Capital

Well over GBP1 billion of new capital was deposited at Lloyd’s in the first half of 2009, largely to address the movement in exchange rates. Net capital resources rose by 11 percent over the six months to a record high of GBP16.9 billion, represented by severally-held members’ assets of GBP14.9 billion and mutually-held central assets of GBP2.0 billion. Underwriting leverage across the market has declined dramatically since 2001, partly reflecting the increasing sophistication of the risk-based capital-setting regime.

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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.

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With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.

Chart: 2009 H1N1 Swine Flu Lethality Rate 1.98 Percent: As of May 6, 2009, there have been 1,516 cases confirmed globally by the World Health Organization (WHO), with 30 fatalities. Consequently, H1N1 has shown a lethality rate of only 1.98 percent. While any loss of life is tragic, the implications of swine flu have not reached pandemic proportions.

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Chart: World ROL Index, Jan 1, 2009: The Guy Carpenter World ROL Index gained 8 percent, after two years of substantial declines. Despite the magnitude of catastrophes and financial losses, the turnaround in pricing was substantially less pronounced than those that followed Hurricane Andrew in 1992, the terror attacks of September 11, 2001, and Hurricanes Katrina, Rita, and Wilma in 2005.

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Mike Van Slooten, Senior Vice President
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Lloyd’s of London (”Lloyd’s”) competitive position strengthened in 2008, largely because of effective risk management oversight and relatively conservative investment allocation. The capital structure has proved resilient in the face of the worldwide financial catastrophe and financial strength ratings remain strong and stable. As a result, Lloyd’s is well-positioned to benefit from current market dislocation.

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Lloyd’s reported a pre-tax profit of GBP1.9 billion (USD3.5 billion) for 2008, half the figure of the previous year but still the third best result in the market’s history. This lower profit reflected weakening market conditions, an increase in catastrophe events after a period of unusually low claims, and exceptionally challenging financial conditions.

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Lloyd’s reported an overall investment gain for 2008 of GBP957 million (USD1.8 billion), compared with GPB2 billion (USD3.7 billion) in 2007 — representing a yield of 2.5 percent (versus a 5.6 percent in 2007). The risk profile of the market’s invested assets is relatively conservative, with strong cash balances and the high credit quality of fixed income securities offsetting falls in value of many corporate bonds and equities.

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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. The Energy result was particularly poor, reflecting significant Hurricane Ike losses in the Gulf of Mexico.

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Lloyd’s underwriting performance again compared favorably with peers in 2008. The headline combined ratio stood at 91.3 percent (compared with 84 percent 2007), with higher levels of attritional and catastrophe claims partially offset by prior year releases and currency gains.

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The final component of the investment result is the return on Lloyd’s central assets which, in 2008, stood at GBP165 million (USD307 million) — compared with GBP128 million (USD238 million) in 2007 — or 7.8 percent (6.6 percent the year before). The increase reflected strong returns from the Lloyd’s fixed interest investments.

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The 2008 accident year combined ratio stood at 103.2 percent (90.5 percent in 2007) but improved by 2.7 points to 100.5 percent after GBP370 million (USD688 million) of exchange gains on non-translation of non-monetary items (which will reverse in 2009). A further 9.2 points from GBP1.3 billion (USD2.4 billion) of reserve releases, mainly on the 2002-to-2006 years, brought the calendar year combined ratio down to 91.3 percent. Lloyd’s has indicated that, prior to exchange effects, the level of redundancy was in line with 2007’s GBP856 million (USD1.6 billion), but will fall from last year’s peak.

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