10 August 2020
The 330-year-old institution might have made its name with insurance, but in recent years its investments, with the help of third-party asset managers, have countered heavy losses from the liability side of the balance sheet. Is the old dog learning new tricks, David Walker asks
Senior executives at Lloyd's have long said that the investment performance in Lime Street is an outcome, not a conscious goal.
But in recent times the general accounts of syndicates and the investment managers running them have done much of the heavy lifting in results, while natural catastrophes battered the underwriters.
Lloyd's 'day job' may be as an insurer, but it must surely be thankful that in recent years investing is a sideline gig.
Last year it made losses on insuring, but made £3.5bn ($4.6bn) on investing including some "exceptional gains" on equities and "bond investments [that] also performed well". That produced an overall result of £2.5bn.
In 2018, the underwriting result was a £1.1bn loss, while investing made £504m, including £333m from syndicates, as losses on risk assets were offset by returns from cash and high-grade bonds.
And in 2017, insuring lost Lloyd's £3.4bn, while investing made it £1.8bn.
While the enormous natural disasters losses of 2017 and 2018 might have been an anomaly, one might still speculate that syndicates knew where to put their investments better than where to expose their liabilities.
That all said, many syndicates do still emphasise, or at least suggest, that underwriting comes first. They are right to do so – two years of underwriting pain is a drop in the ocean for a 330-year old institution.
Chaucer, which is behind the nuclear risks Syndicate 1176 that employs Goldman Sachs Asset Management, said: "investment activities are complementary to the primary underwriting activities of the business and should not therefore divert or utilise financial resources otherwise available for insurance operations."
Whether or not all other syndicates agree, examination of their 2019 annual reports suggests investing is not always only a peripheral support for meeting liabilities.
For one thing, they have enlisted some of the world's best-known institutional asset managers, including BlackRock, Conning, Goldman Sachs Asset Management and Wellington, to run their £64.7bn of balance sheet investments - and in the 2019 financial statements many syndicates openly thanked their managers for healthy performance.
And for another, the investment results are sometimes as enviable as the allocations are eclectic.
Beazley's Syndicate 623, for instance, is a holder of $71.8m of 'capital growth assets' that include hedge funds ($53.7m), illiquid credit ($3.1m) and equity funds ($15m), alongside more familiar staples of sovereigns ($167m), corporate bonds ($264m) and high yield assets ($25m).
The result? An eye-watering - by today's standards, at least - total return of 5%, or $28.9m, in 2019.
The syndicate said it was "the highest in recent years, supported by falling yields, declining credit spreads and strong equity markets". It was well up from 0.6% ($3.5m) in 2018.
Even the syndicate's 'core' investment portfolio, primarily of fixed and floating rate debt securities that forms 87% of the total portfolio, made 4.5% as falling yields and narrowing spreads generated capital gains.
The growth portfolio made 8.2%, versus a 2.8% loss in 2018. The syndicate said it had exploited strong markets earlier in 2019 to add "more volatile asset classes...utilising nearly all of our current appetite for investment risk," before then forsaking some available returns later last year – prescient, perhaps - as risk assets became increasingly expensive.
Beazley's syndicate has long invested in hedge funds, and is joined in an esoteric taste by Syndicate 33 of Hiscox, which holds a combined exposure to asset- and mortgage-backed securities of 11%.
Granted, that is small fry compared to the 41% it has in sovereigns and 46% in credit in its $1.5bn portfolio. But the ABS and MBS played a role in making $45.8m, or a rate of 3.1% in 2019, double that of 2018 and "broadly in line with expectations for the year".
The syndicate made particular note of the non-mainstream investments, and that its own executives and asset managers continue to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held.
"In addition to our sensible, tactical asset allocation position, our selection of asset managers benefited our return. Each manager either outperformed or equalled its respective index. 2019 has demonstrated the value of active management in volatile markets," the syndicate said.
Alliance Bernstein, Wellington and Fiera Capital Corporation got pats on the back, and a share of investment expenses and charges worth $8.9m (2018: $9.7m).
Some managers have triumphed against considerable headwinds, even if these were not always visible.
At Syndicate 1206, whose managing agency switched to Canopius from October 2019, AII Insurance Management helped improve the investment return, year on year, from £1.6m to £2.4m, as mark-to-market losses on fixed income holdings reversed.
The improvement was creditable, not least because behind the scenes the syndicate was recently undergoing a "considerable reduction in investible assets".
A number of managers have had to contend with the sizes and futures of general accounts fluctuating as Lloyd's Decile 10 programme has stopped some syndicates writing poorly-performing lines of business – with knock-on effects for investment assets backing that business.
While injecting some uncertainty into asset managers' lives the scything has been welcomed by some underwriters.
MJ Meacock, the active underwriter at SA Meacock's Syndicate 727, said: "Some of the bigger players in the room have found themselves under pressure to re-underwrite or even cull large parts of their account...this much-needed firming up in the market has been refreshing, and continues to give us some better opportunities."
COVID-19 has hit investment units first, and hardest so far, and many syndicates will probably be licking wounds. So, as the markets recover from the pummelling in Q1, the investment teams at syndicates may well also be hoping for "better opportunities" ahead.
Some syndicates have provided details on scenario and stress-testing, including results, conducted in 2019.
Beazley's syndicate 623 put itself through three climate change scenarios of physical and transitional risks because "the syndicate's stakeholders including investors, regulators and staff are increasingly interested in the financial impact of climate change".
At Ascot Underwriting's Syndicate 1414, chief executive Andrew Brooks also noted a focus on ESG as the risk team presented on "the Principles for Responsible Investment, rating agency implications, UN Global Sustainable Development Goals, the protection gap and the impact of the '2 degree world'" on Ascot.
Examples of actions that have resulted include "improving ways of acting more responsibly within our business, such as ethical procurement practices [and] identifying new products to support areas of society that are exposed to climate risk, and enabling modern working practices", he said.
That syndicate also published the results of stress-tests on its investments, which is mainly debt and other fixed income securities.
Increasing interest yields by 100 basis points would devalue the syndicate's investments by about £10.5m, Brooks said, while an increase in rates of comparable magnitude would boost the value by £10.3m.