Although the 2011 investment return of 1.9 percent was weak relative to previous years, Lloyd’s conservative investment strategy has partially insulated it from some of the more damaging volatility seen across a number of markets since the onset of the financial crisis in 2008 and continuing through 2011.
The global economy was and remains besieged by a number of financial crises that have driven down equity share prices, increased volatility in bond markets and caused uncertainty. The impact of the economic slowdown in the industrialized western economies of the United States, United Kingdom and Europe, as well as its effects on financial markets, subdued investment returns in 2011.
Performance Relative to Peers
Partially due to the business mix written and the Market’s risk appetite, Lloyd’s overall results have displayed high volatility over recent years. As shown in the figure below, when compared to peers from the Guy Carpenter European Reinsurance Composite (nine companies) and the Guy Carpenter Bermuda Reinsurance Composite (18 companies), the overall performance has been better. Lloyd’s outperformed in four of the eight years and only experienced negative return on equity in two years, compared to the Bermuda Composite which had one loss in three years.
Balance Sheet Development
Lloyd’s has demonstrated strong operating performance in recent years. Its robust capital base and significant reserve releases helped to minimize the impact of the 2011 catastrophe losses, which in previous years would have presented more of a threat to operating performance.
Net resources, (1) defined as total assets less policyholder and other liabilities, have risen by GBP4.6 billion for the last five years. But they have remained flat to total approximately GBP19.1 billion in recent years, providing a strong platform that showed resilience in 2011.
Lloyd’s has released reserves each year since 2004. For 2011, the reserve releases accounted for 6.5 percent of the combined ratio at GBP1.1 billion, taking total releases since 2004 to approximately GBP5.5 billion. Standard and Poor’s (S&P) expects such releases to continue, but at reduced levels.
1: Net resources are the closest proxy to shareholders’ funds.