Search archive

Advanced search

The past week has been a good one for anyone looking for indications of the enduring appeal of the London market and the Lloyd's platform that lies at its heart.

First there was a tour de force speech from veteran London equity analyst Chris Hitchings.

Of all the analysts looking at the London-based global specialty underwriters, he is the one with the most experience and the most well-rounded, philosophical overview of the (re)insurance cycle and how it interacts with the London specialty market.

Speaking to a group of Names gathering at their annual conference, he presented detailed slides on the pricing cycle and how London's global specialty (re)insurance businesses reacted to this.

Everyone understands that the job of a good underwriter is to write more business when pricing is good and decline all but the highest quality submissions when pricing is inadequate.

In this respect Lloyd's underwriters can justifiably lay claim to an exceptional record of outperformance over the past decades.

But Hitchings' theory is that in fact the Lloyd's market is hard-wired for success.

Its concentration in specialty, wholesale, excess and surplus lines and reinsurance means that in softer times its clients and its distribution channel tend to send it less business. Either it is insurers retaining more, reinsuring less and writing more adventurous lines, or it is retail brokers declining to share brokerage with a London intermediary placing business in local markets.

Conversely, when markets harden, global insurance players return to their core areas of competence and exit speciality lines, forcing retail brokers to come back to the fold to get business placed.

The end result is that Lloyd's should end up writing relatively less when it should be contracting and writing more when prices are good.

So far so good, but Hitchings pointed out that the real danger has been when, while close to the bottom of the cycle, the London fraternity mistakes a cyclical downturn for a permanent change in its fortunes and embarks on expansion.

The results of this in the past two downturns had been "catastrophic", Hitchings told his audience.

Like many others, the cyclical downturn that began in 2004 has also witnessed expansion - but it has generally been away from the underwriting room, with new 100 percent-owned company vehicles springing up in the US, Bermuda and Zurich.

Growth is always dangerous and it would always cause "accidents", Hitchings concluded.

Today we received further confirmation of the enduring appeal of Lloyd's as the world's pre-eminent platform for global specialty (re)insurance.

This took the form of the sale of the legacy portfolio of Brit Insurance Limited, Brit's UK company platform.

Whilst executed flawlessly, and certainly without consequences that were anything approaching catastrophic, Brit's strategic expansion out of Lloyd's and into the UK commercial insurance arena played exactly in tune with Hitchings's thesis described above.

For better or worse the strategy did not endear Brit to investors and eventually left the group vulnerable to takeover. That Brit's new owners should want it to be a 100 percent Lloyd's business is a great endorsement of the venerable London institution.

It is also interesting that while major players that have been both in and out of Lloyd's may now be rediscovering its virtues, the prospects for Names capital are looking so potentially exciting.

If it was true that some companies spurned Lloyd's platforms to grow outside Lime Street, it was doubly true that inside Lloyd's corporate capital spurned its private cousin over the period of expansion.

Meanwhile, the dwindling Names have continued to prosper and outperform as equity and debt investors' interest has cooled.

If no-one shows any enthusiasm in the next proper hard market it could well be an entrepreneurial, rejuvenated and streamlined high net worth-backed sector that gets offered all the best business opportunities.

In this context, John Nelson's call to Members' agents to come up with innovative and efficient structures to bring private capital to bear on the marketplace should be welcomed wholeheartedly and could just be Lloyd's secret weapon if and when current rating inadequacy catches up on some of its competitors.