Lloyd's stability a plus for agents
in uncertain times
In 2008 Lloyd's was able to absorb higher CAT losses & lower
investment returns; boost written premiums by 10%
By Phil Zinkewicz
The Lloyd’s of London insurance marketplace has been quiet in recent years, compared to a little more than a decade ago when that venerable institution was still trying to recover, quite publicly, from prior lawsuits filed by individual investors who were charging that syndicates had defrauded them out of hundreds of millions of dollars. There were those who were predicting Lloyd’s ultimate demise, which would have meant the largest international bankruptcy in insurance industry history.
However, by dint of serious effort as well as the creation of Equitas and the infusion of corporate capital, Lloyd’s leaders dug themselves out of the morass that threatened total destruction and, today, Lloyd’s is performing well, according to a report by Guy Carpenter & Co., the global risk and reinsurance specialist.
The report, titled “Lloyd’s 2008 Results—Resilience in a Tough Market,” finds that Lloyd’s competitive position strengthened in 2008, in the face of the worldwide financial downturn. Conservative investment allocation, coupled with effective risk management oversight, has helped position Lloyd’s to benefit from the current market turmoil, the report finds.
The Guy Carpenter report says that, in terms of operating performance:
• Lloyd’s recorded a pre-tax profit of $3.5 billion for 2008. Though half of the figure of 2007, that still represents the third best result in Lloyd’s history.
• Weakening market conditions, an increase in catastrophe events, and exceptionally challenging financial conditions accounted for the lower profits.
• Foreign exchange gains of $1.6 billion and prior year reserve releases of $2.4 billion helped keep Lloyd’s overall underwriting results positive, despite the increase in catastrophe activity.
• Lloyd’s aggregate combined ratio was 91.3% in 2008, compared to 84% a year earlier, after reductions of 2.7 points for exchange gains on non-translation of non-monetary items and 9.2 points for prior year reserves releases.
• 2008 Lloyd’s catastrophe claims rose to $3.3 billion, up from $781 million in 2007 and above the long-term average of $1.8 billion. Net losses from Hurricanes Ike and Gustav were reserved at $2.6 billion.
Reporting on Lloyd’s results by class, the Guy Carpenter briefing said that the market’s gross written premium rose by 10% in 2008 to an all-time high of just under $33.5 billion. Growth was seen in all classes with the exception of motor (personal auto), according to Guy Carpenter. The reinsurance account showed the fastest rate of growth, expanding by 15% to $11.7 billion. Underwriting performances for all classes other than marine weakened in 2008, with property, casualty, energy and aviation reporting technical losses before releases from prior year reserves. Energy was particularly hard-hit, reflecting Hurricane Ike losses in the Gulf of Mexico.
Lloyd’s reported an overall investment gain for 2008 of $1.8 billion, compared with $3.7 billion in 2007, representing a yield of 2.5%, vs. 5.6% in 2007. Syndicate investments returned $969 million, vs. $2.3 billion in 2007, representing a yield of 2% compared with a yield of 5.2% in 2007. The return on funds at Lloyd’s was $504 million for 2008, compared with $1.2 billion a year earlier. Return on Lloyd’s central assets stood at $307 million for 2008, compared with $238 million in 2007, reflecting strong returns from fixed interest investments, according to the Guy Carpenter briefing.
Mike Van Slooten, senior vice president of Guy Carpenter, said: “Despite a marked increase in catastrophe activity and the broader turmoil engulfing global markets, Lloyd’s emerged from 2008 in an advantageous position, with strong financial strength ratings and a proven ability to absorb the effects of a severe worldwide financial catastrophe.”
“Those results are certainly welcome news for the U.S. domestic insurance market,” says Frank Mastowski of Jimcor, a New Jersey-based wholesale insurance broker. “Fully one-third of our business is sent to Lloyd’s brokers for placement in the Lloyd’s market. Lloyd’s supplies aggregate capacity we need for our Northeast coastal exposures. Without that, things would be a lot more difficult.”
Asked about the changes that have taken place in the Lloyd’s market in recent years, Mastowski said that corporate capital and the elimination of unlimited liability rules have made all the difference. “I don’t think the Lloyd’s market would be where it is right now without the contribution that has been made by corporate capital. Lloyd’s wouldn’t be able to support the market with only individual investors. And the fact that there is no longer unlimited liability is a plus for the market. ‘Resilience’ is a good word to describe the Lloyd’s market. In fact, the entire surplus lines market has been very resilient.”
There also appears to be good news coming from this side of the Atlantic regarding the U.S. commercial lines insurance market. Standard & Poor’s recently said that, while the market has seen better times and a full-scale turnaround may be still a way off, there are signs that business conditions for the sector could be improving.
The problems that have plagued the U.S. commercial lines insurance marketplace still exist, according to S&P. According to the rating industry, pricing still remains weak, net earnings are down for 2008 and losses on common stock holdings have hurt statutory capital.
“The good news is that business conditions for U.S. commercial lines insurers seem to be improving, albeit slowly,” says S&P. “Surveys that track commercial lines pricing show progressively smaller year-over-year price declines, raising the possibility that the average rate change will turn positive sometime in the second half of this year,” says the rating agency. “Other areas also seem to be on the upswing. For example, investment markets appear to be stabilizing, reducing the threat to earnings and capital of further capital losses,” says S&P.