How Lloyds Got To Be No. 1 In E&S

This has created huge growth over the last two years in the surplus lines market for both property and casualty business, he said.

Beyond the benefits of the hard market, Robert Chase, director of underwriting at Kiln plc, attributed some of the E&S growth at Lloyds to underwriters behaving in a responsive and innovative manner. "Thats a reputation that Lloyds perhaps used to have and was tending to lose slightly," he said.

"I think during this hard market, weve tended to respond in a much better and more positive manner," he said.

David Foreman, chief underwriting officer of Wellington Syndicate 2020, agreed that Lloyds proved its worth to the E&S marketplace when it was offering lines on risks the day after the World Trade Center disaster.

"There was nothing callous in that," he said. "What Lloyds really was trying to do was to say, Look, this terrible event has happened, but we still have a responsibility to offer terms and conditions," he said. "I think that was appreciated by the intermediary fraternity."

Some of the business that has found its way to Lloyds is sizeable, single-risk commercial p-c business. "Weve written a lot of Fortune 500 accounts and seen growth in rates in 2001, 2002 and 2003, which has represented big growth to us as a syndicate," Mr. McCarthy said.

In addition to the growth in the big corporate property accounts, Mr. McCarthy said he has seen a lot of business from small binding authority p-c risks for Mom and Pop commercial business, "and were seeing significant growth in homeowners lines as well."

Indeed, he said, Libertys premiums have more than doubled between 2001 and 2003. In 2001, the syndicate wrote approximately $100 million in excess and surplus gross premiumsa figure that rose in 2002 by 60 percent to about $165 million gross, while this year it has risen to about $215 million gross.

David Bruce, divisional head in charge of high net worth, which is the personal lines division of Syndicate 33, managed by Hiscox plc in London, has also stepped in to fill a gaping hole in U.S. capacity and to take advantage of higher rates.

In the high net worth sector, Mr. Bruce concentrates on such risks as fine arts, household, personal accident, curie, classic cars, kidnap and ransom, contingency business and bloodstock.

"As people pulled out of that class of business, there was a lack of capacity and rates can only do one thinggo up," he said. "We saw it as an opportunity. Not only did the rates go up, there were also tighter terms and conditions."

Up until 2001, the personal lines division of Syndicate 33 wrote a very small book of business, Mr. Bruce acknowledged. "Then in 2002, we increased from virtually nothing to probably $60 million gross for small MGA business. And in 2003, well probably write $100 million of that type of business," he said.

He admits that Hiscoxs big entry into this type of business is opportunistic.

"Weve said to [coverholders], This is an opportunity that were going to grab with both hands. But soonperhaps the later half of 2004 or early 2005the U.S. domestic market will walk back and mop up this business again at the wrong price," he said. "And we will disappear."

(A coverholder is anyone to whom Lloyds syndicates delegate underwriting authority.)

He said his job and his teams job is to make money for his syndicate. "We have some very good relationships, and there will be some longer-term clients that we stay with," he added.

"But as the rates go down, we have told all our coverholders this could be a temporary situation," he said. "It could be two years, it could be five years, but it wont be 10 years."

Gordon Breslin, senior property underwriter for Syndicate 2488, managed by ACE Global Markets, has also seen a great deal of growth in premium volumewith a lower number of coverholders.

"When I joined in December 2001, we had about 350 coverholders on the books," he said, noting that ACE has cut back that number to around about 175.

"But weve decided to make ourselves more meaningful to the people we deal with, and so weve been writing more and more 100 percent deals, which has helped growth," he said.

Gross coverholder premiums have risen from about $85 million in 2001 to about $105 million gross in 2002 and $140 million in 2003, he said.

"Were very pleased with that business model," he said. "Were now making ourselves more meaningful and also making coverholders aware that we are big providers of capacity to them. And so we are able, because we have capacity available, to help our coverholders grow," he said.

Further, he said, it concentrates the coverholders minds. They cant afford to let the business go awry when ACE provides so much of their capacity, which may represent 20 percent of their income, Mr. Breslin added.

Nevertheless, Mr. Breslin said ACE aims for consistency for its coverholders and is not in the business opportunistically. "Weve built our business relationships with proper business partners. We wont necessarily suddenly pull out because the market has turned."

Some people are moving in to write apartment programs because "they know they can make money and then theyll pull out," he said. "Were not like that."

He said ACE has given coverholders parameters for the business they write. "So, if theres any downturn, we wont be pulling out of classes; well just accept what we can get as an adequate rate."

Mr. Chase at Kiln thinks some lines, such as facultative property business, will contract again in the coming years. "Some surplus lines business has come over herebecause theres nowhere else for it to go," he added.

"As soon as domestic markets in the States again start showing an interest in facultative property, "then it will tend to return to those markets," he said.

However, he emphasized, thats not true of coverholder business "where once the coverholders have a relationship with Lloyds, they will tend to think long term and try to retain the relationship."

Indeed, Mr. Chase contended that Lloyds is attractive to coverholders because it offers continuity. "While the names of individual syndicates and the shares they take on this business may vary through the cycles and over time, Lloyds, seen as a whole, has managed to retain a reputation with a lot of the U.S. coverholders for offering continuity."

He also thought the subscription support provided by the market might be attractive to a coverholder because it avoids putting all its eggs in one basket. (When there is subscription support, a group of underwriters participate together on a risk, each taking a percentage of the risk.)

"[The coverholder] can have multiple relationships. He can come over [to London] and meet a number of the different underwriters. If one of them moves jobs, if one of the syndicates closes down, if one of them decides they dont want to continue with that line of business, he hasnt lost everything at once," he said. "And its easier to rebuild."

That, he thought, gives a coverholder a feeling of greater independence.

While he admitted that Kiln sometimes writes 100 percent of a coverholders business, "we are conscious in our dealings with these coverholders that if we were to push in that direction, we might be taking away one of the things they value about dealing at Lloyds."

Mr. Chase said Kiln has used the hard market to build relationships with new coverholders, so the number it deals with has actually risen, bucking the market trend.

"The relationships between particular Lloyds underwriters and coverholders are really quite strong," he said. "There are cases I can think of where there has been a coverholder whose business weve been keen to write for a decade but have never succeeded in obtaining a share."

Now that the market has hardened, two or three key underwriters or supporters of those binding authorities have either ceased trading or decided to exit the business, which has given Kiln an opportunity to come on the risk, he said. "The net effect on our book, therefore, is that the number of coverholders has risen."

He noted that Kiln had just over 200 coverholders in 1998 and close to 250 in 2002.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 8, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.