did this year.

In total, close to £76mn ($104.5mn) of capacity changed hands at this year’s first capacity auction – which was held on 19 and 20 October – the equivalent of a reduction of 40 percent on the £123.8mn traded in auction one last year.

Demand far outstripped supply at last week’s auction with offers to buy – known as subscriptions – totalling £906mn and offers to sell – or tenders – totalling just £83.7mn.

Of the offers to buy, £743mn came from aligned corporate members, up from £549mn last year.

Most of that volume came through a handful of managing agents looking to increase the aligned share on their managed syndicates.

These included Beazley, which bid for up to £535mn on Syndicate 623, and Tokio Marine Kiln (TMK), which bid for £100mn on Syndicate 510.

Unaligned bids – those from members which do not own a syndicate – rose to £164mn from £145.1mn in last year’s auction one.

 

 

The largest volume traded at this year’s first auction was on TMK 510, which accounted for £21.6mn, or 28 percent, of the total capacity that changed hands.

Syndicate 510 capacity saw an increase in strike price to 27.3 pence, up from an average of 16.7 pence in the 2020 auctions, driven by the large bid from the syndicate’s aligned member for capacity at 25 pence, which forced other aspiring buyers to increase their price.

Trading was tight on most syndicates with little opportunity for members to acquire at prices below the strike price. On some syndicates, including QBE 386 and Chaucer 1176, buyers bought capacity at prices much higher than the strike price.

The unaligned market average price, which weights strike prices by the amount of unaligned capacity on each syndicate, rose to 48.3 pence at auction one, up from 41.7 pence in last year’s first auction. This was the highest price achieved since auction three in 2015, which saw an unaligned market average price of 48.8p.

 

  

 

Under Lloyd’s rules, investors on syndicates with mixed capital are able to auction the right to underwrite on the syndicate for following years.

Those looking to sell – tenderers – enter a tender bid in the auction, stipulating a minimum amount.

Those looking to acquire capacity – subscribers – can then submit bids into the auction system, stipulating the price they are willing to pay.

At the end of auction one, only £7.7mn of tendered capacity was left unsold, significantly down on the £29mn of unsatisfied tenders at the end of auction one last year.

Two further capacity auctions are scheduled, on 27-28 October and 3-4 November. Across last year’s three capacity auctions, £222.1mn in capacity was traded, up from £134.8mn in 2019.

Pricing will likely remain firm at the upcoming two auctions given the capacity tendered is unlikely to be sufficient to meet demand on the most sought after syndicates. 

 

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