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The Insurance Insider
October 2015

The first auction for 2015 capacity on Names-backed syndicates at Lloyd’s has seen the biggest price jump in five years, with average prices climbing almost 10p on the previous year to 36.7p per £1 of capacity.

According to analysis by The Insurance Insider, the ratio of tendered to subscribed capacity has rocketed to more than 10x, from just under 2x in the first auction of 2014.

The first auction of 2015 saw a subscribed volume of £354.7mn ($480.0mn) for just £34.9mn of tendered capacity.

The amount of capacity subscribed rose by some £200mn on the previous year to reach the highest subscription volume in the past six years. The next highest volume over this period was the £254mn seen in 2011.

Those investors who already own capacity in syndicates are seemingly keen to keep their stakes, with the amount of tendered capacity in the first auction more than halving from the £77.5mn that was up for grabs last year.

The steep increase in demand will have clearly been the main driver behind the hike in pricing, which could be interpreted as a vote of confidence in the Lloyd’s market at a time when rates are stubbornly soft and terms and conditions are becoming increasingly loose.

Notably, as this publication revealed in September, Berkshire Hathaway is looking to bring an end to its Lloyd’s facility with Aon, raising questions about the underlying profitability of the business currently being put onto the books by managing agents.

It could be that investors have been caught up in the M&A excitement surrounding Lloyd’s, which has seen the likes of Catlin sold for 1.6x net tangible assets, and Amlin for 2.4x. The fact companies outside Lloyd’s are willing to pay such high multiples for a piece of the market may have encouraged investors to bid for a small stake of their own.

Among the biggest risers in the first auction was ERS Syndicate 218, which saw pricing rise to 8.2p per £1 of capacity from 2.9p the previous year.

The 181 percent increase could be a reflection of the perception that progress has been made in turning around the business. After a number of difficult years – which saw the motor-focused syndicate suffer from under-reserving issues – the company turned its first profit in five years in 2014, a year after being bought by private equity firm Aquiline.

ERS may also be benefiting from improved sentiment on the UK motor market, with the AA’s most recent pricing survey showing that rates had moved into positive territory in the second quarter.

Argenta Syndicate 2121 also saw a large positive movement, with the price of its capacity jumping from 5.0p to 12.7p per £1 in the latest round of auctions.

The syndicate has seen a steady improvement in results since it reported a loss of £5mn and a combined ratio of 104 percent in 2011. Since then, Argenta has grown its bottom line and improved its underwriting profitability for three consecutive years, resulting in a profit of £34mn and a combined ratio of 83 percent for the full-year 2014.

Other high risers at the auction include ANV Syndicate 779, which saw its capacity price rise to
9.2p from 5.2p last year, and Beaufort 318, which was up 54.1 percent on last year at 17.7p.

Blue-chip syndicate QBE 386 went the other way, with the price of its capacity again falling – albeit it from premium valuations. The price was down 16.7 percent to 65p per £1. The reduction is likely to reflect investors pricing in the expectation of reduced reserve redundancies as the 2003 and 2005 years become more distant.

Pricing at ANV Syndicate 5820 also suffered in this round, dropping further below the 1p mark at a price of 0.1p per £1, compared to 0.12p last year.

The fall in pricing, from already highly depressed levels, is likely to partially reflect the news that ANV was still not Solvency II-compliant as of 28 September. The Corporation has already imposed a capital loading of £2.5mn on Syndicate 5820 for the 2015 year of account.

ANV Syndicates Limited has been told a reduction in gross premium is required at the firm’s Syndicate 5820 for the 2016 year of account syndicate business forecast, from its 2015 stamp of £131mn. This decision was, however, made after the first round of capacity auctions.