The British Are Coming! No – They’re Already Here
Over 200 years ago Paul Revere rallied the Minutemen with the cry: “The British are coming!” He’d be somewhat surprised to learn of today’s more benign invasion by a number of British insurance companies that do substantial business in the U.S. and how their numbers and the scope of their activities continue to expand.
Given that the U.S. has the world’s biggest economy with a gross national product of more than $10 trillion, a presence in the former colonies is both desirable and virtually essential for companies seeking to expand their horizons. U.K. companies, which share a common language, culture and legal system, continue to look first at the U.S. for market opportunities, joining already established firms, or expanding their own operations. Lloyd’s insurers are leading the pack, which isn’t terribly surprising. After all, Lloyd’s can assert a strong claim to being the world’s first private “globalized” enterprise.
The Syndicates of Lloyd’s, now overwhelmingly public companies, have concentrated primarily on underwriting specialty lines, reinsurance, commercial property and marine coverage in the U.S. Now they’re looking to expand on that experience both from within the London market and through subsidiaries that operate independently of Lloyd’s.
U.S. platform
Asked if this expansion presents any problems for her New York-based operation, Lloyd’s America President Wendy Baker replied, “Not at all. In fact we view it as complementary. Our goal,” she continued, “is to have the best platform. Lloyd’s main concern is not overall capacity, but making sure that we have the optimal platform for each kind of risk we write – surplus lines, reinsurance or others.”
According to Baker, while the London market is ideal for certain risks – generally the larger and more complicated sort – others can more reasonably be addressed in local markets.
“As an example,” she said, “suppose you wanted E&O or D&O coverage on your local Jaycee. That wouldn’t get across the Atlantic because it’s too small – for that you go across the street.” However, if you had a program to cover all of the Jaycees in the U.S., then you’d go to Lloyd’s.
It’s this mid-size and smaller market that is now attracting increased interest from Lloyd’s Syndicates. By continuing to write in the Lloyd’s market, which remains their primary business, while setting up offices and subsidiaries in the U.S., the Syndicates gain several advantages. They increase their flexibility (for both risks and capital); they create a higher profile in the U.S. (which for many is their biggest market); they expand their business and increase returns (which makes shareholders happy), and they decrease their reliance on the Lloyd’s market.
Catlin Group
One of the first, and most successful, U.K. insurers to opt for this approach is Catlin Group. It manages Lloyd’s Syndicate 2003, operates Catlin Bermuda and recently established a third platform, Catlin U.K. “Our structure is somewhat unique,” said James Burcke, Catlin’s communications director, “but it enables us to give both the intermediary and the client a lot of different options.”
Catlin’s U.S. offices in Houston and New Orleans write business through both Lloyd’s and the Bermuda platform. “We’re licensed for surplus lines in about 35 states,” said Burcke, “much of that is treaty reinsurance through the Syndicate. We write a lot of medical malpractice coverage out of Houston, which primarily goes through the Bermuda platform. New Orleans mainly concentrates on high value property coverage.”
Burcke stressed that Catlin’s U.S. operations are more than sales offices. “Underwriters are in place to extend coverage; they can OK the business right away and it’s bound. Naturally, it’s reviewed in London, but so is all of our business.”
Catlin also works through wholesale brokers in the U.S. “They’re a big part of our business – between 10 and 15 percent,” Burcke said. “We have a number of coverholders with binding authority in the U.S.” He cautioned that the company is very careful to whom it “gives the pen” and has put a number of safeguards in place, including regular audits, “so there won’t be any surprises.”
Catlin’s options extend to both wholesale and retail agents, and it will soon open a third North American office in Toronto.
Beazley Group
Beazley Group Plc, a leading Lloyd’s syndicate manager (#2623 and 623), has created the biggest stir – so far. The company, known in the U.K. as Beazley Furlonge Ltd., was put together in 1986. A management buyout in 1993 established its current structure. In November 1994, Beazley purchased Omaha Property and Casualty Insurance Co. (OPAC), a wholly owned subsidiary of Mutual of Omaha. The acquisition, which was finalized earlier this year, gave the new Beazley Insurance Company, Inc., (Beazley USA) access to markets in all 50 states.
“It was inevitable that we come onshore here [in the U.S.],” said Jeff Koenig, Beazley USA’s chief operating officer and chief financial officer. “Half of our business is in U.S. risks and we realized we needed to get closer to those risks.”
The move was well timed. The introduction of corporate capital at Lloyd’s in 1994, along with subsequent changes in the way the London market does business (the franchise system, annual accounting, London Market Principles and Financial Services Authority regulation), ushered in a new era, featuring far fewer, but much larger, players. Beazley is one of them. The firm went public in 2002, indicating that one of its objectives was expansion into the U.S. It raised an additional £105 million ($191 million) to both strengthen its capital position and to fund the OPAC acquisition. Its aggregate underwriting capacity at Lloyd’s in 2005 is £742 million ($1.42 billion).
Beazley’s U.S. subsidiary began writing high value property coverage in December 2004 and launched its specialty lines business in March 2005. “We’re not, however, going after Marsh, Aon and Willis,” said Koenig. “We’re focused on small and mid size specialty lines risks, and on high value homeowners, primarily in the Southeastern U.S.”
Beazley USA’s specialty lines underwriting team, headed by CEO Nicholas Bozzo, operates from its U.S. headquarters in Farmington, Conn. It will write E&O, D&O, employment practices liability, fiduciary liability and fidelity risks. The company’s office in Ponte Vedra, Fla. underwrites high value homeowners business.
When the specialty lines operations began, Chief Executive Andrew Beazley, commented: “Our aim is to become the premier U.S. insurance provider for small and middle-market specialty lines business in our target areas.”
Beazley USA doesn’t work through MGAs – “We retain the pen,” CFO Koenig said – but they are interested in establishing an agency structure. “We’re looking to sign highly qualified agents,” he continued. “Basically we credential them, looking at their experience and their book of business. We’re looking to bring value to our agents and brokers through our product offerings, in such a way that allows them to grow and for Beazley to make a healthy profit.”
Lloyd’s capacity
While Beazley’s entry into the U.S. market as an admitted carrier is somewhat unusual, it’s firmly within the Lloyd’s tradition. Lloyd’s says it now has almost 20 percent market share of the U.S. surplus lines market. It provides coverage to 93 percent of the companies on the Dow Jones Index, and it has on deposit total U.S. trust funds of approximately $12.2 billion. The U.S. is the largest overseas market for Lloyd’s underwriters. U.S. premium income in 2003 was approximately $8.3 billion, over a third of Lloyd’s premium income, and about 54 percent of that income came from surplus lines.
However, as Lloyd’s America President Baker pointed out, “current volume at Lloyd’s is essentially flat, with 2005 capacity even down slightly, as we plan for softening markets in some lines.” Capacity for 2005 is in the £13.7 billion ($25.8 billion) range, a reduction of around 9 percent from 2004. Given Lloyd’s commitment – as repeatedly expressed by Chairman Lord Peter Levene and CEO Nick Prettejohn – to make profits on underwriting and not to chase market share, the reduction leaves a number of the more dynamic Lloyd’s companies with people and money in need of a place to work.
That situation and the continuing expansion of the U.S. market gives the U.K. companies an added incentive to build on their record of prior success through Lloyd’s. Of the 44 active managing general agents there are very few who aren’t considering expansion plans.
Hiscox
Hiscox Plc, which does business both in the Lloyd’s market and independently, is one of them. The company, headed by Robert Hiscox, is the world’s leading specialist in fine arts coverage. “About 40 percent of our business comes from the U.S. market,” said spokesperson Fiona Fong. Syndicate #33 writes approximately 70 percent of its business in U.S. dollars.
Consequently it focuses heavily on the U.S. market, which, as it discovered last fall, also has a downside. Charlie, Frances, Ivan and Jeanne reduced Hiscox’s 2004 operating profit by around $46 million. Rather than licking its wounds, the company increased its capacity, both for the remainder of 2004, an additional $46 million, and for 2005, an additional $92 million. Hiscox 2005 capacity is $1.416 billion.
While it already does substantial business in the U.S. through Lloyd’s, especially in fine arts coverage, along with its other specialties, kidnap & ransom, extortion and similar security related risks, Hiscox is also planning to enhance its U.S. presence other ways. “Robert Childs [Hiscox director of underwriting] describes the U.S. as a ‘reverse net,'” Fong said. “Bigger and more complicated risks go through the net and land at Lloyd’s, the smaller ones get left inside.”
In an effort to pull in some of those smaller risks, Hiscox has been seeking a director of U.S. operations. “We’re in no hurry,” Fong continued, “but we are actively recruiting candidates to head up the U.S. market in order to build on our strengths both in London and the U.S.”
Fong also noted that Hiscox “is building an electronic trading platform which will include coverages for terrorism and technology – mainly technology companies’ systems, not hardware.”
Lloyd’s is now a two-way street. Just as U.S. companies – ACE (Syndicate 2488 – formerly Charman Underwriting); Markel (Syndicate 3000); St.Paul Travelers (Syndicate 5000); General Re (Faraday Syndicate 435), XL (Syndicate 1209) and others – seek opportunities beyond their home markets, so Lloyd’s companies look beyond Britain and Europe.
They’re also being driven to seek “non-Lloyd’s” business by current market conditions. Levene and Prettejohn’s efforts to break the boom and bust cycle have fundamentally changed the rules on how the Syndicates operate. As Prettejohn noted in a 2003 address to the U.K.’s Chartered Insurance Institute, “Under the new franchise arrangements, businesses at Lloyd’s have to take a hard look at how much business they plan to write in the coming year.” He’s since gone on record that “given current market conditions and the focus on delivering underwriting profit, it is a positive sign that there has been a decrease, not an increase, in capacity at this point in the insurance cycle.”
That position may benefit Lloyd’s, which, due to its unique structure, is in a better position to control capital flows in and out of the market. But big companies with capital and expertise have to make use of those resources. Hence opportunities outside Lloyd’s become even more attractive, if not essential, to assure continued growth. The Syndicates are no longer private rich men’s clubs, but public companies. As such they owe a duty to their shareholders to increase value. They can’t stand still and wait for Lloyd’s to give them the green light to do so.
Amlin and Wellington
Among others not waiting are Amlin Plc and Wellington Plc. Amlin, which manages Syndicate 2001, is one of Lloyd’s major players. It is established in the U.S, specializing in aviation, direct marine, property, casualty and commercial auto. Its Lloyd’s 2005 capacity is $850 million ($1.6 billion), down from £1 billion ($1.882 billion) in 2004. Commenting on the company’s 2004 earnings, Chairman Roger J. Taylor noted that despite the four hurricanes [the syndicate took a $118.7 million hit], Amlin’s return on equity was 22.3 percent, “the third year in succession in excess of 20 percent.” Some 68 percent of Amlin’s non-marine business is in the U.S. The company has been looking to expand beyond Lloyd’s for some time.
David Haggie, the head of Haggie Financial, which represents both Amlin and Brit, another major London market company (Syndicate 2987), said that Amlin currently “does no business outside of Lloyd’s.” He added, however, that the North American market remains a central focus for the group.
Wellington (Syndicate 2020) is another leading Lloyd’s insurer that is also already established in the U.S. Its wholly owned subsidiaries – Wellington Underwriting Inc. and Wellington Specialty Insurance Company – operate from seven offices across the U.S. It also retains a 19 percent share in Bermuda-based Aspen Re, which it founded. Wellington’s U.S. affiliates concentrate on specialist lines for both primary and reinsurance with a substantial presence both inside and outside the Lloyd’s market. Its 2004 capacity was £728.8 ($1.372 billion).
Those are some of the major British players in the U.S. market. There’s a certain ineffable rightness in these days of corporate anagrams to know that the names of the top management of many of these companies are the same as the company itself. A few examples: Stephen Catlin, chief executive and deputy chairman; Andrew Beazley , CEO and active underwriter for syndicate 623, and Robert Hiscox, chairman of the board since 1970.
They bring not only additional capacity to such high profile lines as E&O, D&O and medical malpractice, but also the cumulative experience of generations of Lloyd’s underwriters.