May 2015

Inside This Issue

2. Market Conditions – by

sector

8. Results

13. Merger Frenzy

14. AIRL Forecasts

Quarterly Review Argenta Insurance Research Limited

Welcome to the latest Quarterly Review

Results reported this year, both on a GAAP basis for the 2014 calendar year and for the

closing 2012 underwriting year of account, were better than expected.

We provide further detail in the Results section of this edition, where the encouraging

prospects for the 2013 and 2014 underwriting years of account are also reviewed.

However, there is no escaping the current very tough underwriting environment, which we

comment upon in the Market Conditions section.

Michael Meacock, who is approaching his 50th year as active underwriter of Syndicate

727, comments in his underwriter’s report in the 2014 Syndicate Report & Accounts in the

following measured and somewhat resigned terms:

‘In some areas of the business rate integrity is now completely absent and if and when the

claims experience returns to normal, as it surely will, the underwriting results will be most

unattractive in those areas. As the underwriting cycle softens further it is preferable to be

patient and trade to a lower premium volume.’

As an experienced operator, and there are many experienced underwriters in the Market,

one has a greater degree of confidence that he will be able to deal with difficult conditions

that underwriters face and maintain the potential to make profits for his capital providers.

The extract below, from another underwriter’s report, is revealing:

‘Undoubtedly 2015 will be a testing year… We shall continue with our proven strategy of

being nimble, and writing a highly selective portfolio that is not heavily dependent on any

one subclass. We continue to be driven by strong underwriting technical results

emanating from our niche areas, particularly where we have leadership control.

Furthermore, we recognise the need to proactively monitor alternative areas of cover that

would complement our portfolio and enhance our product lines.’

Contact Details

Jeremy Bray

jeremy.bray@argentaplc.com

T +44 (0)20 7825 7174

Andrew Colcomb

andrew.colcomb@argentaplc.com

T +44 (0)20 7825 7176

Robert Flach

robert.flach@argentaplc.com

T +44 (0)20 7825 7179

Argenta Insurance Research Ltd

Fountain House

130 Fenchurch Street

London EC3M 5DJ

www.argentaplc.com

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Pressure on reinsurance rates

and terms is likely to continue

through 2015

In three sentences, we have a remarkable concentration of the insurance jargon and

clichés that CEO’s frequently use to describe the current market and how they are coping

with it. The way in which the strategy is expressed may cause us to wonder if the author

is telling us what he thinks we want to hear, but once deconstructed it is a sensible

strategy and one that many are trying to pursue. Not all will be successful, but as noted

above, experience will count.

Market Conditions

In this section we review current conditions in each major class of business. The pie

charts show (in pink) the proportion of the total Lloyd’s market that is written in each class

and the small line charts show the combined ratio for the Lloyd’s market for each line of

business since 2010. The combined ratio is defined as the sum of claims incurred plus

operating expenses (including acquisition costs), divided by net earned premiums. Hence,

the lower the ratio, the more profitable the class of business is (see also the Results

section).

Reinsurance

The exceptionally low interest rate environment in the global economy has meant that

hedge funds and pension funds have been highly motivated to find ways of accessing a

class of business that has produced some excellent results in recent years - reinsurance.

A variety of instruments is used – principally catastrophe bonds, insured linked securities

(ILS) and collateralised reinsurance.

This type of investor in reinsurance is believed to have a lower return threshold than

traditional reinsurers because a smaller proportion of overall assets is being put at risk, so

there is no risk of ruin, as there is for a traditional reinsurer.

The emergence of these non-traditional instruments has occurred at a time when

reinsurers have enjoyed good results and it has coincided with a cyclical downturn in the

world’s economies, both of which factors suppress demand for reinsurance. Traditional

reinsurers have been forced to compete in order to retain market share, often under

pressure to give concessions on terms and conditions – broader cover for the same or

less premium.

Most underwriters we speak to report rate decreases that exceed 10% year on year,

together with a gradual erosion of terms and conditions, with the hours clause (defining

the period during which losses arising out of a single proximate cause, for example a

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windstorm, can be aggregated together) being one of the prime examples. It seems

unlikely that there will be any meaningful change in the rating environment for so long as

there continues to be a surfeit of capital to support the available business.

The traditional view that a major loss will drive out capital and restore rating levels is

undermined by the fact that surplus capital in the reinsurance sector now is a multiple of

any historic loss, even when inflated to today’s purchasing parity and insurance

penetration - insurance penetration being the propensity of businesses and individuals to

buy insurance, which tends to increase over time.

Brokers and reinsurance buyers have begun to reverse the stance they took in the

aftermath of the global financial crisis when they actively sought to broaden the range of

reinsurers used on a placement, and are now using smaller panels of reinsurers, and

restricting access to business to those reinsurers seen to be “relevant”. Relevant seems

have a variety of meanings, including an ability to write across most lines of reinsurance

purchased by a cedant, and perhaps more cynically, an ability to meet the clients’ pricing

expectations.

Although the largest part of the reinsurance sector is property reinsurance, including

catastrophe, per risk excess and pro-rata reinsurances, reinsurance of casualty and

specialty lines are also included here. These areas have proved more difficult to

penetrate on the part of the non-insurance investors, such as ILS, but rates have

nonetheless been under pressure as insurers retain risk in house and as reinsurers look to

replace income lost from the property arena.

One particular issue is the emergence of Periodic Payment Orders (PPOs) as a

mechanism to compensate victims of accident bodily injury - most notably, but not

exclusively, in respect of UK motor business. PPOs impose a great deal of long tail

exposure, including inflation, mortality and interest rate risks, on reinsurers.

Although reinsurance is a major part of many syndicates’ inward business, it is also in

many cases the single largest expense. More syndicates are buyers of reinsurance than

are sellers. With the exception of a few loss hit renewals, syndicates have been able to

improve the breadth and depth of cover they have bought, typically at a lower price.

Property

The property book is divided into two main sections: larger industrial and commercial

risks written in the open market to the broker network (typically on large placements

involving layered placements and a number of different insurance markets) and smaller

Reinsurers strive to be

‘relevant’

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Smaller premium property

business is under less

pressure

The cyber market continues

to expand

Marine hull and cargo remain

marginal but specialist areas

offer better returns

business (for both commercial and personal policyholders) written on Lloyd’s behalf by a

large number of coverholders. The former business has been under rating pressure for a

number of years and this is not expected to abate.

There was a moment of opportunity for terrorism business over the New Year, due to

uncertainty concerning the renewal of the Terrorism Risk Insurance Act (TRIA) in the US.

TRIA is a federal ‘backstop’ for insurance claims relating to acts of terrorism in the US.

The renewal was however signed into law during the opening weeks of 2015.

Greater optimism surrounds the smaller premium business, with syndicates reporting

growth in the US excess and surplus lines business (non-standard business that falls

outside US domestic insurers, a market worth $34 billion in 2013, with Lloyd’s having a

20% market share). Rates have started to come under pressure, although some areas of

the book were reporting rate increases throughout 2013 and the first half of 2014.

Casualty

Although ‘Casualty’ includes many sub-categories of business, meaning that the overall

result masks a wide variety of performance, results in the sector are only marginally

profitable. Syndicates must therefore ensure that they are both reserving adequately for

past liabilities and that new business is properly rated, given expected levels of claims

inflation and an increasingly litigious global environment. The cyber market continues to

expand, helped by high profile losses, and the fact that western governments are keen to

ensure that security standards are increased, with insurance seen as having a role to play

in achieving this.

Marine

The larger classes, hull and cargo, continue to be marginal, although there are areas of

specialism where some syndicates can make attractive returns. Although the wreck of

the Costa Concordia was successfully re-floated and removed for salvage, loss costs

have continued to escalate. For most Lloyd’s underwriters, the loss had exceeded

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reinsurance retentions and the deterioration is contained within reinsurance programmes,

meaning that the net impact was limited to increased reinstatement costs. The loss raises

issues for insurers as to the difficulties of removing wreckage in environmentally sensitive

areas.

Energy

Energy business will be profoundly challenged by the fall in the oil price, as investment in

exploration and extraction becomes less viable at current energy prices. Some wells will

be capped and equipment mothballed, reducing the premium base in an already

competitive arena. Underwriters need to select risk very carefully, as maintenance

budgets can be cut and loss experience deteriorates in response to lower profitability for

the operators.

Aviation

There has been a series of large losses in both the hull & liability and aviation war markets,

following a period largely free from major loss which masked some inadequate rating.

Losses included the two Malaysia Airlines passenger jets: MH370 flying from Kuala

Lumpur to Beijing in March 2014 and MH17, shot down over the Ukraine en route from

Amsterdam to Kuala Lumpur in July. The two losses caused the deaths of 537

passengers and crew. The exact cause of the loss of MH370 remains unclear, and while

aviation war insurers have paid half the loss, the hull loss will fall to the all risks insurers if

proximate cause cannot be verified.

In addition, Air Algerie, TransAsia and AirAsia all suffered losses, and in the aviation war

market, factional fighting at Tripoli airport caused heavy losses. There were also losses in

the satellite market.

Although rate increases were imposed for impacted lines and clients, no widespread

withdrawal of capacity has taken place. As the losses were unevenly distributed, those

disproportionately affected have been able to convince their management that it was just

The fall in the price of oil

creates difficulties for the

energy market

In spite of several aviation

war losses, excess capital

persists

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UK motor operating

environment continues to be

tough

ill-fortune, and those largely unaffected have been unable to leverage their positions to

secure rate increases. The destruction of the Germanwings Airbus A-320 in March 2015

is a significant loss for the European market, again with a portion falling on the aviation

war market, although it seems unlikely that this will change rating levels, given the

continuing over-supply of capital to the sector.

Motor

Lloyd’s data in the pie chart above, in addition to UK motor, includes international

business, which encompasses fire, theft and collision (FTC), motor truck cargo and

dealers’ open lot business written to coverholders and in the open market in the US.

Such risks are written by a number of syndicates, often within their property division. The

number of syndicates writing UK motor business continues to fall; two-thirds of Lloyd’s

motor business is written by three syndicates, one of which (Chaucer) has recently

announced the sale of its UK motor book to Gibraltarian insurer Markerstudy Group. One

smaller syndicate (Canopius 260) was merged into composite Syndicate 958/4444 for

2015.

For members underwriting through Argenta, UK motor business is almost exclusively

written by ERS Syndicate 218. ERS does not write the full gamut of UK motor business,

which is now dominated by internet based aggregator sites such as confused.com and

comparethemarket.com, but writes a specialist book of commercial motor, agricultural

vehicles, modified and collectors cars and non-standard risks sourced through the broker

network. It is nonetheless subject to some of the wider challenges facing the industry.

The market remains fiercely competitive, with rates falling during the year, but reaching a

plateau (according to the AA index) by the end of the first quarter of this year.

The legal landscape has changed rapidly, with the introduction of more restrictive

payments of legal fees under Ministry of Justice reforms, the Road Traffic Accident Portal

(a streamlined process for dealing with low valued motor related personal injury claims),

as well as increased scrutiny by the Financial Conduct Authority of add-on products such

as breakdown, personal accident and warranty, along with interest charges on monthly

payment instalment options. Insurers were disappointed that the UK Competitions and

Markets Authority report, delivered in September 2014, took no action against credit hire

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operators and did not elect to ban the payment of referral fees by law firms looking to act

for alleged accident victims.

Loss Activity in 2015

For the first quarter of 2015, insurers and reinsurers reported benign loss experiences and

no significant insured catastrophe activity. The tragic earthquake that struck Nepal on 25

April has caused considerable economic loss (currently estimated at $5 billion) but only a

fraction will be incurred by insurers due to low insurance penetration. The aviation

market, however, continues to suffer losses. Germanwings flight 9525 from Barcelona to

Dusseldorf crashed into the French Alps, 100km north of Nice, on 24 March 2015. All 144

passengers and six crew were killed. It quickly emerged that the co-pilot, who was later

reported as having been treated for suicidal tendencies, had locked the captain out of the

cockpit before he started the fatal descent into the mountain. Although Germanwings is

described as a low cost airline, it is owned by Lufthansa, and is insured under the

Lufthansa insurance programme. The deliberate act of the part of the co-pilot means that

the war policy responds for the hull loss - an Airbus A320-200 insured for $13m - written

mostly in the Lloyd’s market, and led, we understand, by Cathedral Syndicate 3010. The

liability element of the loss will be by far the larger part, with a pay-out likely to be around

€1 million per passenger for EU residents. Our understanding is that Lufthansa’s ‘all risks’

policy is led by Allianz, but that parts of the programme are placed in the London

company and Lloyd’s market. Assuming a loss of around €150 million, the loss could also

make its way into lower levels of reinsurance programmes.

Hurricane forecasters predict another quiet year

Tropical Storm Risk (TSR) is predicting another below-average Atlantic hurricane season

for 2015.

In TSR's April forecast, Professor Mark Saunders and Dr Adam Lea have forecast eleven

named storms, five hurricanes and two major hurricanes of category three or above. This

is 45% below the 1950 to 2014 long-term norm and about 50% below the 2005 to 2014

ten year norm for hurricane activity.

Predictions were down slightly from TSR's initial forecast in December, when it predicted

thirteen named storms and six hurricanes. However, TSR has increased its forecast of

major hurricanes by one.

"The TSR forecast has reduced since early December 2014 due to updated climate

signals indicating the tropical north Atlantic and Caribbean Sea in August-September

2015 will likely be cooler than norm and cooler than thought previously" , it said in a

report.

Another quiet Atlantic

hurricane season?

8

Lloyd’s 2014 GAAP result

very similar to 2013 – both

helped by absence of natural

catastrophe losses

The Atlantic hurricane season runs from 1 June to 30 November.

Last year, the Atlantic season saw a quiet year with activity lower than the already below-

average predictions.

The 2014 season saw eight named storms, six of which became hurricanes and two major

hurricanes of category three or higher.

Results

Lloyd’s declared its global results for 2014 at the end of March. The results were very

similar to those declared for the previous 12 months.

Even after ten years of Lloyd’s reporting its results on a GAAP basis, there is still scope

for confusion between annual accounting (GAAP) and the traditional underwriting year of

account basis. To avoid exacerbating any confusion, we have separated our comments

into two sections in this Review. First, we consider the GAAP accounts (which are given

greater prominence as they are more directly comparable with all other insurers); second

we look at the 2012 underwriting year of account, which closed at 31 December 2014.

Lloyd’s Annual Results (GAAP)

2014 2013 2012 2011 2010 2009

Gross written premiums £m 25,628 26,103 25,500 23,477 22,592 21,973

Net earned premiums £m 19,575 19,725 18,685 18,100 17,111 16,725

Result for the year before tax £m 3,161 3,205 2,771 -516 2,195 3,868

Ratios

Loss ratio % 49.0 48.6 54.0 71.2 58.6 51.5

Expense ratio % 39.1 38.2 37.1 35.6 34.7 34.6

Combined ratio % 88.1 86.8 91.1 106.8 93.3 86.1

Return on capital % 14.7 16.2 14.8 -2.8 12.1 23.9

A combined ratio provides a helpful shorthand for the profitability of an insurer. It is

calculated as the sum of claims incurred, plus operating expenses (including acquisition

costs), divided by net earned premiums. The lower the ratio, the more profitable the

enterprise. At a benchmark 100%, the insurer is not making any money out of

underwriting. It may nevertheless be making a profit from the investment return being

generated from claims’ reserves and the underlying capital of the insurer. In times of

higher investment returns, insurers have been able to declare profits with combined ratios

as high as 104%. However, in the current climate of very low interest rates, insurers will

need to deliver combined ratios well below 100% in order to provide the returns to

investors that their cost of capital requires.

Lloyd’s results were very similar to those of 2013; gross premium income was down by

2% and overall profitability was down by 1.5%. Both years benefited from a release from

reserves that reduced the combined ratio by 8%. The continued absence of natural

catastrophes has flattered the results for both years. The most severe catastrophe losses

9

were in the aviation sector, including the two Malaysia Airlines passenger jets and a

number of aircraft destroyed in fighting at Tripoli airport. Total catastrophe losses added

just 3% to the combined ratio. A repeat of the loss experience of 2011 would have seen

the Market record a combined ratio closer to 110%, compared with the 88.1% achieved

for 2014. At the five year average catastrophe experience, the combined ratio would have

been more than 95%.

Lloyd’s reported combined ratio

Source: Lloyd’s

Combined ratio restated using five year average cat. loss ratio

Source: Lloyd’s, AIRL analysis

This analysis leads to two observations. The first is that although the results for the 2013

and 2014 years have, as noted above, been better than expected due to the absence of

catastrophe losses, if we apply a normal level of catastrophe experience (as in the chart

above showing the five year average catastrophe loss ratio), there is still profit margin in

the business. However, it is an inescapable reality that a single major catastrophic event

or a run of more modest events would push the current year into loss.

Using a five year average

catastrophe loss ratio, there

is still a profit margin

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Syndicates supported by

private capital continue to

outperform

All syndicates recommended

for support by APCL in 2012

made a profit (and some non-

recommended made a loss)

The second is the steady increase in the expense ratio, up from under 35% in 2009 to

more than 39% in 2014. There are a number of reasons for this: the proportion of

reinsurance business is falling, down from 36% in 2010 to 33%. Brokerage costs, which

form part of administrative costs, are typically much lower for reinsurance business, but

more significant is the increasing cost of employment and regulation.

It is encouraging to see that those syndicates supported by private capital again

outperformed those with a wholly aligned capital base, despite the perceived cost

benefits of the latter structure. Syndicates with third party capital have produced a lower

aggregate combined ratio than the Lloyd’s market as a whole in five of the past six years.

Source: Lloyd’s, syndicate reports & accounts, AIRL analysis

Underwriting Year Accounts

Syndicates report to their members on a traditional underwriting year of account basis,

distributing profits three years in arrears.

The 2012 account produced a highly satisfactory average result of in excess of 12% of

capacity to our members. It is pleasing to note that all syndicates recommended for

support by Argenta Private Capital delivered a profit. This result is approximately twice

the forecast made at the 18 month stage, 60% higher than the forecast made after 24

months and more than 20% better than the 33 month forecasts. This was despite the

2012 account bearing the lion’s share of Lloyd’s involvement in a US$20 billion insured

event in the form of Superstorm Sandy, which brought high winds and flooding to New

Jersey, New York and other parts of the North Eastern US in late October 2012.

Unusually, we have been asked by clients “what went right ?”, which we examine in the

next few paragraphs.

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The chart below shows the development of the managing agents’ forecasts between the

initial forecasts at 15 months and the closure of the account after 36 months.

2012 Year of Account – Development of forecasts by quarter

Source Syndicate QMA Form 120, from March 2013 to December 2014.

This chart shows the progression of the mid-point forecast as a solid line, with the various

components (positive and negative) that make up the overall result shown as different

coloured bars.

The fall in the value of Sterling, in particular against the main trading currency for Lloyd’s,

the US Dollar, meant that premium volumes calculated at year end rates of exchange

were higher than previously expected. There were also some improvements in the total

investment return as bond markets began to be more worried about incipient deflation in

the Eurozone than they were about impending interest rate increases in the US. This

increased bond prices and is recorded in the profit and loss account as an unrealised gain

on investments. Investment returns continue to be very thin and the difference this made

was limited, with the investment return coming only very slightly higher than the low point

that was achieved for the 2011 year of account. Investment returns for the 2011 and 2012

underwriting years of account are less than a third of those achieved for the 2007 year of

account.

The chart above also shows the impact of the continuing reserve releases, which become

apparent only in the final twelve months of the account (i.e. quarters, 9, 10, 11 and 12,

when the predecessor year has closed). Third party syndicates have, in aggregate,

produced a release from reserves every year since 2003, and these have contributed an

average of more than 4% of capacity to the final result over this period. We continue to

be sanguine about the overall level of reserves held by syndicates. The safety margin of

provisions for claims incurred but not reported (IBNR) continues to improve. We measure

this by reference to the ratio of IBNR to reserves held for known claims (net IBNR divided

by net outstanding claims), and we can see in the chart below that this ratio has climbed

to a new high on the closure of 2012.

2012 underwriting year of

account helped by a stronger

US Dollar, a better

investment return than

expected and prior year

releases

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Expect releases from

reserves to continue in future

years, but probably at a lower

percentage of capacity

IBNR as a percentage of net outstanding claims

Source: Syndicate reports & accounts, AIRL analysis

A caveat here is that the low frequency of loss reduces syndicates’ ability to post loss

reserves and in turn to make IBNR provisions. One of the reasons that the ratio has been

increasing is because there has been little claims activity. This can be seen in the charts

below, which tracks the total quantum of the reinsurance to close (RITC) paid from one

year to the next. This total amount has been almost static since the close of the 2009

account.

Arguably exposure has grown over this period, as the RITC has assumed liability for

additional years (albeit that some of the older liabilities have been extinguished). It seems

reasonable to expect releases from reserves to be lower in Sterling terms than they have

been over the past few years. As syndicate capacity has increased over the same period

- aggregate capacity for members’ syndicates was almost 30% higher in 2013 than it was

for 2009 - it also seems reasonable that this will translate into lower releases from

reserves, producing a much smaller surplus when expressed as a percentage of capacity,

than we have seen over the past five or six closed years.

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Lloyd’s Statistics

Lloyd’s publishes an annual compendium of syndicate results and other valuable analyses

of market trends. Although the content could be seen as slightly ‘geeky’ i.e. more

interesting to analysts than the average member of Lloyd’s, it does contain a full listing of

all Lloyd’s syndicates (on a GAAP basis) as well as data on premium, claims and

membership trends within the Market. The 2015 edition is due to be published on 15

May. In order to be able to download the file you will need a relatively speedy internet

connection (file size is around 40Mb) and to have registered at

http://www.lloyds.com/the-market/tools-and-resources/resources/statistics-relating-to-

lloyds/request-subscription-pre-print (subscription for market participants is free, but

£2,500 to non-participants).

APCL will be publishing the 2015 edition of the Lloyd’s Syndicate Profiles in late August

Merger Frenzy

XL Group and Catlin

By far the most significant development of the year to date has been a succession of

major mergers amongst insurers and reinsurers. For Lloyd’s watchers, the most

interesting is the combination of Catlin, the largest of the London market listed vehicles,

with XL. XL, based in Ireland but with its roots in the Bermudian market, was formed in

1986 and has total premium revenues of $6.6 billion and total assets of $45 billion; Catlin

by comparison has annual premiums of $6 billion and assets of $15 billion. The combined

business will be known as XL Catlin. Catlin has had a historically stronger Lloyd’s

presence, writing $3.3 billion into Syndicate 2003 in 2014.

XL also has substantial interests at Lloyd’s, having acquired two businesses that owned

Lloyd’s managing agents. These were Mid Ocean, former owner of the Brockbank

agency which managed Syndicates 588, 861 and 1209, and Nac Re, which acquired the

old Morgan Fentiman and Barber business, managing agent to Syndicate 990. In recent

years, the Lloyd’s business has become a smaller part of the group, with premium

volumes accounting for less than 6% of its reinsurance premium. The combined capacity

at Lloyd’s of the two businesses is £1.6 billion, or 6% of Lloyd’s total capacity in 2015.

The merger creates uncertainty as to whether the combined group will wish to continue

with SPS 6111, in which many APCL clients participate. As the individual appointed to be

head of reinsurance buying for XL Catlin is a former Catlin executive, there are perhaps

grounds for optimism that the SPS will continue to form part of XL Catlin’s reinsurance

arrangements.

Brit Insurance and Fairfax

Brit Insurance was formed by the acquisition of the Wren managing agency business by

one of the original Lloyd’s corporate capital vehicles, Benfield & Rea Investment Trust, in

2015 edition of ‘Statistics

Relating to Lloyd’s’ now

available

14

1999. For a number of years it traded as a listed vehicle with a Lloyd’s and a non-Lloyd’s

platform, and enjoyed a high profile as the principal sponsor of the England cricket team

and the Oval cricket ground in South London. In 2011, the company was taken private,

acquired by Achilles Netherlands Holdings, a consortium made up of two funds,

Luxembourg based CVC and, Apollo, a New York based private equity business.

The business was restructured and simplified under the new ownership with the disposal

of non-Lloyd’s interests, before being relisted on the London Stock Exchange in 2014.

CVC and Apollo continued to own 75% of the business.

In February 2015, it was announced that Canada’s Fairfax Financial Holdings had agreed

to buy the business at a price of $1.88 billion, allowing CVC and Apollo to exit their

investment. Fairfax is an established Lloyd’s player, having owned Advent Underwriting

Limited (itself formerly a listed insurance vehicle at Lloyd’s) since 2009, as well as Newline

Underwriting Management Limited. Advent and Newline are managing agents to

Syndicates 780 and 1218, with capacities of £200m and £100m respectively. The

acquisition of Brit increases Fairfax’s total capacity at Lloyd’s to £1.25 billion (or just

under 5% of Lloyd’s total 2015 capacity).

Montpelier and Endurance

It was announced in March 2015 that Bermuda based Endurance Specialty Holdings was

to acquire its smaller rival Montpelier Re in a deal valued at $1.8 billion. The two

companies have a combined premium income of $3.6 billion in 2014. Endurance does

not currently own a Lloyd’s business, but Montpelier formed Syndicate 5151 in 2007. Its

current capacity is £180m, although Endurance CEO, John Charman, described the

Lloyd’s presence as “scalable”, suggesting that the new management may seek to

increase the business volumes over time.

AIRL forecasts

Our analysis on reserving adequacy give us comfort that a number of the syndicates that

feature prominently in our clients’ portfolios are likely to continue to be able to make

reserve releases, assuming that their current reserving strategies remain unchanged.

The absence of natural catastrophes means that loss ratios on the open years are

amongst the best in recent times. At the same time, it is apparent that the rate softening

over the past few renewal seasons is beginning to have an impact on attritional loss

ratios.

On the tables on pages 16 and 17 we have adjusted our forecasts for a few syndicates:

QBE Syndicate 386 declared its first prior year loss since the 2002 year of account,

attributed to worse than expected experience from the general liability and professional

indemnity classes, after a number of years of bumper releases. This has caused us to

revise our expectations for the syndicate slightly downwards. We are also relatively

15

pessimistic about the levels of interest rates, and hence the investment income, on what

is one of the largest funds in the Market.

R&Q Syndicate 1991, which commenced trading for the 2013 year of account, has taken

longer than projected to develop the coverholder relationships on which the syndicate

relies. Loss ratios to date validate the approach in what are very tough market

conditions, but current indications are that, given the low business volumes and start-up

costs, the syndicate may not deliver positive returns to its capital backers before it fourth

year of operation – 2016.

Similar considerations apply to Asta Syndicate 1729, which commenced underwriting in

2014. Income is projected to be well below plan, and the impact of fixed costs means

the syndicate is likely to record a loss in its first year, but it should improve into the

second year.

Disappointingly Apollo Syndicate 1969 is now forecasting a breakeven result for the

2013 year of account. This is attributed to individual large losses on the property and

cargo & specie accounts, which were not large enough to make a reinsurance recovery.

We are now more optimistic on Nuclear Syndicate 1176. The proportion of liability

business has increased in recent years, and we have gradually improved our projections

for the release from the reserves the syndicate is providing for the class.

We have made one important change to the tables below. The row designated ‘Market’

at the bottom of both tables now refers to the aggregate of Argenta clients’ capacity,

whereas it previously referred to 100% of the capacity of the syndicates where Argenta

clients had a share. As Argenta clients tend to have bigger shares on better performing

syndicates, the Market row under-estimated the overall result for our clients.

You will spot that our forecast for the Market for the 2015 year of account has

deteriorated by 1% of capacity. This is due to two factors: first we have now included

the new syndicate, 1884, which commenced underwriting on 1 April 2015 and which we

anticipate will lose money in its first year. Second, the aggregate position has only

changed very marginally, from just above 5.5% to just under, so this movement does not

represent a radical change in our view for the year.

16

Results for 2012 and updated 2013 forecasts

2012 2013 Managing

Agent AIRL Managing

Agent AIRL

Q3 14 Result Q3 14 Q3 14 Q4 14 Q3 14 Q4 14

33 Hiscox 14% 17% 15% 5% 5% 12% 12%

218 ERS 0% 0% 2% -1% -1% 0% -1%

260 Canopius 1% 4% 1% -12% -13% -9% -9%

308 Tokio Marine Kiln 5% 6% 5% -1% -1% -1% -1%

318 Beaufort 11% 12% 11% 7% 7% 8% 9%

386 QBE 11% 10% 14% 8% 9% 11% 9%

510 Tokio Marine Kiln 7% 9% 8% 7% 8% 9% 10%

557 Tokio Marine Kiln 5% 6% 9% 12% 12% 14% 15%

609 Atrium 13% 18% 13% 5% 5% 9% 9%

623 Beazley 10% 14% 12% 4% 4% 8% 9%

727 Meacock 9% 12% 12% 6% 6% 10% 10%

779 ANV 0% -2% 0% 0% 1% 0% 2%

958 Canopius -3% 0% -3% 6% 5% 6% 5%

1176 Chaucer 58% 62% 57% 25% 30% 25% 35%

1200 Argo 5% 7% 4% 4% 4% 4% 4%

1969 ANV 9% 9% 9% 3% 0% 3% 0%

1991 R&Q -3% -6% -3% -6%

2010 Cathedral 13% 18% 13% 10% 10% 11% 11%

2121 Argenta 12% 14% 11% 8% 9% 10% 10%

2525 Asta 13% 23% 15% -4% -1% 6% 9%

2526 AmTrust -19% -38% -19% 0% -8% 0% -15%

2791 MAP 10% 12% 11% 9% 10% 10% 12%

4020 Ark 12% 17% 12%

5820 ANV 0% 0% 0% 3% -2% 3% -4%

6103 MAP 21% 25% 21% 30% 33% 30% 32%

6104 Hiscox 35% 39% 42% 40% 40% 41% 41%

6105 Ark 12% 17% 12% 6% 7% 6% 7%

6106 Amlin 45% 47% 46% 37% 37% 37% 37%

6107 Beazley 28% 33% 28% 8% 8% 8% 8%

6110 Pembroke 8% 8% 8% -1% 0% -1% 0%

6111 Catlin 8% 10% 8% 10% 10% 10% 10%

6113 Barbican 21% 22% 22% 22%

Market (Argenta Clients) 10% 12% 11% 7% 8% 10% 10%

17

AIRL Forecasts for 2014 and 2015 accounts

2014 2015

AIRL AIRL

Q3 14 Q4 14 Q3 14 Q4 14

33 Hiscox 8% 9% 5% 5%

218 ERS 1% 1% 2% 3%

260 Canopius -6% -6%

308 Tokio Marine Kiln 2% 3% 4% 3%

318 Beaufort 6% 5% 4% 4%

386 QBE 8% 5% 7% 8%

510 Tokio Marine Kiln 8% 8% 7% 7%

557 Tokio Marine Kiln 8% 18% 11% 11%

609 Atrium 8% 9% 6% 6%

623 Beazley 7% 7% 6% 6%

727 Meacock 8% 8% 7% 7%

779 ANV -3% -3% 2% 1%

958 Canopius 5% 7% 5% 5%

1176 Chaucer 32% 36% 36% 40%

1200 Argo 3% 4% 4% 3%

1969 ANV 5% 5% 4% 4%

1729 Asta -2% -4% 2% 1%

1884 Charles Taylor -9%

1991 R&Q -4% -3% 0% 0%

2010 Cathedral 7% 7% 7% 6%

2014 Pembroke -1% 0% -3% 0%

2121 Argenta 7% 7% 5% 5%

2525 Asta 8% 9% 8% 9%

2526 AmTrust -4% -6% -3% -4%

2791 MAP 6% 9% 6% 7%

4020 Ark 4% 6% 5% 5%

5820 ANV 1% 0% 4% 2%

6103 MAP 16% 16% 7% 7%

6104 Hiscox 20% 26% 9% 10%

6105 Ark 7% 6% 6% 5%

6107 Beazley 25% 24% 15% 15%

6111 Catlin 7% 8% 5% 5%

6113 Barbican 9% 9% 0% 0%

Market (Argenta Clients) 7% 7% 6% 5%

18

Your Notes

19

Your Notes

Caveats

This Quarterly Review publication is issued for general information purposes only and should not be construed as an

invitation or inducement to engage in underwriting activity, nor investment advice. The document has nevertheless

been prepared in accordance with the general principles of the Financial Conduct Authority (FCA) financial promotion

rules, in addition to those stipulated by the Code for Members’ Agents: Responsibilities to Members.

Whilst all reasonable care has been taken to ensure that the information contained in this document is accurate at the

time of publication, Argenta does not make any representations as to the accuracy or completeness of such

information. Further, Argenta does not represent, warrant or promise (whether express or implied) that any information

is or remains accurate, complete and up-to-date, or fit or suitable for any purpose. This document provides

information about syndicates' past performance. Past performance is not a guarantee for future performance. The

forward-looking statements (including, but not limited to, the AIRL forecasts) in this document are subject to

uncertainties and inherent risks that could cause actual results to differ materially from those contained in any forward-

looking statement. Whilst it intends to publish future Quarterly Reviews, Argenta undertakes no duty to update publicly

any forward-looking statements contained herein, in light of new information.

Unauthorised use, disclosure or copying of the document is strictly prohibited and may be unlawful.

Argenta Private Capital Limited is authorised and regulated by the Financial Conduct Authority.

Argenta Insurance Research Limited is a wholly owned subsidiary of Argenta Private Capital Limited.