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LONDON-Lloyd's of London should continue to be a mixed capital market and not turn into a strictly corporate capital structure, some market executives believe.
Lloyd's strength is in its diversity, and that includes its source of capital, generated by a mix of traditional names; members' investment trusts, known as MAPAs; insurance companies; and publicly listed corporate investment trusts.
This year, 44% of the market's capacity of 10.3 billion pounds ($17.64 billion) is corporate, and traditional names are providing 56%.
Market executives predict that next year, 60% to 65% of the market's capital will be corporate. But delegates and speakers at the Sept. 11th autumn meeting of the Assn. of Lloyd's Members hope traditional members will remain a source of syndicate capital in the future.
"I am a name at Lloyd's. I have been for a very long time, and I have every intention of continuing to be a name as long as I think it's commercially sensible," said Graham McKean, chairman of London-based broker Ballantyne McKean & Sullivan Group and a Lloyd's Council member.
"I care passionately about Lloyd's of London, and I am unrepentantly one of those who has no enthusiasm whatsoever for a wholly corporate Lloyd's," Mr. McKean said to a round of applause from 170 ALM delegates.
Christine Dandridge, Lloyd's underwriter for syndicate 609, managed by Atrium Cockell Underwriting Ltd., also is concerned about corporate capital dominating the market.
"We should seriously question whether new units should be sponsored totally by corporate funds," Ms. Dandridge said to another round of applause. There are 17 new applications for corporate-backed Lloyd's entities next year, she said. Lloyd's regulatory board vets the applications for these new entities and Lloyd's Council gives the final approval.
These new units would only increase capacity that doesn't need increasing, according to Ms. Dandridge.
Lloyd's syndicate executives predict an overall increase in premium income capacity next year of 11% at a time when rates are falling, noted Ms. Dandridge. These predictions of growth in some cases are being made in a soft market because "underwriters are telling capital providers what they want to hear," she said.
Nevertheless, Lloyd's is a different animal since corporate capital was introduced in 1993. There are 57 managing agencies at Lloyd's this year, and 22 of them are now owned by insurance companies managing nearly 42% of Lloyd's capacity, according to Jeff Park, managing director of consultant J.J. Park & Co. Ltd. Of these, 14 are from the United States, five are from Bermuda, one is from the United Kingdom, one is from Continental Europe, and one is from Australia.
Seven other managing agencies representing 14% of this year's capacity are controlled by publicly listed investment trusts and "are good investors and thoughtful," said Mr. Park. Another 16 managing agencies with 33% of market capacity are controlled by "integrated vehicles," where a single entity controlling the agency provides much of the managed syndicates' capital. These vehicles "have an economic imperative to reach critical mass. . .and they need to get to a big size. . .so capital is important to them. In general the investors in these vehicles are pretty good," said Mr. Park. The remaining managing agencies, representing 11% of capacity still are privately owned.
The quality of Lloyd's investors generally is very high because of Lloyd's strict vetting procedures, said Mr. Park.
The insurance companies' share of Lloyd's "will only grow," he said.
But insurers are not hostile to traditional names, Mr. Park said. They "tend to be politically correct" and do not want to offend people already investing in the market. Most of them could "happily" provide all the capacity their syndicates need, "but they don't need to do it tomorrow."
Some insurers envision traditional names continuing in the market and are structuring their syndicates so names won't be pushed off, he said.
"They are here for the same reason you are here," he told traditional members at the ALM conference. "They want to make money and underwrite insurance, and they know a lot about that, and generally they do a pretty good job."
Mr. McKean also said he has a "large amount of respect" and a great deal of business with the insurance entities investing in Lloyd's. But, he said that as a broker, he has dealt with all sorts of entities with different capital bases, each of which work well for their own reasons.
There are tensions between managing agents and traditional members that need to be resolved, said Mr. McKean. Traditional names mistrust managing agents "who they see as trying to unload them," said Mr. McKean. Managing agents don't trust traditional members to stick with them after events of the past few years, however, which is why they want continuity of capital that corporate investors can provide.
There also is tension between managing agents and traditional members over the annual venture. Under this system, each syndicate's capital is renewed annually so one year's membership is different from the next. To keep each syndicate's business going smoothly, a reinsurance premium is paid from one year to close the syndicate's business into the next year, known as "reinsurance to close."
Managing agents say it is costly to renew capital each year under the annual venture. However, Mr. McKean notes that Lloyd's syndicates earned considerable profits under the annual venture system for many years before losses hit the market.
Other changes possibly could be made besides eliminating the annual venture, noted Simon Caulfield, vp of Mercer Management Consulting in London. Mercer recommends that Lloyd's look at several alternatives, including allowing syndicates to choose between annual venture and continuous capital status.
Lloyd's is unique, and the source of its strength is its differentiation, said Mr. Caulfield. The last thing Lloyd's should do is try to emulate its competitors, he said.
Mr. Caulfield is concerned with a principle in Lloyd's statement of policy issued last June that states "market forces" will determine the evolution of Lloyd's capital structure. This "concerns me a lot," he said, because strategy is about making tough choices by management and not leaving those decisions up to market forces.
Traditional members need to be active on reform at Lloyd's, Mr. Caulfield added, "otherwise there is a risk that continuous (corporate) capital will dominate the market."
Max Taylor, Lloyd's chairman designate, steered clear of internal wranglings in the market when addressing delegates at the conclusion of the ALM meeting. Focusing on "global growth and opportunities," he noted it may be that there isn't too much insurance capacity worldwide, but that it's concentrated only in certain sectors of business.
Mr. Taylor put the size of Lloyd's and the London market in perspective. Lloyd's and the London market had a 12.5% share of the world's marine market in 1994, but only a 2% share of the world's non-life market.
Overall, Lloyd's market share of global premium dropped from 1.8% in 1985 to 1.3% in 1994.
Mr. Taylor added that Lloyd's' brand name is still "held in very high regard worldwide."since corporate capital was introduced in 1993. There are 57 managing agencies at Lloyd's this year, and 22 of them now are owned by insurance companies managing nearly 42% of Lloyd's capacity, according to Jeff Park, managing director of consul.