February 3rd, 2010

Lloyd’s: A Resurgent Market, Part I: Overview, Underwriting and Operating Performance

Posted at 10:00 AM ET

Overview

Lloyd’s, poised to strongly capitalize on opportunities as 2009 began, saw its competitive position continue to strengthen during the year. The resilience of operating performance and capitalization to the very challenging economic environment of the past 18 months, coupled with a continued reduction in the number of legacy issues, has been rewarded. Market share gains, rating affirmations and continued strong investor interest prevailed.

One of the best ways to demonstrate the improvement in Lloyd’s standing is to look at the relative movements in the financial strength ratings assigned to the market and to the lead operating companies of major peers over the last few years. Lloyd’s compares outstandingly.

Standard & Poor’s Rating Notch Challenges since 2001

lloyds-1-sp

Source: Guy Carpenter

Underwriting Capacity

Based on indicative figures obtained by Guy Carpenter, Lloyd’s has doubled in size since 2001 in terms of UK sterling underwriting capacity. Around 40 percent of the significant GBP6.2 billion increase between January 1, 2009 and January 1, 2010 relates to appreciation of the US dollar against UK sterling. The exchange rate underlying syndicate business plans moved from 1.99 to 1.50. The remaining 60 percent reflects a GBP0.5 billion contribution from new entrants and projected growth associated with rate increases on certain classes and additional business opportunities.

Lloyd’s Market Underwriting Capacity 1993-2010

 

lloyds-2-capacity

Source: Guy Carpenter

Operating Performance

Lloyd’s is currently experiencing a period of unprecedented profitability. Aggregate pre-tax profits reported since 2001 total GBP14.7 billion, despite significant US hurricane activity.

Lloyd’s Pre-tax Results 2000-2009lloyds-3-pretax-results

Source: Guy Carpenter

2009 Interim Results

Lloyd’s reported strong results for the first half of 2009. Pre-tax profit rose by 39 percent to GBP1,322 million, representing an annualised return on equity of 17.5 percent, driven by improved investment conditions and generally benign catastrophe loss experience.

Interim Results - Source of Earnings

lloyds-4-interim-results

Source: Guy Carpenter

Written Premiums

The business gains apparent in Lloyd’s results for the first half of 2009 demonstrate the market’s enhanced competitive position. Gross written premium rose by 35 percent to a record GBP13.5 billion. On a constant currency basis the increase was 9 percent, of which 4 percent was due to rate increases, predominantly in energy and property treaty, and 5 percent was due to new business. Fortunately, growth in catastrophe-exposed classes has coincided with a year of below average major losses, which bodes well for full-year profitability.

Through the nine months to September 30, the Lloyd’s listed vehicles were showing average growth of around 15 percent at constant exchange rates. As well as growing their Lloyd’s capacity, the larger operations are benefiting from bolt-on acquisitions and growth outside the market. The belief that this sector is well-positioned to benefit from the current vogue for subscription placements is reflected in continued share price out-performance.

Relative Insurance Stock Price Index Performance 2008-2009

lloyds-4-stock-price-index

Source: Bloomberg (January 1, 2008 = 100) 

Underwriting Performance

Lloyd’s reported an underwriting profit of GBP678 million for the first half of 2009, a 3 percent decline on the prior year. The accident year net loss ratio improved by 0.9 points to 59.1 percent, with the greater profitability of catastrophe-exposed classes out-weighing rising claims frequency in casualty and other classes most exposed to the recession. The contribution from major losses remained below average at GBP258 million, the largest events being the Air France crash, Windstorm Klaus and the Australian bushfires. The calendar year net loss ratio deteriorated by 1.6 points to 55.2 percent, reflecting a reduction in prior year reserve releases from GBP407 million to GBP315 million. These came mostly from the 2006 and prior years. The net expense ratio deteriorated by 0.9 points to 36.4 percent, impacted by adverse currency effects.

Interim Results - Lloyd’s Combined Ratio Breakdown

 

lloyds-5-combined-ratio

Source: Lloyd’s

On an underlying basis, excluding IFRS effects relating to foreign exchange movements on non-monetary items, the accident and calendar year combined ratios stood at 90.5 percent and 86.6 percent, respectively.

Investment Performance

The interim investment return increased from 0.9 percent to 1.6 percent, driven by the recovery in corporate bond values. Balance sheet de-risking at some of the integrated Lloyd’s vehicles has resulted in significant redemptions from hedge funds and private equity investments. The overall asset split across the market at June 30, 2009 was government/agency bonds: 29 percent; cash and letters of credit: 35 percent; corporate bonds: 32 percent; equities: 2 percent and alternative assets: 2 percent.

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