Insurance credit ratings agency AM Best has affirmed the A (Excellent) financial strength of the London market and its Chinese reinsurance subsidiary, but has warned of a profit squeeze amid falling rates across major business classes and an unusual concentration of natural and man-made catastrophe events.
In an update released last week, AM Best says Lloyd's should maintain a strong capital base despite the more “challenging phase of the insurance cycle”.
“Performance in 2010 is likely to be weaker than the excellent level achieved in 2009, particularly following the Chilean earthquake and Deepwater Horizon oil rig catastrophes,” AM Best says.
“The overall combined ratio of the market is expected to deteriorate to between 95% and 100% (85% in 2009).”
Lloyd's recorded a pre-tax profit of £3.898 billion ($6.73 billion) in 2009 – a record unlikely to be matched this year as storms in Europe, the Chilean earthquake and Gulf of Mexico oil spill combine to erode the market’s profits.
Losses from the Gulf of Mexico oil spill – while largely contained by BP's use of captive insurance – are still estimated to cost the market around $US600 million ($684 million).
AM Best's report comes just weeks after Lloyd's Chairman Lord Levene described 2010 as a year of “direct hits”.
Lloyd's CEO Richard Ward warned insurance executives in May to avoid chasing short-term profits to avoid a “perfect storm” of catastrophic claims.