Good morning ladies and gentleman. Thank you for inviting me to speak at your conference. It is always a great pleasure to address our individual members, whose commitment to Lloyd’s is as valued as it is vital.
While preparing for this talk, I looked back at what I had said to you in June 2006, when I last addressed this conference. I spoke about the future of Lloyd’s and the successful journey we were undertaking, demonstrated by the impressive manner in which we overcame the hurricanes of 2005. I admitted though that we still faced significant challenges. In meeting these, I set out how we would continue to focus on three key areas: strong performance management, an optimal global trading platform and the Lloyd’s strategic plan which we’d just produced. I also suggested that to succeed in the future we would have to remain ready to embrace change and be ever mindful of the danger of complacency in an ever more competitive world.
In this industry, which spends so much time analysing and preparing for risks, particularly those of a cataclysmic nature in our case, it is perhaps a little ironic that even in June 2006, none of us were able to foresee the looming economic catastrophe.
The momentous events of the financial crisis have dominated the last two years and changed the economic landscape forever. But the approaches I described back in 2006 have stood us in good stead so that we are well placed to ride out the economic storm and to exploit the opportunities it presents. And looking back, I am glad to note that what I said then is still relevant today and that our thinking has stood the test of time. That, I believe, is what Lloyd’s has done, through many trials and tribulations over the years, some of our own making, but most, functions of the unpredictable nature of the world and the kind of business we are engaged in. We have stood the test of time. But that is not enough to ensure our future success. While our light is definitely not going out it will require a significant amount of effort and hard work to ensure that it continues to burn brightly.
We have a long history which has bestowed us a market leading position and an institutional knowledge and expertise which is unsurpassed anywhere in the world. This has not happened by chance. The creation of a new franchise structure in particular has led to fundamental changes in our business model – a model which has helped to keep us on course, despite record insurance losses in recent years. During the recent boom years, we also stuck to a cautious investment strategy, much to the amusement of some commentators and more bullish competitors. We intend to stick with this strategy in the future.
The Lloyd’s market has retained a focus on traditional insurance and reinsurance products. In essence, we stuck to what we were good at. We have rejected the exotic products that got so many others into trouble, with the consequences we’re all still suffering. In short, we have a prudent business model, which when combined with our strong franchise performance framework, means that we were able to weather the financial storm. This has meant that despite the economic crisis, we posted a profit of £1.9 billion. The Central Fund rests at a healthy £2 billion and we’ve retained a stable A + rating.
We have also worked hard to make it easier for our customers to do business with us, making significant improvements in our operational efficiency and processes, and to improve relationships with our key stakeholders – market businesses, regulators and of course our investors.
When I first joined Lloyd’s, I think it is true to say that there was virtual open warfare between the Corporation, ALM and the Names. I am pleased to say that the desire to work together from all three parties means that we now enjoy a co-operative relationship. Lloyd’s for its part has delivered on its commitment to ensure that individual investors can access their profits more easily, open years are closed more quickly and that our timetables are more aligned with the business planning process. In return, I am grateful for your ongoing support and commitment to the market.
Having the benefit this morning of addressing so many representatives of private capital, I would like to put on record my concern that there are too many voices being expressed at the moment inviting new individual members to enter the market on the basis of “come on in, the water is lovely”.
Now is not the time to say that the water is lovely. We are facing difficult conditions at the moment, the lack of investment income is self-evident, and the likelihood of 2009 and 2010 being bumper years for the industry looks exceedingly unlikely.
Of course we want to retain private capital, as I said earlier it is an essential part of our base, but as those of you who are here this morning will know only too well, this is not an investment opportunity for widows and orphans. It remains a market which requires a deep understanding, and the patience to sit through the flat years, even sometimes the harsh years, and that understanding and philosophy is not shared by everyone.
So, ladies and gentlemen, before you go off to encourage all your friends to join now, I would say to you that this is not the right time, rather we need to retain our strong capital base primarily made up of those who have a deep and longstanding understanding of this market. In that way, we can retain our ability to perform, realising always that we have to look forward when the market is difficult and not just cast eyes longingly rearwards to those years when performance has been exceptionally good.
The underwriting environment will remain challenging as the global recession impacts economic activity and international trade. While insurance remains a non-discretionary purchase we are likely to face claims inflation, a fall in insured values and an increasing number of fraudulent claims. Also the strong investment performance we have achieved in the past, as a consequence of our conservative investment approach, cannot be repeated with this year’s very low interest rate environment and with the markets continuing to be volatile. There will be opportunities for the Lloyd’s market but it is by no means a one-way bet. The Equitas transaction which [will shortly bring/has brought] finality to thousands of names is a reminder of our past and the need to be circumspect.
It is essential that we continue to focus on underwriting discipline and capital preservation. The work carried out by Rolf Tolle in the Franchise Performance Directorate has been crucial to our recent success and has helped build the very strong foundations upon which our future growth will be based – raising the bar for underwriting standards across our market. I’m glad to say that this work is set to continue under the leadership of Tom Bolt. Tom is joining us from Marlborough Managing Agency when Rolf retires and will build on Rolf and his team’s superb achievements. I am sure Tom will update you on how he plans to take this agenda forward once he takes up his post.
Allied to this, we will also stay focussed on the need to continue to improve our risk management procedures. There is no doubt that September 11th changed things for our industry forever. The unthinkable became thinkable and we had to adapt and plan accordingly. I have to say that this has certainly proved the case with regard to the financial crisis. If I had said to you only last year that Lehman Brothers would collapse and AIG would essentially be nationalised, I doubt you’d have believed me.
We obviously remain the market of choice for insuring against catastrophic events. But our ability to analyse and manage these risks has to be second to none going forward. The Franchise Performance Directorate has also ensured that managing agents behave more responsibly in respect of catastrophic events by ensuring that their exposure does not risk their own capital or the Central Fund. Our Risk Management team has improved the Realistic Disaster Scenario process to ensure that all syndicates better understand their exposure.
Another important focus will be our continuing efforts to grow our business in international markets. Since our inception, we have had a profoundly international outlook. As growth becomes more limited closer to home, developing our partnerships with emerging markets will be ever more important. And it’s much, much more than an aspiration. We became the first overseas reinsurer to be admitted to the Brazilian market last year. We also recently obtained new establishment licences in Poland, Austria and Portugal.
And of course we’re mindful of the fact that while we’re a truly global business, 66 per cent of our business is from what you might call the Anglo-Saxon world – North America and Britain. Yet we’re cognisant of the profound shift which is occurring in the global economy, with economic power and influence unquestionably moving eastwards. We’ve been working with domestic Chinese insurance companies ever since 1978, and in 2006 we began trading as Lloyd’s China Reinsurance Company Ltd. We’re planning to expand more in Asia wherever the opportunities arise.
I hope you will have noticed a recurring theme in this speech: the extent to which we are not complacent in any area of our business operations. Nor are we risk averse. We are, as you might expect, risk aware. I readily accept that we have adopted a conservative investment strategy. It is also true that we do all we can to ensure that our syndicates abide by strict standards, and eschew writing business they do not fully understand. But I don’t think you can conclude from this that we are a conservative business.
Rather, we seek to capitalise on the kind of opportunities which arise as a result of solid, secure, well-informed, well-regulated trading, within a highly volatile and risky world. But this base of solidity gives us the confidence and the resources to adapt to a changing environment, and to exploit the right kind of opportunities. Our light is certainly not going out. With your help, and with a lot of continuing hard work, I firmly believe it will get brighter in the years ahead.
Thank you for listening.
