Lloyd’s of London: Observation and Speculation

1. Lloyd’s of London:Observation and Speculation Todd J. Hess Chief Risk Officer and Deputy Swiss Re Underwriters Agency Casualty Actuaries in Reinsurance Seminar June 4, 2002

2. Capital Providers • Bespoke Names • Corporate Capital • MAPA • Conversion Vehicles • Qualifying Quota Share Reinsurance • Banking Arrangements/Gearing Structures Lloyd’s of London

3. Chain of Security • Syndicate vs Capital provider links • Premium Funds • Trust Funds • Includes prior year reserves • Solvency Reserves • Funds at Lloyd’s (FAL) • Central fund • Actual Funding • Reinsurance Layer • callable funds Lloyd’s of London

4. Funds at Lloyd’s • RBC • set to assure overall capital adequacy • reserve and underwriting (new business) risk • minimum levels but no maximum • Solvency reserves • Coming into line • Nature of Capital Lloyd’s of London

5. Chain of Security--Amounts 1st Link: Premium Trust Funds £13.5 B 2nd Link: Capital Held at Lloyd’s £ 7.7 B 3rd Link: Other declared assets £ 0.3 B 4th Link: Lloyd’s Central Assets £ 0.4 B (central fund reinsurance and callable assets not included) Aggregate Resources £21.9 B Current and Future Liabilities £17.6 B As of 12/31/2001 Lloyd’s of London

6. Aggregates are not key:Results by quartile Lloyd’s of London

7. How can it get that bad? Lloyd’s of London

8. Capital’s Funding Flows • RBC (part of FAL) • Premium trust funds • Solvency reserves (part of FAL) • Cash call • Closing the year Lloyd’s of London

9. Where are the weak links? • Potential questions: • Premium trust funds: not necessarily released by US regulators • Cash call: if willing to stay in the market. Not an option in the unlimited liability days. • Solvency reserves (part of FAL): if posted at coming in line date • Solid • RBC (part of FAL) • Central Fund • Central Fund Reinsurance Lloyd’s of London

10. A comment, a question Chain is a poor Metaphor: Not as weak as the weakest link--indeed, as strong as the strongest. Would other capital providers answer the call if central fund is depleted? Lloyd’s of London

11. Lloyd’s Strengths • Strong Brand • Marketplace where difficult things get done • Leader in important markets • Global Licenses • Mutualized Security • Committed Broker Support • Capital model not conventional insurance Lloyd’s of London

12. Chairman’s Strategy Group Reforms • Annual Accounting • First reported this year along with traditional 3 year accounts • End unlimited liability and annual venture • Lloyd’s as franchiser • Caution in fundamentally unprofitable lines • Limit multi-year contracts • Control use of delegated underwriting authority • Reduce over-reliance on reinsurance Lloyd’s of London

13. My personal speculation on the future of Lloyd’s • Lloyd’s will survive as a marketplace • It will continue to be the pre-eminent center for Marine risks for the whole world • It will be be important for all lines for territories outside the US, but less in the US, especially reinsurance • Mutualized security will be abandoned (sadly) • The franchise model will add credibility despite separately rated syndicates Lloyd’s of London

14. References www.lloydsoflondon.com Lloyd’s global results 2001, including the Annual Financial Statements and Annual Report obtained from website Lloyd’s of London