GIRO40 Lloyd s Update 8 11 October, Edinburgh

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GIRO40 Lloyd s Update 8 11 October, Edinburgh Lloyd s Update Results & Reserves Syndicate Capital 2014 YoA Lloyd s and Solvency II 10 Oct 2013 2 1

Half year update - Results & Reserves 10 Oct 2013 3 Lloyd s Update Results & Reserves Half year results Prior year reserve experience Reserve margins 10 Oct 2013 4 2

Strong performance offset by reduced investment return m June 2011 June 2012 June 2013 % Change Dec 2012 Gross written premium 13,534 14,768 15,496 5 25,500 Underwriting result (1,138) 1,104 1,261 26 1,661 Combined ratio % 113.3 88.7 86.9 91.1 Investment return 1 548 619 247 (60) 1,311 Profit/(loss) before tax (697) 1,530 1,379 (10) 2,771 10 Oct 2013 Source: Lloyd s pro forma basis, 1 Technical account, 2 Return on syndicates assets, members funds 5 at Lloyd s and central assets, 3 Non-technical account Lloyd s performance is in line with peers Sources: i) Lloyd s pro-forma financial statements, ii) Insurance Information Institute, iii) Reinsurance Association of America (iv) Company data (8 European companies: 17 Bermudian companies) 10 Oct 2013 6 3

2013 major claims well below average 5 yr H1 average 1,114m H1 average 406m Source: Lloyd s pro forma basis. Indexed to June 2013 Claims in foreign currency translated at the exchange rate prevailing at the date of loss 10 Oct 2013 7 and prior years continue to benefit from good experience and initial reserve practice COMBINED RATIOS AY excl. Major claims Major claims Prior year reserve movements Calendar year AY excl. Major claims Major claims Prior year reserve movements Source: Lloyd s pro forma basis Calendar year 10 Oct 2013 8 4

Favourable experience across most years 10 Oct 2013 9 but less so than at year end 10 Oct 2013 10 5

and across all classes of business 10 Oct 2013 11 Observed reserve releases in line with benchmarking results Prior year result: 0.8bn Over 2/3rd from syndicates with a reserve benchmark index of 1 or 2 10 Oct 2013 12 6

Reserve margins in capital setting have increased significantly Source: Provisional TPD excluding life syndicates. Excludes ULAE 10 Oct 2013 13 Summary Half year profit of 1.4bn, characterised by an absence of major cats but offset by low investment returns Continued prior year reserve releases, supported by favourable experience across most classes and years Largest proportion of reserve releases coming from the strongest ranking syndicates Surplus remains stable but the market is tending towards claiming the maximum for capital setting Claimed margins will face increased scrutiny and challenge 10 Oct 2013 14 7

Syndicate Capital 2014 YOA 10 Oct 2013 15 2014 YOA Syndicate capital Results still pending No big movements at the market level Non-aligned syndicates finalised 18 th October Today: an update on changes to our review tools 10 Oct 2013 16 8

Lloyd s SCR review: changes for 2014 YOA Agents were asked to provide more data this year Form 313: split of LCM vs. non-lcm cat claims Form 314 (entirely new) Supplementary Questionnaire (entirely new) Why was this asked for? How is it being used? Let s look at an example: the diversification credit 10 Oct 2013 17 What is the diversification credit? Diversification credit ( ) at a given percentile = (aggregate result with full dependence) LESS (aggregate result with selected dependence) Diversification credit (%) is a % of full dependence result It is a very material (and contentious) driver of the SCR Occurs whenever risks are aggregated Often exceeds e.g. 25% at the 99.5 th for insurance risk Expert judgment is key consideration 10 Oct 2013 18 9

What s the objective? The goal is an appropriate credit and equity between syndicates This isn t straightforward there are many moving parts The shape/skewness of the marginal distributions The degree of dependency The relative size of the distributions The number of distributions All of the above can/should vary between syndicates 10 Oct 2013 19 Existing tests have uses and limitations Some tests/rules in use at Lloyd s: Conservation of risk : the SCR is larger than any component Sum of Squares Test : actual vs. aggregate with nil correlation Input/output correlations: are they sufficient? Compare stress at 99.5 th, e.g. premium risk must exceed cat Each of the above has its limitations This year: we have additional information and more tools Let s look at an example using Syndicate 9999 10 Oct 2013 20 10

Ratio of per centil e to mean Ratio of per centil e to mean 14/10/2013 Case study: Looking at the drivers The goal is to better understand the source E.g. low dependencies and/or highly skewed distributions? Implications are obviously different Today: premium risk and reserve risk as an example The same techniques can be used elsewhere e.g. between COB within reserve risk 10 Oct 2013 21 Skewness of distributions (1st driver) Ratio of key percentiles to the mean Synd 9999 is a bit below average at 99.5th 135% 160% 130% 125% 120% Market (wtd average) SYND 9999 150% 140% Market (wtd average) SYND 9999 115% 130% 110% 120% 105% 100% 110% 95% 100% 90% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% TOTAL r eser ve CLAIMS per cent il e 90% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% TOTAL Pr emium r isk ex Cat CLAIMS per cent il e Limitation: a peer group is more relevant but smaller and less credible 10 Oct 2013 22 11

Joint exceedance pr obabil ity 14/10/2013 Dependencies (2 nd driver) Probability of both risks going pear-shaped Synd 9999 is near average at the 99.5th 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Per cent il e of pr emium/ r eser ve r isk Fully Dependent SYND 9999 Independent 0.600% 0.500% 0.400% 0.300% 0.200% 0.100% 0.000% 99.0% 99.5% 100.0% Limitation: simulation error becomes an issue at higher percentiles Fully Dependent Market SYND 9999 Independent 10 Oct 2013 23 Relative size and number of risks (3 rd & 4 th drivers) The credit will be larger if (all else being equal) The risks are of similar size There are more risks (e.g. reserve classes) Max Diversification Ratio = [SST( =100%) SST( = 0%)] / SST( = 100%) Useful index for comparing diversification potential But it has the limitations of the SST 10 Oct 2013 24 12

Diversification at Insurance risk 99.5th 14/10/2013 Diversification credit (result) Synd 9999 is just below average (surprise!) Also have the results from the Qualitative Q aire 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 25th percentile min mean max 75th percentile Syndicate 9999 5.0% 0.0% Value 10 Oct 2013 25 Next steps Lloyd s to review data from September submission and Supplementary Questionnaire The intention is to issue further guidance on diversification (post completing the reviews) 10 Oct 2013 26 13

Lloyd s and Solvency II 10 Oct 2013 27 Where is Lloyd s in terms of Solvency II? Lloyd s is Solvency II ready SII project transitioned into business as usual PRA review of Lloyd s internal model nearing completion PRA model approval won t be granted until SII in force PRA feedback pushing for some refinements Will be addressed over the coming year 10 Oct 2013 28 14

Where is Lloyd s in terms of Solvency II? Benefits Better modelling & parameterisation Better articulation of risk appetites Better link between capital and risk management 10 Oct 2013 29 Better Modelling & Parameterisation Reserve Volatility (attritional) 50 risk groups, 20 years of account, 1 year and ultimate basis 2000 parameter values Challenge How to apply expert judgment consistently How to explain expert judgment Use structured approach, based on consistency considerations 10 Oct 2013 30 15

Reserve Volatility Consistency considerations At any dev period, volatility to ultimate one year volatility For volatility to ultimate, UW volatility reserve volatility Ultimate reserve volatility decreases with increasing dev year For older dev periods, one year volatility approaches volatility to ultimate Volatility for a high level class < volatility for subclasses At late stages of development, volatility tends to constant 10 Oct 2013 31 Reserve Volatility Structured Review Steps 1. Ultimate volatilities By high level class of business First six development years only 2. 1 year to ultimate ratios 3. Uplift for subclasses 4. Uplift for influence of reserving cycle on casualty 5. Extend to older development years 10 Oct 2013 32 16

Reserve Volatility Direct estimation based on reserve change ratios Over one year To ultimate Reserve t 1 Paid during the year Reserve Reserve n ow Paid since t Reserve t t Note: the formulae given here are simplified for presentation purposes and ignore credit for future profit, adjustments for premium development and rate changes 10 Oct 2013 33 Reserve Volatility Sample CoVs based on sliding window of development years Eg CoV for dev year 2 is based on data from dev years 1-3 (ignoring latest three years of account for ultimate volatility) YoA 1 2 3 4 5 6 7 8 2005 0.67 0.74 0.77 0.83 0.89 0.91 0.95 0.95 2006 0.81 0.81 0.87 0.86 0.92 0.91 0.88 2007 1.15 1.05 1.08 1.13 1.01 0.97 2008 1.32 1.26 1.25 1.09 0.99 2009 1.08 1.10 1.03 1.04 2010 1.08 1.02 0.99 2011 1.06 1.05 2012 1.18 CoV 0.23 0.21 0.17 0.14 0.10 0.05 10 Oct 2013 34 17

Reserve Volatility high level class Ultimate reserve change volatilities 1.00 0.90 1year to ultimate volatility ratios 0.80 Excl_CAT_Sample_CV Selected 1year reserve change volatilities 1 2 3 4 5 6 Development year Excl_CAT_Sample_CV Selected 0.70 0.60 0.50 0.40 0.30 0.20 0.10 - Excl_CAT_Sample_CV Selected 1 2 3 4 5 6 Development year 1 2 3 4 5 6 Development year 10 Oct 2013 35 Reserve Volatility Uplift for risk groups within one high level class Ultimate volatilities by sub class - sample CoVs Ultimate volatilities by subclass - fitted CoVs 1 2 3 4 5 6 Development year 1 2 3 4 5 6 10 Oct 2013 36 18

Summary and reminders of dates Deadline US Trust Fund SAOs 14 February 2014 Worldwide SAOs 20 February 2014 SAO Reports 31 March 2014 Please submit two copies of the SAO report: one of which must be a hard copy, electronic copies are encouraged Jerome Kirk, Market Reserving & Capital, G5, Lloyd s, One Lime Street, EC3M 7HA electronic copies via email to SAOReports@lloyds.com Reserve Margins FAQs: we expect the Data Accuracy Statement (DAS) to be signed by a Director or formally recognised by the Board signing actuary rotation Governance one pagers upcoming events: Lloyd s Seminar 8 November Signing Actuaries Forum 2 December 10 Oct 2013 37 Questions Comments 10 Oct 2013 38 19