Lloyd’s CFO Stresses Overall Strength after Record Loss

Lloyd’s of London reported the largest first half loss in its 323 year history yesterday, Sept. 21 – £697 million, or over $1 billion.

However, Lloyd’s Chief Financial Officer, Luke Savage, was relatively calm when he spoke with the IJ about the loss.” Yes it’s about 10 times the average for the first half,” he said, “but, compared to the industry as a whole, we did better than out peer group.”

He explained that the losses suffered by U.S. and Bermuda re/insurers were larger in comparison to Lloyd’s, and that, although Lloyd’s were larger than the average losses of European re/insurers, “if you strip out the domestic content, we actually did better.”

Despite the historic loss, Lloyd’s remains extremely strong, with around £2.5 billion [$3.91 billion] in its central fund, which backs all of the syndicates. The total assets of all of the companies and syndicates which are part of the Lloyd’s market are around £857 billion [$1.34 trillion], a figure, which, Savage said, “exceeds liabilities by around £17 to £ 18 billion [$26.6 to $28.2 billion].”

Not so long ago that wouldn’t have been the case. Savage recalled that, when he first joined Lloyd’s in 2004 friends asked him why he would join such an obviously outmoded institution. As Mark Twain famously remarked reports of his death were greatly exaggerated. In 2000 Time Magazine published an extensive report in its European Edition on Lloyd’s imminent demise, which never occurred. In fact Time seems more likely to disappear than Lloyd’s.

Lloyd’s was fortunate enough to choose some exceptional people to sort out its problems. Its most recent top executives – Chairman Lord Peter Levene, and CEO’s Nick Prettejohn and Richard Ward, – have implemented basic changes in how the Lloyd’s market conducts business. It has jettisoned most of its more cumbersome procedures and joined the modern world – not as a follower, but as a leader.

While Savage doesn’t dismiss the losses in the first half of the year, he’s now gearing up Lloyd’s to face the rest of 2011, which is currently experiencing “a very active hurricane season.” He is also attempting to come to terms with perhaps an even greater problem – the ongoing economic crisis in the U.S. and Europe, especially the crisis in the Euro Zone.

“These are very difficult times,” Savage said; “you can’t insulate the asset portfolio; you can’t continue to rely on investment returns.” The situation makes Lloyd’s emphasis on underwriting discipline increasingly important.

In addition, Lloyd’s has always been very conservative in its investment strategy. “We have only around 4 percent of our investments in equities,” said Savage. The bulk of investments are “split up, with about one-third in cash, one third in government bonds, and one third in highly rated corporate debt.”

He added that, as a result Lloyd’s investments usually “do better when markets are going down, as there is less loss.” Conversely, they don’t do as well when the markets are going up.

The situation may nonetheless be quite serious; Although Savage wouldn’t make any predictions on either the likelihood of future catastrophic events, or the financial future, he did say that “an asset write down, such as the failure of a major bank, would be about as bad as a major catastrophe.”

As Lloyd’s has weathered the catastrophe onslaught that hit it for the first half of 2011, it could almost certainly weather a financial cat as well.