Lloyd’s Does Well in a Tough Year

Lloyd’s year-end review shows that, like the rest of the industry it faced a number of challenges in a difficult year. Low interest rates diminished investment returns for insurers, while the soft market provided little scope for premium increases. “Plenty of industry capacity meant that rates in most lines of insurance and reinsurance continued to soften,” Lloyd’s explained on its web site.

Despite these difficulties, however, Lloyd’s managed rather well, following its stellar results – a £3.9 billion ($6.01 billion) profit – in 2009. 2010 started with several natural disasters – the earthquakes in Haiti and Chile and windstorm Xynthia in Europe. Lloyd’s losses from the Chile quake are approximately $1.4 billion.

Lloyd’s Chief Executive, Richard Ward sounded a warning note, indicating that the market could not afford to be “complacent” and must focus on “profitable underwriting and sound risk management.”

Lloyd’s interim results for the first half year of 2010 showed that profit had declined to £628 million ($968 million) from £1.322 billion ($2.04 billion) in the same period of 2009. The result reflected significant claims and extremely challenging investment conditions in the first half of the year.

Lloyd’s pointed out that “catastrophe claims in 2010, particularly the first half, were relatively high. There were over three hundred catastrophe events in 2010, costing the insurance industry $38 billion, almost double the losses in the previous year,” according to figures compiled by Aon Benfield.

By contrast the industry dodged the bullet in the second half of 2010, as one of the most active Atlantic storm seasons on record kept largely clear of the U.S.

The other large loss for the Lloyd’s market was the explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico. Losses for Lloyd’s insurers were estimated at between $300 and $600 million.

Lloyd’s noted, however, that despite the difficult trading environment, it “has been able to capitalize on opportunities and play to its strengths. According to reinsurance broker Guy Carpenter, in the past two years Lloyd’s operating performance and capitalization has proved resilient. Market share gains, rating affirmations and continued strong investor interest prevailed.”

In fact the Lloyd’s market is “experiencing a period of unprecedented profitability and growth, says Guy Carpenter. It has almost doubled in size since 2001 in terms of underwriting capacity through a combination of organic growth, new entrants and positive exchange rate movements.”

As a result of its “disciplined underwriting and strong competitive position” the rating agencies expressed their confidence. Fitch and Standard & Poor’s affirmed their ‘A+’ ratings on the Lloyd’s market.

Lloyd’s pointed out that Fitch noted the market’s “strong financial profile” and “robust operating performance” in 2010, indicating that it had been achieved against an uptick in major loss events in the first half of the year.

In its ratings report, S&P cited the market’s strong competitive position, unique brand, its position as the world’s largest subscription market, and improving systems and processes. The attractiveness of Lloyd’s is demonstrated by the continual flow of new entrants to the Market in recent years, S&P added.

Source: Lloyd’s of London