Lloyd’s Finance Director Sees ‘Flight to Quality’

March 25, 2009

Luke Savage, Lloyd’s of London’s finance director (among other titles), is certainly aware that 2008 was a “tough year,” as he put it in a telephone interview. Lloyd’s profits dropped by 50 percent (See IJ web site – https://www.insurancejournal.com/news/international/2009/03/24/98985.htm ).

He’s also prepared for “a very tough 2009.” But Savage is more positive in some respects. He pointed out that, while Lloyd’s investment returns were down in 2008, they nonetheless held up pretty well in comparison to the overall investment market. As an example he noted that the value of government bonds had actually risen substantially in the fourth quarter by £350 million ($512 million).

“What we’re seeing is a flight to quality,” Savage said. With around £2.6 billion ($3.8 billion) in its Central Fund (the facility that assures claims’ payments), Lloyd’s is well positioned to offer security. “The insurance market is going through a period of uncertainty, and policy holders are hesitant about placing all of their business with one carrier.”

Lloyd’s structure is tailor made to solve that problem. “We’re a subscription market,” Savage explained. “A risk is typically shared by more than one Syndicate.”

How this is accomplished is rather complicated, but basically a “lead Syndicate” – where coverage is initially placed – has standing agreements with a number of other syndicates as to the percentage of certain risks they will cover and on what terms. The policyholder thereby automatically spreads the risk of non-payment of a claim among a number of syndicates, who are in turn backed by a selected number of carriers – all of whom have met Lloyd’s rigid financial standards. In the rare instances when a syndicate can’t pay a claim, the policyholder has recourse to the Central Fund.

Savage explained that the Central Fund’s assets are “about two thirds in government bonds, about one-sixth in high grade corporate bonds and around one-sixth in equities. We don’t take much risk,” he added.

In addition Lloyd’s franchise board oversees the types of risk the syndicates write. “2008 was the third worst year on record for natural catastrophes,” Savage said, but our share of the losses [mainly from Gustav and Ike] was only around 10 percent, which we think is pretty good. Our underwriting and our catastrophe models performed well.”

With the economic crisis a continuing presence, it’s hard to predict the future. “We’re seeing some improvements in the credit markets,” said Savage, “credit splits [what a borrower pays in interest and what a lender makes] are widening.” He also indicated that “some rates [premiums] are hardening, but we’ll have to see what happens with the April first and July first renewals if there’s really a trend, but by and large rates are more healthy.”

In a final observation on the effect of the economic crisis Savage said: “Most insurance companies stuck to underwriting principles. They didn’t get involved with the asset side of the balance sheet.” Although he did indicate that a number of life companies may have problems as they went too heavily into equities. Lloyd’s future, and much of the P/C industry’s future, “will ultimately depend on the winds and the catastrophes,” as far as financial results are concerned.

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