Lloyds bonanza follows Katrina
Daily Mail, March 30, 2007, p. 99
By Alex Brummer
Mar. 30--There's nothing like a good catastrophe to improve the prospects of Lloyd's of London. The Katrina disaster of 2005, which dragged it into the red, has been followed by a bumper year that left its coffers overflowing with profits of 3.7bn.
In the same way 9/11 transformed the rates that insurers can collect for aviation, terrorism and commercial property cover, so Katrina and the disaster that befell Louisiana enabled Lloyd's and other insurers to bump up rates for hurricanes, cyclones, storms and wind carried damage.
As the bad weather has failed to materialise for 2006, despite dire forecasts of global warming and longterm climate change, the London insurance market is finding that its cup runneth over.
In Lloyd's, pre-modernisation and reform, such wild swings in claim experience were masked by a complex three-year accounting cycle that was highly confusing and meant results were always out of date.
But at least it avoided the embarrassment of the market chairman having to go on the radio and explain to the uninitiated why ordinary consumers were paying everincreasing insurance premiums, while the underwriters and brokers who make up Lloyd's were coining it.
Chief executive Richard Ward explained it this way: "After two exceptional-years of hurricane activity, 2006 was an exceptional year for a very different reasons.
"A lack of catastrophe and rate increases in windstorm affected lines combined to produce the eye-popping profits."
The recovery of Lloyd's from the disaster of a decade ago, when incompetent underwriting and inadequate finance brought the market to its knees and tarnished its reputation, is looking complete.
One of the main reasons for the current buoyancy at Lloyd's is that the legacy of the dark days of a decade ago, when the market was under constant siege from its investors -- the so called Names -- has largely passed into history.
The claims and liabilities dating to those days were rolled up and reinsured through Equitas and only this week ownership of this enterprise and its liabilities was passed from London to the Sage of Omaha and the world's biggest force in insurance, Warren Buffett.
Under a deal approved by the Financial Services Authority, Buffett's company National Indemnity takes on the whole of Equitas" operations, staff and its exposures as well as 3bn of reinsurance.
As a result, the 34,000 Names will effectively be freed from the threat of ever having to cough up any more cash should long-term asbestos and other claims, written before 1993, come to fruition.
In fact Buffett has agreed share a payout of 50m with the Names when the deal is completed. As welcome as this will be, it is unlikely to silence the most vocal critics of Lloyd's, many of whom were wiped out as a result of sloppy brokering and underwriting in the past.
The difference between the old Lloyd's of London and the remodelled market is very evident from the 2006 results. These show that after years in the doldrums, the performance of Lloyd's now compares very favourably with that of its competitors in the US, Europe and Bermuda where the key operating ratios are far inferior.
Nevertheless, Lloyd's does have a Bermuda triangle of its own. In the past few years a number of Lloyd's firms, including Kiln, Hiscox and Omega Underwriting, have upped sticks and moved to Bermuda, taking with them jobs and expertise.
The exodus to the pink-sanded tax haven raised concerns about London's ability to compete and retain core skills in the long term.
Chief executive Ward insists the exodus can be handled because the departing firms "are absolutely committed to the Lloyd's platform for writing their business." The worry must be, however, that over time the connection to their City of London roots may fray.
Predicting the future for an insurance market is all but impossible, especially when terrorism, climate and natural risks have all become elevated. Ward notes that while the premiums on wind-related risks are now sturdy those on other forms of underwriting, including marine, aviation and property, are showing signs of softening.
He urges brokers and underwriters not to write business for market share, but for profit.
Lloyd's is doing its best to de-risk and improve the quality of market operations with modern computing and management techniques.
But the cold reality is that even the most robust systems can be thrown into chaos by an act of God.