September 13th, 2012

Lloyd’s Operating Performance: Part I

Posted at 1:00 AM ET

Matthew Day, Senior Vice President
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After experiencing its single biggest catastrophe year ever in 2011, Lloyd’s expects market conditions to remain tough in 2012. Fears of a double-dip recession have made investors very cautious, particularly in Europe, and the Eurozone crisis has slowed insurance growth in the region. Looking forward, Lloyd’s has warned that the difficult global economic conditions may mean that the insurance cycle will be slower to turn than in the past.

Financial Reporting

Since January 1, 2005, Lloyd’s syndicates have reported audited and annually accounted results under UK Generally Accepted Accounting Principles. The financial statements for the Lloyd’s Market as a whole are prepared on a pro forma basis. They are based on an aggregation of syndicate annual accounts, members’ Funds at Lloyd’s (FAL) and the results of the Society of Lloyd’s. These pro forma financial statements, which are not audited, are prepared so that the financial results of Lloyd’s and its members, as well as their net assets, can be compared with those of general insurance companies.

2011 Results

For 2011, Lloyd’s reported a pre-tax loss of GBP516 million, representing a -2.8 percent return on capital. 2011 is regarded as the second-highest year for natural catastrophe claims for the insurance industry and the highest ever for Lloyd’s. Catastrophe-related losses cost the Lloyd’s Market GBP4.6 billion in 2011, up from GBP2.2 billion in the previous year.

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The economic slowdown continues to negatively affect Lloyd’s investment return, which fell to 1.9 percent or GBP955 million in 2011, down from GBP1.2 billion in 2010.

Underwriting Performance

The 2011 Lloyd’s combined ratio jumped to 106.8 percent from 93.3 percent in the previous year as a result of an exceptionally high number of large loss events, beginning with the Australian floods and then continuing with the New Zealand and Japanese earthquakes, US tornado losses and floods in Thailand. The large losses incurred in 2011 shaped the insurance sector for the year, causing rates to rise and increasing concerns of the risks of insuring so-called “cold spots.”

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Gross written premiums (GWP) in 2011 rose to GBP23.4 billion, an increase of 3.9 percent compared with the previous year. The main drivers of this growth were the reinsurance and marine classes, which accounted for 1.9 percent and 1.3 percent, respectively, of that growth.

Despite the losses of 2011, the underwriting performance in all other lines of business was relatively strong. An excess of capital in property and casualty subdued pricing pressure in these lines, and combined ratios were suppressed across all classes (except motor) by prior year reserve releases.

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