Profits at Lloyd's last year plunged to $2.7 billion–less than half of the $5.66 billion reported for 2007–but its chief executive was counting his blessings, contending that the market's positive bottom line was “a pretty good result” given the state of the financial markets and overall economy.

Lloyd's cited strong underwriting discipline and conservative investment strategies as the reasons for remaining in the black during a sharp downturn on both Wall Street and Main Street.

Indeed, Richard Ward, Lloyd's chief executive officer, told National Underwriter that “to have a profit in the conditions that we had to trade through 2008 is a pretty good result. Investment income was getting trashed throughout 2008, and yet we were able to return a positive number for investment–a 2.5 percent investment return,” totaling ?1 billion ($1.4 billion at current exchange rates).

While the combined ratio for Lloyd's was up 7.3 points from 2007's ratio of 84, the market remained profitable from an insurance standpoint with a combined ratio of 91.3–well below the figures posted by the U.S. and European markets.

Lloyd's noted an estimated average ratio of 101 for U.S. property-casualty insurers; 102 for U.S. reinsurers; 97 for European insurers and reinsurers; and 92 for Bermuda insurers and reinsurers.

Standard & Poor's Ratings Services agreed with Mr. Ward's positive assessment. “This represents a very solid performance in a year characterized by heavy catastrophe losses and extreme volatility in global financial markets,” S&P said in a statement.

The rating agency added that Lloyd's results “benefited from foreign exchange gains,” although S&P warned that “a significant proportion…can be expected to reverse, due to timing differences, during 2009.”

S&P said its financial strength rating for Lloyd's (“A-plus”) and its outlook for the market (“Stable”) are unaffected by full-year results reported for the financial year ended Dec. 31, 2008.

On the underwriting side, Mr. Ward conceded that 2008 was “very challenging as a result of major losses from catastrophes, such as [Hurricanes] Ike and Gustav.”

Nevertheless, he said Lloyd's “still managed to return an underwriting result of ?1.2 billion ($1.76 billion).” When combined with the market's investment return, the overall profit before taxes was ?1.9 billion ($2.76 billion). “That is a good result,” he concluded.

Mr. Ward said Lloyd's has managed to escape the financial disaster threatening some individual insurers by being “very conservative.”

On the investment side, he said Lloyd's has adopted “for awhile now, a pretty conservative investment strategy, where our assets are split, roughly, one-third in cash, one-third in corporate bonds–'double-A'-rated or better–and one-third in government bonds. Our exposures to equities, where a lot of the problems have arisen, have not impacted us–we've had less than 5 percent in equities.”

On the liability side, Mr. Ward said, while Lloyd's is “in the business of taking risk, we just don't want to take too much risk in any one particular class.”

He explained that when looking at financial institutions and directors and officers liability coverage–two heavily exposed lines following the subprime mortgage crisis–”we made a decision awhile ago to scale back our exposure to financial institutions.” While Lloyd's has some exposure today, he added, “it's very manageable and with business as usual.”

Mr. Ward said Lloyd's has been scaling back on D&O coverage over the last few years, since claims arose from the Enron and WorldCom debacles.

This, he said, is an example of the wider approach in the Lloyd's market, “which is centered around risk management and risk diversification. We are in the business of taking risk, but we don't want to be overexposed to any one class or line of business.”

He added that “by insuring we are not overexposed, we will be able to trade forward. We don't want to repeat the mistakes of the past, where we suddenly find we have enormous losses from asbestos, or from the World Trade Center.”

Asked whether he sees American International Group or other insurers and reinsurers recklessly undercutting pricing, as others in the market have suggested, Mr. Ward noted that “the focus for us, irrespective of what our competitors do, is to insure that we write the right business at the right price.”

On the underwriting side, he emphasized that underwriting discipline is “absolutely key. People talk about AIG and lots of competitors out there, but we need to insure that we write the right business at the right price, and don't chase market share.”

To do this, he said, Lloyd's has to be “confident enough to walk away from business if we don't think it's appropriately priced.” In the current environment, he added, with investment return uncertain at best, underwriting discipline is of “paramount importance.”

Regarding a move observed over the past few years for Bermudians to enter the London market, he said that while he doesn't know if the trend will continue, it is an “indication of the attractiveness of the Lloyd's market.” More Bermuda companies are now entering the Lloyd's market than two years ago, he said.

“We've had the likes of Max, Flagstone, Ariel, Renaissance and Validus coming through and acquiring Lloyd's business. Whether there are more to come, or not, we'll just have to wait and see,” Mr. Ward said.

Special Reports /

Lloyd&#039;s Sees Profits Cut In Half For 2008, But Satisfied Given State Of The Economy

Related Stories

Recommended For You

Lloyd's Sees Profits Cut In Half For 2008, But Satisfied Given State Of The Economy