Lloyd’s: An Overview of the Market Keith Stern: UK Regional Manager October 2014

Agenda History Market Structure Financial Strength Financial Results Global Reach Uk insurance market & Lloyd’s Accessing the market Coverholders Events questions

History

From Coffee House… First known reference to Edward Lloyd’s coffee house in Tower Street (London Gazette 18-21 February 1688) In February 1688, Edward Lloyd’s Coffee House in Tower Street was referred to for the very first time in the London Gazette. Nevertheless, what Lloyd’s coffee house specialised in was information about shipping. A driven man, Lloyd made sure he provided intelligence second to none. Edward Lloyd was not involved in risk transfer – he was an entrepreneur who recognised the value in his coffee house being seen as the best place to go for merchants to find the latest shipping news. Over time, these merchants came together to insure their cargoes in these coffee houses, which has ultimately developed into the global market place it is today. Although Lloyd’s has moved location a number of times over the centuries, some of the earliest ‘underwriters’ accepted the strength of the Lloyd’s brand and kept the name, even after moving away from the coffee house origins.

…To every type of Insurance 1877 - Lloyd’s first non-marine policy was written at Lloyd’s by Cuthbert Heath, a prominent Lloyd’s underwriter, writes Lloyd’s first reinsurance contract for a fire insurance company, which subsequently provides cover for profit losses as a consequence of fire. (source: http://www.lloyds.com/lloyds/about-us/history/corporate-history/the-early-days) N.B. The 1st motor policy at Lloyd’s was written in 1904 which described the car as a ‘ship navigating on land’. 1906 - The 1906 San Francisco earthquake - which cost UK insurers £17.5 billion at today’s values – bolstered London’s standing in the US and led to innovation in the form of the first excess of loss reinsurance policies underwritten by Cuthbert Heath at Lloyd’s. 1911 - The first-ever aviation insurance policy was written by Lloyd's in 1911. Lloyd’s stopped writing policies a year later after bad weather caused a series of crashes, but in 1919, far-sighted underwriter Cuthbert Heath started the British Aviation Insurance Association. In 1921, the venture was closed ‘in view of the fact that there seems to be no immediate future in aviation insurance and that there is no business to be had’. The Association was revived in 1930. 1969 – By the time Edwin “Buzz” Aldrin and Neil Armstrong set foot on the surface of the moon, Lloyd’s had already been providing innovative insurance products for satellites. In 1965 The first space satellite insurance is placed, covering physical damage to the Intelsat 1 on pre-launch which marked the beginning of a new era for insurance. Today, space and satellite insurance is an area in which Lloyd’s continues to pioneer. (Source: http://www.lloyds.com/lloyds/about-us/history/innovation-and-unusual-risks/pioneers-of-travel) 1877 1906 1911 1969

PIPER ALPHA 1988 EXXON VALDEZ 1989 HURRICANES 1989 ASBESTOS 1980s- 1990s At this time, the Society entered the most turbulent and traumatic time in its history, facing up to a series of problems which would, in time, lead to the birth of the modern, robust and secure Lloyd’s we know today. Lloyd’s had long known that some types of cover if offered were very risky. But suddenly, unexpectedly large legal awards made in US courts on asbestos, pollution and health hazard claims, some dating back 40 years or more, resulted in huge losses to Names. The financial challenges faced by the market were compounded when, between 1987 and 1989, a series of gigantic oil, wind and fire claims, including the loss of the North Sea oil rig Piper Alpha, came into Lloyd’s. Costs were in their billions. David Rowland was appointed as first full-time remunerated Chairman of Lloyd’s, initiating sweeping reforms to save Lloyd’s after the catastrophes that had threatened its collapse. He spearheaded the establishment in 1996 of Equitas, a special vehicle into which all pre-1993 business would be transferred by reinsurance-to-close – at a cost of over $21bn. There were losses for many Names, but Lloyd’s had survived. (Source: http://www.lloyds.com/lloyds/about-us/history/corporate-history/1800s-to-modern-day)

…and an appetite for unusual risks requiring innovative solutions Oscar jewels http://www.lloyds.com/News-and-Insight/News-and-Features/Market-news/Specialist-2008/Jewels_and_dresses_worthy_of_iconic_status_16012008 Ilja Gort has insured his nose for €5m. A Dutch wine maker has insured his nose for €5m to cover against any incident that could threaten his livelihood. http://www.lloyds.com/News-and-Insight/News-and-Features/Market-news/Specialist-2008/Gort_nose_Lloyds_cover_makes_sense_19032008 - GREAT BBC VIDEO INTERVIEW ON THIS LINK More recently, Troy Polamalu’s hair for the Head & Shoulder’s division of Procter & Gamble http://www.lloyds.com/News-and-Insight/News-and-Features/Market-news/Specialist-2010/Lloyds-puts-1m-price-on-Polamalus-head Coffee tongue - Lloyd's has insured Costa Coffee's Italian Master of Coffee's tongue http://www.lloyds.com/News-and-Insight/News-and-Features/Specialist/Specialist-2009/Costas_chief_taster_insured_for_10_million_09032009 Space insurance - As NASA’s space shuttle programme comes to a successful end, commercial space companies are queuing up to take that giant leap into space – and underwriters at Lloyd’s are working with them to make sure they have the insurance cover they need. http://www.lloyds.com/News-and-Insight/News-and-Features/Market-news/Specialist-2011/Insurers-prepare-for-a-new-era-in-space Smile - Ugly Betty star America Ferrera's smile insured at Lloyd's for $10m. The policy was bought by at home teeth-whitening product Aquafresh White Trays as part of a promotion involving the celebrity which aims to raise money for US charity Smiles for Success. Santa Claus - As Santa to the stars, Brady White has insured his beard at Lloyd's. Even the most famous delivery man in the world needs insurance - so when Father Christmas wanted to insure his long white beard there was only one place to go – the world’s leading, specialist insurance market. Brady White is an actor turned professional Santa who visits the likes of Pamela Anderson and Rene Russo and is the face of Father Christmas for Macy’s department store in New York. Known as “Santa to the Stars”, he has had his whiskers protected by Lloyd’s for a decade. (Source: http://www.lloyds.com/news-and-insight/news-and-features/archive/2006/12/its_a_white_christmas) In the 1940s executives at 20th Century Fox had the legs of Betty Grable insured at Lloyd’s for $1 million each. Rolling Stones’ guitarist Keith Richards. http://www.lloyds.com/News-and-Insight/News-and-Features/Archive/2006/10/Famously_providing_insurance 7

The Lloyd’s market is known for its specialist expertise… The vast majority of Lloyd’s business is made up of large, complex risks that are essential to enable and support global trade: Property Catastrophe, Energy, Marine, Aviation, Space are amongst the largest classes of business written at Lloyd’s 8 8

Market Structure

Lloyd’s Key Characteristics Lloyd’s is a market, not a company The Lloyd’s market insures complex and specialist risks and SME business London based international business (UK is our second largest market = £3.5bn) Regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) Products are distributed via Lloyd’s brokers, coverholders and syndicate service companies. Lloyd's is probably the world's best known - but least understood - insurance brand This is because Lloyd's is not an insurance company but a market place, where its members (syndicates) come together to write insurance and reinsurance Supporting capital is provided by investment institutions, specialist investors, international insurance companies and individuals Over 325 Years of doing business – established when a number of shipping merchants came together to insure their cargo’s and has developed into the global market place it is today

Lloyd’s market structure Corporation of Lloyd’s Management Coverholders 56 Managing Agents 200 Lloyd’s Brokers Service Companies Policyholders Members 91 Syndicates Direct Corporate Reinsurance Individual Underwriting BUSINESS FLOW (£26,106m) Policyholders Businesses, organisations, other insurers and individuals from around the world who want to protect themselves against risks that could affect them. They approach a broker and explain their individual needs. Members Members of Lloyd’s provide the capital to support syndicates’ underwriting. Members include some of the world’s major insurance groups and companies listed on the London Stock Exchange, as well as individuals and limited partnerships. Syndicates Underwriters decide which risks a syndicate will underwrite and on what terms. Much of Lloyd’s business is conducted in the Underwriting Room where face-to-face negotiations take place with Lloyd’s brokers regarding the risks they want to place at Lloyd’s. Managing agents These are companies set up to manage one or more syndicates. The managing agent employs the underwriting staff and handles the day-to-day running of a syndicate’s infrastructure and operations. Brokers Brokers provide advice to clients, negotiate terms with underwriters and service the business during the life of a policy. Depending on the complexity or size of the risk there may be more than one broker in the distribution chain. Corporation of Lloyd’s The Corporation oversees and supports the market and promotes Lloyd’s around the world. This includes determining the capital that members must provide to support their proposed underwriting, working with management of underperforming syndicates to improve performance, undertaking financial and regulatory reporting for the Lloyd’s market, managing and developing Lloyd’s global network of licences and the Lloyd’s brand. CAPITAL PROVISION (£60,782m) www.lloyds.com/directories

A DYNAMIC AND DIVERSE MARKETPLACE At December 31st 2013, the Lloyd’s marketplace was home to 56 “live” managing agents that manage 91 syndicates

Financial Strength

INDEPENDENTLY ASSESSED Lloyd’s Ratings INDEPENDENTLY ASSESSED In the eyes of leading ratings agencies, Lloyd’s is viewed as enjoying robust capital reserves: Standard and Poor’s: ‘A+’ (strong) Fitch Ratings: ‘AA-’ (very strong) A.M. Best: ‘A’ (excellent) The Lloyd’s financial strength ratings apply to every policy issued by every syndicate at Lloyd’s since 1993. At the time of writing (January 2014), Lloyd’s is on a positive outlook with all 3 of these rating agencies ` Lloyd’s Annual Report 2013

OUR CHAIN OF SECURITY LINK ONE: SYNDICATE ASSETS (£42,342m) Before writing business, a syndicate must put up funds to cover their own share of claims These funds are the first port of call when paying policyholder claims Lloyd’s financial strength is derived from the ‘Chain of Security’: The 1st link is syndicate assets – the 1st call for any claims Figures correct as at December 2013

OUR CHAIN OF SECURITY LINK TWO: MEMBERS’ FUNDS AT LLOYD’S (£15,242m) Every member (corporate or individual) must provide sufficient capital to support their underwriting These funds are held in trust for the benefit of policyholders and used only if the syndicate assets have been exhausted The 2nd link are the Member’s Funds at Lloyd’s – every Member has to put up funds in order to be able to participate in the Lloyd’s market Figures correct as at December 2013

OUR CHAIN OF SECURITY LINK THREE: LLOYD’S CENTRAL FUND (£3,198m) The Central Fund includes members’ annual contributions and funds issued by the Corporation of Lloyd’s If a syndicate has failed to meet its liabilities and the two previous links proved insufficient, the Central Fund can provide a final reserve to cover those outstanding liabilities The Central Fund is there to protect policyholders in case any underwriting member should be unable to meet his or her liabilities out of Syndicate Trust Funds, funds deposited at Lloyd's, reserves, and personal assets outside of Lloyd's. An annual contribution is made to this fund by every Lloyd's member. Background (from www.lloyds.com) 1923 Harrison’s Folly – and the creation of the Central Fund The Lloyd’s of today is financially sound – but in addition to this, policyholders have the added security of knowing that, should an underwriter or syndicate fail and be unable to pay its claims, there is a central fund to fall back on. The Central Fund is a fund of last resort. It comes into play if a member has insufficient assets to cover a claim on an individual basis; in this case, and at the discretion of the Council of Lloyd’s, assets in the Central Fund can be allocated to cover that member’s liabilities. The idea for the Central Fund came about after underwriter Stanley Harrison had pursued a complex motor/credit insurance line and run up debts of over £360,000. He confessed to the Chairman, Raymond Sturge, who called a meeting, telling underwriters that if Harrison’s debts weren't paid in full, the name of Lloyd’s ‘will never recover in our lifetime’. For the first time, the principle of mutuality appeared, the combined members agreeing unanimously to pay a share of the debts proportionate to their premium income. Shares ranged from £10,000 to eight pence. Sturge described it as an ‘heroic conclusion’. Harrison’s Folly had laid the foundations for what came to be known as the Central Fund, which was officially created four years later. (source: http://www.lloyds.com/lloyds/about-us/history/corporate-history/1800s-to-modern-day) Figures correct as at December 2013

Financial Results

Strong U/W Results 2009 2010 2011 2012 2013 Gross written premiums (mns) 35,376 £21,973 35,469 £22,592 36,389 £23,477 40,545 £25,000 $43,698 £26,106 Combined ratio 86.1% 93.3% 106.8% 91.1% 86.8% Investment return 2,848 £1,769 1,975 £1,258 1,528 £955 2,084 £1,311 $1,406 £839 Result before tax (mns) 6,227 £3,868 3,446 £2,195 (800) (£516) 4,517 £2,771 $5,734 £3,205 Return on capital (pre-tax) % 23.9 12.1 (2.8) 14.8 16.2 Whilst it is too early to know the results for 2013, here we can see the past 5 years’ results Source: Lloyd’s Annual Report 2013. All figures as at 31 December 2013

2013 major claims Significantly below long term average A snapshot of major claims for Lloyd’s over the past 16yrs Source: Lloyd’s 2013 Annual Results (March 2014) Claims in foreign currency translated at the exchange rate prevailing at the date of loss

Lloyd’s outperforms peers Combined ratio We have changed our primary peer group used to benchmark our performance to a group of companies which we think more accurately reflects Lloyd’s business mix. The companies are derived from S&P’s, AM Best’s, and Fitch’s own Lloyd’s peer group. Peer group comprises of : Arch, AIG, Ace, Everest Re, Munich Re, Partner Re, Hannover Re, SCOR, Swiss Re, Mapfre, XL. Peer group insurance/reinsurance : 57%/43% Lloyd’s insurance/reinsurance : 62%/38% Peers Combined Ratio Higher than Lloyd’s ACE 87.9% AIG 101.3% Hannover Re 95.1% SCOR 92.5% Mapfre 96.1% XL 92.5% Munich Re 93.5% Lower than Lloyd’s Everest Re 84.5% Arch Capital 86.3% Partner Re 85.2% Swiss Re 83.3% Source: Lloyd’s pro forma financial statements, Dec 2013 Peer group formed of 11 companies operating in the US, European and Bermudan markets

Global Reach

2013 Lloyd’s Premiums by region Europe (including UK [18%]) 33% US (including Canada) 43% Central Asia & Asia Pacific 12% 13% 2012 12% 2011 10% 2010 9 % 2009 Rest of the World 4% US & Canada 41% 2012 44% 2011 43% 2010 45% 2009 Other Americas 8% Other Americas 8% 2012 8% 2011 7% 2010 6% 2009 Lloyd’s global business is still heavily reliant on the English speaking world, although in recent years the faster growing parts of the world are starting to change this. As the global economy rebalances, Lloyd’s has launched Vision 2025 to better position the market in future Europe + UK 15% + 18% = 33% 2012 16% + 18% = 34% 2011 16% + 20% = 36% 2010 16% + 20% = 36% 2009 Sources: Lloyd’s Annual Reports (2008 – 2013): http://www.lloyds.com/Lloyds/Investor-Relations

Market Development Scope 2014 Lloyd’s Office Network Europe North America Europe www.lloyds.com/AMERICA 4 1 3 1 3 2 1 3 3 3 3 3 3 3 3 2 2 Type Market Development Scope Territories 4 Local underwriting with co-located syndicates (or via a Lloyd’s regulated entity); Country Manager with Market Development Role China Japan Singapore Lloyd’s has a network of offices around the world South Africa, Australia, Hong Kong (SAR) Benelux, France, Germany, Ireland, Italy, Poland, Spain, Sweden, Switzerland Brazil 3 Country Manager with Market Development Role UK Canada, US Northeast, US Southeast, US Central & US West 2 Legal Representative for regulatory requirements Cyprus, Greece, Israel, Malta, New Zealand, India Austria, Denmark, Norway, Portugal, Lithuania Argentina, Belize, Chile Namibia, Zimbabwe, US Virgin Islands 1 Legal Representative for minimum regulatory requirements

Uk insurance market & Lloyd’s

Uk insurance market Chart: Insurance Market Leaders (2012) (based on ABI Statistics; UK domestic business only, excluding Lloyd’s; in billion GBP) 0.0 2.0 4.0 6.0 4.9 3.4 3.4 3.2 3.1 2.5 2.0 1.7 A number of regional brokers and MGAs have made it clear to me, and to Lloyd’s Underwriters and Brokers, that they are turning away from the companies markets and looking to Lloyd’s because they have become disillusioned with the levels of service, support and product quality from players such as RSA and Aviva. Next we will take a look at some broad trends in the market using AM Best’s analysis of regulatory returns for property, motor and liability. Emphasise that this is very high level! 1.7 1.7 Almost 75% of the market is dominated by these 11 players 1.4

Lloyd’s Premium Income 2008-2013 by Class of Business Lloyd’s UK Premium income Lloyd’s Premium Income 2008-2013 by Class of Business Split % Direct: RI 59:41 55:45 54:46 53:47 51:49 55:45

99% of UK businesses are SME Swot analysis Lloyd’s in UK Distribution model - network of coverholders and service companies. Brand - results of brand survey are encouraging. STRENGTHS Accreditation of new Lloyd’s brokers and coverholders Ratings and Reserves Perception issues on claims and contract certainty. Accessibility for regional brokers and MGAs Competition from the companies market. WEAKNESSES Absence of Lloyd's regional offices. OPPORTUNITIES Becoming more active regionally. Some disaffection between regional brokers and MGAs and the companies market. Building new relationships - broker networks/cluster groups (£6.5bn premiums in their control) Extended programme of events/activities. 99% of UK businesses are SME Growth of aggregators and comparison sites in SME sector. Need to stay ahead of the game re: online trading. Continuation of prolonged soft market conditions. New regulatory regime in UK (FCA & PRA) Volatility of the UK economic recovery. THREATS (Challenges)

Accessing the market

How to access this channel Access to Lloyd’s for EU Brokers This roadmap is for local Brokers who are seeking access to the Lloyd’s Market for a local client How to access this channel Placement Risk Carrier Via Local Service Company Lloyd’s Managing Agent Syndicate(s) Contact local Country Manager >www.lloyds.com/offices Access Service Company details in the Coverholder Directory > www.lloyds.com/directories/coverholders Via Local Coverholder Local Broker / MGA with binding authority, Underwriting Agency Lloyd’s Managing Agent – direct or via a Lloyd’s Broker Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access the Coverholder Directory > www.lloyds.com/directories/coverholders Via Eu Service Company (crossborder) Lloyd’s Managing Agent Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access Service Company details in the Coverholder Directory > www.lloyds.com/directories/coverholders Via Eu Coverholder (crossborder) local Broker / Agent with binding authority, Underwriting Agency Lloyd’s Managing Agent – direct or via a Lloyd’s Broker Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access the Coverholder Directory > www.lloyds.com/directories/coverholders Via Lloyd’s Broker Lloyd’s Managing Agent Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access Directory of Lloyd’s Registered Brokers www.lloyds.com/directories/brokers Become a coverholder In countries with established licence – approval via Delegated Authority Approval Process (contact Managing Agent and Lloyd’s Broker) Lloyd’s Managing Agent – via a Lloyd’s Broker or direct Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access information for prospective Coverholders > www.lloyds.com/coverholders Link to Adam’s slides – the current roadmap illustrates the channels that we currently have to fulfill our objectives. Going forward we want to open up the market through technology i.e. to open up the market even more and to improve our exposure to regional brokers around the country. - Adam to explain how the initiatives to achieve our aims are already in play. Become a managing agent approved broker Become a non Lloyd’s Registered Broker - approval via individual Managing Agent registration process (direct contact) Lloyd’s Managing Agent Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access information on Managing Agents – non Lloyd’s Brokers > www.lloyds.com/nonlloydsbrokers Become a Lloyd’s registered broker - approval via Lloyd’s Broker Approval Process Lloyd’s Managing Agent Syndicate(s) Contact local Country Manager > www.lloyds.com/offices Access information on becoming a Lloyd’s Registered Broker > www.lloyds.com/brokerregistration 30

coverholders

Improvements to the coverholder model Prior to July 2010 No applicant coverholder had been visited by a Lloyd’s representative No Lloyd’s networking opportunities for coverholders Restricted access to the Lloyd’s brand Lack of best practice guidelines UK Population: 700 coverholders Today Visited all applicants (ex-City of London) since 2010 - 95% have been approved Held coverholder conferences A number of enhancements have already been made - faster turnaround times, branch approvals, broker sponsored approvals, and more informative welcome packs Greater access to the brand, a coverholder toolkit and enhanced guidelines online. Monitoring how we compare to the companies market (‘gap’ analysis) and enhancements to the rules on sub-delegation/internet trading UK Population: 1600 coverholders (‘grand-fathered’ 600 restricted coverholders this year)

Coverholders (& Service Companies): Regional Distribution www.lloyds.com/directories Number of Coverholders August 2014: Total 1649 Number of Service Companies August 2014: Total 90 Coverholders South East: 363 London: 295 East: 241 South West: 138 West Midlands 137 East Midlands 124 North West 119 Yorkshire 75 Wales 59 Scotland 34 North East 28 Jersey 7 Guernsey 6 Isle of Man 4 Northern Ireland 15 Isle of Wight Service Co South East: 7 London: 42 East: 10 South West: West Midlands 8 East Midlands 1 North West Yorkshire 5 Wales Scotland North East Jersey Guernsey 2 Isle of Man Northern Ireland Isle of Wight One area of significant growth for Lloyd’s UK business has been the growth of the coverholder and service company models. In 2010 there were 73 service companies and approximately 500 coverholders. We have examined ways in which we can raise Lloyd’s profile in the regions via the coverholder model through making the brand more accessible to them. We can see where Lloyd’s coverholders and service companies are located regionally in the UK: London, the south east and the east of England account for 75% of Lloyd’s coverholders. Service companies are a little less concentrated down South, with significant presence of S/C’s in West Midlands, Northwest and Yorkshire, Source: Market Intelligence based on: Lloyd’s Delegated Authorities

Events where can you meet lloyd’s underwriters & brokers?

2015 events schedule Compass Broker Services (Whittlebury Hall) – 25th/26th February 2015 – 4 underwriters BIBA (Manchester) – 13th/14th May – 10 underwriters AIRMIC (Liverpool) – 15th/16th/17th June – 22 underwriters and brokers Broker Expo West (Bristol) – 24th Sept 2015 – 4 underwriters Lloyd’s Meet the Market (Birmingham) – October – 100 market practitioners Broker Expo North (Coventry) – 12th November – 5 underwriters BIBA Scotland – November – 4 underwriters Contact me at keith.stern@lloyds.com

Questions? We look forward to working with you