Lloyd’s first six months results, released yesterday, were generally good. Profits were down slightly at £1.38 billion [[$2.222 billion] from £1.53 billion [$2.463 billion] for the first half of 2012, while gross written premiums rose 4.9 percent [3.3 percent when exchange rate fluctuations are excluded] to £15.5 billion [$24.96 billion].
Lloyd’s CFO Luke Savage was justifiably pleased with those results; however, as he said in a telephone interview, they continue to be affected by the “very low yields on investments.”
He explained that the low interest rates that have persisted for five years now, affect Lloyd’s more than other re/insurers, as it invests only in very low risk securities, which also have to be quite liquid. “Only around five percent of our investments are in equities,” Savage said. “It seems that each year is lower than the one before.” About the only positive result has been to reinforce Lloyd’s Syndicates dedication to make profits from underwriting, rather than to chase market share.
Even though the U.S. and the UK economies seem to be turning around, Savage said he doesn’t expect any “short term effect.” He pointed out that Mark Carney, the Governor of the Bank of England, has stated that interest rates won’t be raised until unemployment drops below 7 percent, and that’s not expected to happen until 2017, although there’s some speculation that the goal could be reached by 2015.
Asked his opinion on the entry of alternative capital into the re/insurance market, Savage said there would be “some downward pressure on rates,” but that the additional capital is also entering the market for good reasons. 2011 was the second most costly year for re/insurance industry losses, “but there was no market change,” he said; “now we’re seeing capital surplus increasing.”
There’s an ongoing debate about whether the hedge funds, pension funds and private equity firms will leave the market if there are major natural catastrophe loss events, or whether they are committed to the re/insurance market, and willing to accept the risks.
Over the long term that capital may prove beneficial. As Lloyd’s and other groups expand in emerging markets and into new lines of business, it could provide the extra funds necessary to do so. Referring to Lloyd’s 2025 plan, which is aimed at that goal, Savage said: “More established markets are very tough; therefore we need to move into new markets.”
There has been a great deal of discussion in the London market about the increasing reliance on computerized data, and the possible threat it may pose to a specialty market like Lloyd’s, if some lines of business become “commoditized.”
Savage pointed out that as markets evolve this seems to be a natural consequence. “Motor [automobile] insurance is an example. 30 years ago we wrote a lot of business, but over time more and more information becomes available, and it’s become commoditized.”
Lloyd’s has always been on the cutting edge when it comes to insuring difficult risks, and it’s in that area where Savage sees the market going in the future. “You don’t have enough historical data when it comes to new risks, or risks that are unique.” He mentioned satellite coverage and oil rigs as good examples of the latter.
“You have to work out the right price and the right coverage terms,” he said. “Over time you get it right, so I don’t see any short term threat.” As the nature of any specific risk becomes clearer, new risks emerge, which also demand the specialized knowledge Lloyd’s brokers and underwriters have developed over the years.