Lloyd's 2010 capacity to hit record: Analysts

LONDON—Lloyd's of London is set to offer a record £23 billion ($36.7 billion) in insurance and reinsurance capacity in 2010, analysts say.

The significant increase comes as rates in many lines are softening and the economy is expected to lessen demand for some lines. But the majority of extra capacity is to compensate for the weakness of the British pound against stronger currencies such as the U.S. dollar, and reflects growth opportunities in niche lines, underwriters and analysts say.

Capacity for the Lloyd's market is estimated to be £22 billion to £23 billion next year—as much as a 27% increase from 2009—said Chris Klein, London-based global head of business intelligence at Guy Carpenter & Co. L.L.C. Guy Carpenter produces the estimate based on a poll of Lloyd's managing agents.

As much as 40% of the increase is due to changes in the foreign exchange rate for the British pound against the U.S. dollar, Mr. Klein said. Lloyd's 2010 capacity is based on an exchange rate of $1.50 to £1, compared with $1.99 to £1 in 2009, he said.

The remaining 60% of additional capacity reflects new entrants to the market, organic growth and expected premium rate increases, he said.

“Lloyd's is feeling bullish on organic growth opportunities,” Mr. Klein said.

Lloyd's has doubled its capacity since 2001. The market has enjoyed relatively high financial strength ratings and has posted accumulated profits of £14.7 billion ($23.46 billion) from 2001 through the first half of 2009, he said.

Moody's Analytics, a unit of Moody's Investors Service, estimated Lloyd's 2010 capacity would rise 27% to almost £22.8 billion ($36.38 billion). Twenty percentage points of the increase reflect changes in foreign exchange rates, while just one percentage point—£165 million ($263.3 million)--relates to four new syndicates due to start underwriting in 2010, said Robert Smith, director-insurance at Moody's Analytics in London.

The remaining increase in capacity reflects expectations of new business and rate increases in certain lines, such as marine and aviation, he added.

Lloyd's capacity figure indicates what the market could, rather than will, underwrite, Mr. Smith said. And syndicates usually factor in a margin above what they expect to write in case rates increase after a large loss, he added.

Established players at Lloyd's such as Hiscox syndicate 33 have increased capacity from £750 million ($1.2 billion) in 2009 to £1 billion ($1.6 billion) in 2010 to reflect changes in exchange rates, said Robert Childs, London-based chief underwriting officer and chairman of Hiscox USA. “But I find no justification to have large numbers of new entrants into a market that is perceived to be softening,” he said.

Increases in capacity for foreign exchange rates mean Lloyd's underwriters will be able to maintain line sizes for U.S. dollar-denominated business, said James Vickers, London-based chairman of Willis Re International. But if growth for exchange rates is stripped out, Lloyd's 2010 capacity will not be significantly higher than 2009, he said. “Buyers should not view this increase in Lloyd's capacity as a wall of new capacity,” he said.

The 27% increase in capacity is not unduly concerning, even though rates in many lines of insurance are not expected to rise in 2010, Mr. Smith said.

“The increase in capacity is mainly down to the changes in exchange rates and new business coming to Lloyd's. But there could be issues on the margins, especially among the weaker syndicates where there is concern over (underwriting) controls and what is being written,” Mr. Smith said.

Kiln Ltd. expects the capacity it manages at Lloyd's to be 28.9% higher in 2010, or £1.6 billion ($2.55 billion). About half the increase reflects changes in exchange rates, but Kiln also has planned for a 16% increase in gross written premiums on the same rates of exchange in 2010, said Richard Lewis, group director of underwriting for Kiln in London.

Five percentage points of this is “head room” that will allow Kiln to write more business if rates become more attractive after a large loss, he said. Kiln expects organic growth as it expands into new areas in 2010, he added.

For example, the insurer started to underwrite space insurance in 2009, opened an office in Brazil, and launched a new unit to underwrite esoteric risks such as cyber liability and reputational coverages, Mr. Lewis said.

But Kiln does not want to grow disproportionately, and so is unlikely to write more U.S. or European catastrophe reinsurance in 2010, unless rates increase, he said.

Beazley P.L.C., which plans a new property treaty reinsurance syndicate in 2010, is not planning significant growth, said Adrian Cox, London-based head of specialty lines for the Lloyd's insurer. Most of Beazley's increase in capacity next year is due to changes in foreign exchange rates, he said.

Beazley will continue to grow its U.S. midmarket professional lines business, but growth rates are slowing as the market has become more competitive, he said.

The Lloyd's insurer also is cautious about lines exposed to potentially higher claims because of the economic slowdown, such as employer practices liability, and this will limit premium income, said Mr. Lewis.

But there also are opportunities to grow in 2010, he said. There is demand for errors and omissions and directors and officers liability coverage, and Beazley expects to grow new product lines such as liability coverage for the technology sector and environmental liability, he added.

Brit Insurance Holdings N.V., which plans to increase capacity in 2010 to £745 million ($1.2 billion) from £525 million ($837.7 million) in 2009, does not expect to grow its U.S. reinsurance book, said Jon Turner, chief executive of Brit Reinsurance and active underwriter of syndicate 2987.

Brit Insurance, like most Lloyd's managing agents, expected a period of rate hardening and increased business opportunities in 2010, he said. But a benign year for catastrophe losses in 2009 means many Lloyd's syndicates have “pulled back” their plans, he added.

The majority of Brit Insurance's capacity increase reflects changes in exchange rates, Mr. Turner said.

There are growth opportunities even in a soft market, said Nick Ferrier, head of business development at Liberty Syndicate Management Ltd. in London, a unit of Liberty Mutual Group Inc.

Liberty continues to diversify its book of Lloyd's business, which has a high proportion of U.S. and European catastrophe exposures, he said. Liberty's increase in 2010 capacity, which mainly is due to changes in foreign exchange rates, also allows for anticipated organic growth, said Mr. Ferrier.

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