Equity Syndicate Management Ltd

Subject: Various                                             

Syndicate Affected: Syndicate 218

  

Financial Results to 30 June 2011

Equity Syndicate Management Limited (“ESML”), the managing agent of Syndicate 218 (“the Syndicate”), submitted to Lloyd’s on schedule the audited Regulatory Returns for Syndicate 218 for the six months to 30 June 2011.  

As stated in the 2010 Syndicate Report and Accounts, the twelve months to 31 December 2010 saw a significant strengthening in the Syndicate’s claims reserves primarily due to an unprecedented increase in motor third party bodily injury claims.  

Underwriting and claims developments in the first half of 2011 have, however, been benign and the Syndicate is starting to see the benefit of the extensive remediation activities undertaken over the past 12 months. These developments and the financial performance are discussed in more detail in the ensuing paragraphs.

 

2010 and Prior Underwriting Years
During the first six months of the 2011 calendar year, motor claims payments on the 2010 and prior underwriting years developed favourably. Accordingly, ESML’s consulting actuaries, Towers Watson, have reduced their best estimate for net motor ultimate claims by £20.4 million since their last review in December 2010. This improvement has been driven by better than expected development for the attritional claims, offset slightly by worse than expected development in the larger claims.

 

The property account experienced a modest deterioration in the 2010 underwriting year driven by adverse development arising from the winter freeze event that occurred during December 2010. Property reserves held in respect of the 2009 and prior underwriting years developed favourably.  There were no material aggregate movements on the other classes.

 

2011 Underwriting Year

The 2011 underwriting year is benefiting from the premium rating improvements and extensive remedial actions introduced with the aim of returning the Syndicate to profitability. Key activities include:

 

• A significant strengthening of management resources, with a number of key senior appointments;
• Substantial premium rate increases, applicable to most key business classes;
• An exit from the vast majority of third party aggregator-sourced business (with the exception of motorcycle) resulting in private car and van business no longer being written with the four largest volume brokers;
• The shedding of unprofitable broker relationships, while others undergo specific underwriting action;
• A complete underwriting health-check, comprising a detailed review of all classes of business and the implementation of a wide range of underwriting and operational improvements, including the restructuring of classes;
• The development of a robust longer term pricing strategy;
• Enhanced management information systems to improve granularity of portfolio analysis and performance;
• Rigorous review and transformation of claim settlement and reserving practices, including more detailed and transparent procedures for motor bodily injury claim estimation;
• Implementation of more sophisticated claims systems, resulting in improved cost control;
• Enhanced claims data, allowing the creation of better accident period information and improved reporting on claims development; and
• Commenced implementation of a number of counter-fraud solutions as part of enhanced fraud management initiatives.

 

At an individual underwriting year level, 2011 was £68m or 20.6% down on the 2010 underwriting year position at six months (£261.5m compared to £329.5m). This reduction comprised two offsetting trends:

 

• Lower policy volumes stemming from the remedial actions, including the deliberate exit from aggregator-originated sources and the cancellation of certain broker relationships; and
• Substantial premium rate increases, applied across most key portfolios.

 

For the full 2011 underwriting year of account, we continue to expect gross written premiums to be in line with the Lloyd’s Syndicate Business Forecast projection of a 15% reduction on the 2010 underwriting year.

As a result of the remedial activities and achieved price increases, Towers Watson projected a significantly improved net ultimate loss ratio of 87.6% for the 2011 underwriting year motor account at 30 June 2011. By comparison, the motor ultimate net loss ratio for the 2010 underwriting account was 100.9% at 30 June 2011 down from 102.0% at 31 December 2010.

Uncertainty and Risk Margins
As previously mentioned, a significant proportion of the remedial activity is focussed on the claims area and in particular, on case estimating. In particular, during the past nine months ESML has completed a rigorous review and transformation of its motor claims reserving practices including:

• Changes to claims estimating philosophies to provide more detailed and transparent procedures for bodily injury assessment and alignment of estimating practices across all classes of motor business;
• Changes to claims closure procedures to include clearer guidelines on bodily injury claims and to extend the closure period for non-movement claims from 2 to 3 years to create a more cautious approach; and
• A rolling programme of work to apply the new claims philosophies to all open claims on all underwriting years of account.  

Consequently, although motor claims have generally settled in accordance with expectation in the six months to 30 June 2011, incurred claims have continued to increase as each underwriting year has been subject to the new estimating philosophies and other remedial activities. There remains, therefore, a degree of uncertainty over the future development of the Syndicate’s motor claims reserves.

For the purposes of preparing the Lloyd’s Regulatory Returns for the six months to 30 June 2011, ESML once again adopted its consulting actuaries’, Towers Watson’s, best estimate outcome with a risk margin. The risk margin has been set at 7.5% of net claims reserves, which is an increase from the 5.0% margin established at 31 December 2010 reflecting the larger difference in paid and incurred claims projections.  

Accordingly, in respect of business earned to 30 June 2011 the best-estimate reserves as at 30 June 2011 for the 2011 and prior underwriting years total £617 million (including the risk margin of £42 million).

As part of the reserving process, Towers Watson estimated the liabilities for all policies written prior to 30 June 2011. Total net reserves on this ‘written’ basis were £787 million including the risk margin of £42 million. Towers Watson also estimated ranges around their central best estimate of £745 million, before risk margin. In particular, they defined the best case and the worst case from a range of reasonable best estimate outcomes. The upper end of the range around total net written reserves represents a £75 million increase over the net written reserve position (including the risk margin), whilst the lower end of the range would represent a £156 million decrease in the net written reserve position (including the risk margin) .  

The table below shows the ranges by underwriting years, at whole account gross and net of reinsurance, in £ millions:

 

 

Chiltington International Limited Case Estimate Review

In order to gain a greater degree of confidence in case estimate strength whilst the various remedial actions are being implemented, ESML instructed Chiltington International Limited (“Chiltington”) to provide an independent view of the strength of case estimates held for motor Third Party Injury (TPI) claims on the 2007 through 2011 underwriting years of account. This review followed a similar exercise carried out by Chiltington in the autumn of 2010.

Chiltington’s findings are documented in a report that was finalised on 19 August 2011. Chiltington concluded that their analysis leads them to suggest that the Syndicate could anticipate savings (case estimate reserve releases) of approximately 16% from the claims sampled. Chiltington’s findings broadly support the conclusions reached by Towers Watson and therefore the reserves established for policies written to 30 June 2011.  

A copy of the Chiltington report has been provided to the Syndicate’s supporting members’ agents.

Underwriting Year Forecasts

For the purposes of preparing the Syndicate forecasts to ultimate for the 2008, 2009 and 2010 underwriting years at 30 June 2011, ESML has again adopted Towers Watson’s best estimate outcomes with a risk margin equivalent to 7.5% of net claims reserves.  

For the low and high syndicate forecasts, ESML has adopted Towers Watson’s best case and worst case outcomes from their range of reasonable best estimate outcomes with an additional risk margin of 7.5% of net claims reserves.

As a percentage of underwriting capacity these are as follows:

 

Other key forecasting assumptions include:

• The 2008 Underwriting Year of Account is closed at the end of 48 months;
• The 2009 and 2010 Underwriting Years of Account close as normal at the end of 36 months;
• Reinsurance assets remain valid;
• Investment yields track expectations; and
• No unforeseen claims deterioration or change to the current legal environment.

Syndicate Planned Allocated Capacity

On 7 July 2011, ESML notified Lloyd’s of a proposed decrease in the syndicate allocated capacity of the Syndicate for the 2012 underwriting year of account to £437.6m representing a de‑emption of 10% from the 2011 capacity of £486.3m.

2012 Underwriting Year of Account Syndicate Business Forecast (“SBF”)

On 8 July 2011, ESML submitted to Lloyd’s an initial SBF for the 2012 underwriting year of account. This initial SBF forecast gross written premiums of £518.5m and an ultimate profit of £17.4m representing a 4.0% return on the planned underwriting capacity of £437.6m (reflecting the de-emption). The initial SBF was not approved by Lloyd’s and will be superseded by a revised 2012 SBF was submitted to Lloyd’s on 8 September 2011. The revised SBF forecasts £495.1m of gross written premiums and an ultimate profit of £6.8m, representing a 1.6% return on planned underwriting capacity.

ICA

For capital setting purposes, ESML has decided that it is appropriate to set capital for Syndicate 218 using the Lloyd’s ICP benchmark loss ratios. Details of the final 2012 ECA requirement for the Syndicate are awaited from Lloyd’s.

Regulatory Review

ESML continues to work closely with its regulators, the Financial Services Authority and Lloyd’s, to keep them informed of progress with the remediation programme. Furthermore, as mentioned at the Syndicate 218 and Lloyd’s Annual General Meetings held earlier this year, Lloyd’s Market Supervision and Review Committee has established a formal inquiry into matters that may have affected Equity’s reserve deterioration. ESML is cooperating fully with the inquiry. The findings of the inquiry will not be made public. ESML understands that it is possible that the inquiry may lead to Lloyd’s bringing enforcement proceedings under its enforcement powers. In that event, the proceedings would be confidential and the publication of the outcome of any such proceedings would only be made by Lloyd’s in accordance with its enforcement rules.

 

 

Date issued: 9 September 2011

  

 

Contact Information:

Agency contact name: Andrew Gibson

Agency contact no: + 44 (0)1277 206257

 

For auction office use only: D2011017