Lloyd's Lowered Profit Still Meets Expectations

The insurance market said its pretax profit for full-year 2004 was ?1.357 billion, ($2.605 billion), on a pro-forma annually accounted basis–falling from ?1.892 billion ($3.632 billion) pretax profit during the 2003 period.

Gross written premiums fell more than 10 percent to ?14.71 billion ($28.24 billion), which the market attributed to more disciplined underwriting by its member syndicates.

The combined ratio for Lloyd's also eroded a bit but remained at a profitable level of 96.9, compared with 90.7 for 2003. Lloyd's emphasized that despite the change, its combined ratio is still superior than the 98.7 percent estimated average for U.S. property-casualty insurers.

The Lloyd's combined ratio also looks favorable compared with U.S. reinsurers, which had 106.1 percent average, and European insurers and reinsurers, which booked 98.2 percent last year.

A major reason Lloyd's recorded lowered annual profit in 2004 was what the insurance market referred to as "the worst-ever year for industry losses from natural catastrophes."

The market said heavy claims from a string of hurricanes that hit the Caribbean and Southeastern United States last autumn resulted in $2.3 billion in net claims after reinsurance. On top of those losses, the Asian tsunami last December cost Lloyd's an additional ?100 million ($191 million). The catastrophe claims in 2004 ended up adding 11.3 combined ratio points, according to a calculation by Standard & Poor's Ratings Services.

Another factor that put a dent in Lloyd's profit level last year was a ?323 million ($622 million) pretax hit from the settlement the market reached last month with six insurers regarding a dispute over coverage they provided for Lloyd's Central Fund.

Under the insurance arbitration settlement, insurers led by Swiss Re paid Lloyd's ?152 million ($290 million). But Lloyd's had to write off extra payments it had anticipated from the ?500 million ($954 million) policy, according to the insurance market.

Standard & Poor's, in responding to Lloyd's results, also pointed out other smaller developments that put a drag on Lloyd's profit: they include reserve strengthening on prior years and costs relating to run-off syndicates, which cost ?300 million ( $572 million) in total.

But Lloyd's top management sounded pleased with the numbers. "These results, achieved despite significant losses from natural catastrophes, are testimony to the continually improving quality and strength of the Lloyd's market," announced Lloyd's Chairman Peter Levene.

Lloyd's Chief Executive Nick Prettejohn added that his insurance market's performance "compared well" with global competitors. But he warned that while market conditions still remain profitable, they are "increasingly competitive in a number of lines." Mr. Prettejohn added: "We must remain vigilant if we are to continue to deliver a strong underwriting performance."

A.M. Best Co., which is keeping its "A" financial strength rating for Lloyd's of London following the annual result, said the profit falls at the "upper end of the range" anticipated by the agency.

Standard & Poor's, which is maintaining its "A" rating and the "Stable" outlook on the Lloyd's market and its "triple-B-plus" rating on the subordinated debt, said the figures are "generally better" than its expectations. All in all, "underlying profitability is very strong," the ratings agency noted.