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Lloyd's Navigates Economic, Regulatory Headwinds as 2012 Profit Surges

Source: BestWire

Posted on 28 Mar 2013 by Neilson

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LloydsLloyd's turned in a strong performance for 2012, recovering from what Chief Executive Richard Ward said was the costliest catastrophe year on record in 2011 while also dealing with adverse economic conditions and regulatory uncertainty related to Solvency II.

The 2012 pretax profit for Lloyd's was 2.77 billion pounds (US$4.2 billion), compared with a loss of 516 million pounds in 2011. Gross written premiums rose 9% to 25.5 billion pounds, an increase boosted by an average premiums rise of 3%. The combined ratio improved to 91.1 from 106.8.

The profit came despite the effects of claims, and uncertainty in both the economy and regulatory environment, said Ward in a press conference at Lloyd's. The market had net incurred claims of more than 10 billion pounds, with Hurricane Sandy producing claims of 1.4 billion pounds. The Lloyd's financial report said Sandy was one of the biggest claims in its history. Apart from Sandy and the loss of the cruise ship Costa Concordia off the coast of Italy in January, Ward said 2012 was a relatively benign year for the Lloyd's market compared with 2011, which was dominated by major catastrophes. He said Lloyd's also escaped the effects of a costly U.S. drought.

The frequency and severity [of storms] seem to be on the increase, Ward added. He said claims are a concern, with the increase in economic activity in hurricane-exposed areas. This, he said, will be reflected in pricing.

Chairman John Nelson said 2012 marked a welcome return to profitability after the exceptional run of catastrophe losses in 2011. In 2012, we experienced a more normal claims environment.

Nelson said the performance in 2012 fits well with Vision 2025, Lloyd's strategy for building its presence in emerging markets. These results, combined with our capital strength, are a good platform from which to work towards our vision of strengthening our position as the global center for specialist insurance and reinsurance in 2025, Nelson said in a statement.

The market faces the prospect of low interest rates and economic uncertainty in the eurozone, slower growth rates in emerging markets and an abundance of capital that has limited premium increases, according to Nelson.

The financial landscape in which the insurance industry is operating remains challenging, Nelson said.

In addition to the profit, Ward said, We are able to see some growth in the marketplace. I think overall, we're quite pleased with the result. Lloyd's is confident it can deal with difficult economic circumstances [and] also grow profitably, he said.

Recent events in Europe have served as a reminder that the eurozone crisis has not gone away, said Ward, who expressed frustration at the delay in the implementation of Solvency II in the European Union, given that we have worked so hard in the Lloyd's market.

Last year represented the end of Lloyd's Solvency II preparations, Ward said. What we are doing here at Lloyd's is taking the good elements of Solvency II and applying them to the Lloyd's market, he said.

Lloyd's central assets rose to a record of 2.48 billion pounds from 2.38 billion pounds a year earlier. Net resources passed 20 billion pounds for the first time. Total resources of the Society of Lloyd's and its members stood at 59.2 billion pounds, up from 58.8 billion pounds in 2011.

Investment return was 2.6%, or 1.31 billion pounds, up from 995 million pounds in 2011. Prior-year reserve surplus releases fell to 1.35 billion pounds from 1.17 billion pounds.

Return on capital was 14.8%. There are not that many businesses that can generate that type of return in the current economic situation, Ward said. Over the past five years, Lloyd's return on capital has averaged 12.1%.

Luke Savage, Lloyd's director of finance, risk management and operations, said Lloyd's investments in government bonds are in safe haven countries rather than in economically troubled European jurisdictions.

On corporate bonds, Savage told the press conference, some managing agents have moved to lower rated instruments in an attempt to improve their yields. It doesn't surprise us that we've seen that small shift, he said.

Savage said Lloyd's achieved its target of cutting costs by 8%. Lloyd's does not want to attract too much capital into the market, lest an influx push down premiums, he said, adding that strong returns look attractive to hedge funds and pension funds.

Lloyd's has a current Best's Financial Strength Rating of A (Excellent).