Lloyd’s reports record £3.9bn profit and vows to continue ‘hard slog’ in Europe

The London-based market has enjoyed a tremendous run of success since the heavy global losses of 2001 and Chairman Lord Levene has helped reinvigorate the market by leading a robust modernisation process based on much tougher risk management and control standards.

This was reflected in an excellent profit before tax of £3.9bn for 2009 compared with a result in 2008 of £1.9bn. Lloyd’s reported a market-wide average combined ratio of 86.1% against 91.3% in 2008. It said that this compares with an average combined ratio of 100% reported by U.S. property and casualty insurers, 94% for U.S. reinsurers, an estimated 99% for European insurers and reinsurers and 84% for Bermudian insurers and reinsurers.

The market reported that central assets increased to just over £2bn and managed an investment return of £1.8bn against £957m the year before. The surplus on prior year reserves was £934m against £1.3bn in 2008.

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Lord Levene said: “The hard work and very careful attention to risk in the Lloyd’s market have resulted in a pre-tax profit of £3.9bn, the highest that we have ever recorded. The result has been achieved despite the economic turbulence that characterised most of 2009, although we were certainly helped by a low level of catastrophe-related losses – helped by a benign Atlantic hurricane season. The market can be proud of what it has achieved in 2009. These results show that not all parts of the financial services sector are the same and, at Lloyd’s, our strength and resilience means that we can face the future with confidence.”

In an interview with Commercial Risk Europe during the recent World Insurance Forum in Bermuda where he was a speaker, Lord Levene conceded that the market remains underweight in Europe from where it sources under 20% of its business compared to over 40% from the U.S.

“Europe is very important for us. When I first joined Lloyd’s some 45% of the business came from the U.S. which was great but I thought we ought to see a change in the proportion of business from Europe and Asia,” he said.

“The French market is only 22 miles away from the U.K. and yet we only generate about $500m in premium from France compared with about $18bn from the U.S. France is not a 36th of the size of the U.S. How do we achieve a growth in European business? Well it’s just hard slog. Our image in Europe is fine, but, we just need to continue the hard work,” said Lord Levene.

The Lloyd’s Chairman said that one of the challenges that faces the market is simply one of process because the market is made up of a large number of independent companies that pool some, but by no means all, resources to develop and process business.

The Lloyd’s central administration does play a role in marketing and development and has invested in recent years in mainland Europe with new operations in Scandinavia and Poland, for example. But, as Lord Levene concedes, there is a still a strong tendency in larger markets such as France, Germany and Italy to look to local companies first and international capacity second when coverage is sought.

“There are also cultural problems such as language, not least the language of the policy itself,” he explained. “The exact words used can have a huge impact on a claim and the original intent of the policy needs to be clearly understood by all to avoid future problems so either the policyholders have to accept an English policy or the underwriters have to write their policies in German, French and Italian,” continued Lord Levene.

Lord Levene said, however, that underwriters cannot simply give up on fresh markets because of such challenges and used Asia as an example, a market of which he is very aware as a Non-Executive Director of the China Construction Bank, one of the world’s biggest banks.

“The biggest risks facing companies that do business in China, for example, are culture and language. Understanding what is really intended can be quite difficult and generally something unexpected hits you from left-field you did not expect. It is getting better. When we at Lloyd’s first set up in China [the market has been granted a license] people said why did you bother with China? But it is just about the second biggest economy in the world and it will be the biggest. So my question back is ‘do you want to be in the second biggest economy in the world?’ and of course the answer is yes. You have to be there for when it really takes off and those who are there will be regarded as pioneers,” he explained.

Asked whether the central market should leave such business development in Asia and Europe up to the individual syndicates and businesses that manage them, Lord Levene is clear the centre has a role.

“We need to make a central offering. Most local business in Europe goes to local insurers. If we say ‘what about syndicate XYZ?’ they say who the hell is that? If you say ‘its Lloyd’s of London’ then they have heard of us. So it has to be an advantage,” he said.