Lloyd's - Lloyd's announces £3.7 billion profit for 2006

• Strong underlying conditions and an exceptionally low level of catastrophes
• Combined ratio compares well with international peer group
• Strengthened balance sheet
• Continuing focus on underwriting discipline

Lloyd’s, the world’s leading specialist insurance market, today announced a profit of £3,662 million for 2006.

Financial highlights:

• profit of £3,662 million¹, before tax;
• combined ratio of 83.1% (2005: 111.8%) compares favourably with an estimated average of 93% for US property and casualty insurers (i) 95% for US re-insurers (ii) 94% for European insurers and re-insurers and, 86% for Bermudian insurers and reinsurers (iii);² and
• 14.8% increase in central assets to £1,454 million (2005: £1,266m).

Commenting on the results, Chairman of Lloyd's, Lord Levene, said:

“2006 was an excellent year for Lloyd’s and the market has performed well. During the year, we benefited from strong underlying conditions and an exceptionally low level of catastrophes. However, it would be unrealistic to expect such a favourable claims experience this year. With a trend for more frequent and severe natural catastrophes, we must continue our focus on underwriting for profit. The market is well prepared to meet these challenges.”

Lloyd's Chief Executive, Richard Ward, said:

“Lloyd's is in a strong competitive position and our performance compares well with our global peers. Retaining our competitive edge requires an unrelenting focus on all our customers. We have a clear vision to be the platform of choice for specialist insurance and a clear strategy in place to achieve this.”

Copies of the Chairman's statement and Chief Executive's report are attached.

Footnotes

1. Source: Lloyd's Pro forma Financial Statements
2. Sources i) Insurance Information Institute estimate, ii) Reinsurance Association of America, iii) Company data (8 European companies; 16 Bermudian companies)

Notes to editors

1. A copy of Lloyd’s 2006 Annual Report can be accessed at www.lloyds.com/2006results

2. A combined ratio is a measure of an insurer’s underwriting profitability based on the ratio of net incurred claims plus net operating expenses to net earned premiums. A combined ratio of 100% is break even. A ratio of over 100% is a loss; less than 100% is a profit.

3. Central assets include the assets of the Central Fund and the other assets of the Corporation. In aggregate, the value of Lloyd's central assets, excluding the callable layer and the liability in respect of the subordinated debt, amounted to £1,454m at December 2006. The Society financial statements are drawn up under IFRS.

4. Balance due to/(from) Members and Funds at Lloyd’s represent the aggregate of each member’s resources. These resources operate on a several basis and are only available to meet each member’s share of claims. Central Assets are available at the Council’s discretion to meet the liabilities of any member on a mutual basis. 

5. The results ultimately attributable and distributable to members are determined in proportion to their share in the syndicate for each underwriting year of account. In accordance with this, the 2004 year of account has closed at 36 months with a net profit of £1,540m. Years of account in run-off during 2006 reported a profit of £111m.

6. This press release includes forward-looking statements. These statements are based on currently available information and consistent accounting policies as applied at 31 December 2006. They reflect Lloyd’s current expectations, projections and forecasts about future events and financial performance. All forward-looking statements address matters that involve risks, uncertainties and assumptions. Based on a number of factors, actual results could vary materially from those anticipated by the forward-looking statements. These factors include, but are not limited to, the following:

• Rates and terms and conditions of policies may vary from those anticipated.
• Actual claims paid and the timing of such payments may vary from estimated claims and estimated timings of payments, taking into account the preliminary nature of such estimates.
• Claims and loss activity may be greater or more severe than anticipated, including as a result of natural or man-made catastrophic events.
• Competition on the basis of pricing, capacity, coverage terms or other factors may be greater than anticipated.
• Reinsurance placed with third parties may not be fully recoverable, or may not be paid on a timely basis, or such reinsurance from creditworthy reinsurers may not be available or may not be available on commercially attractive terms.
• Developments in the financial and capital markets may adversely affect investments of capital and premiums, or the availability of equity capital or debt.
• Changes in legal, regulatory, tax or accounting environments in relevant countries may adversely affect (i) Lloyd’s ability to offer its products or attract capital, (ii) claims experience, (iii) financial return, or (iv) competitiveness.
• Economic contraction or other changes in general economic conditions could adversely affect (i) the market for insurance generally or for certain products offered by Lloyd’s, or (ii) other factors relevant to Lloyd’s performance.
• The foregoing list of factors is not comprehensive, and should be read in conjunction with other cautionary statements that are included herein or elsewhere. Lloyd’s undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
• Foreign exchange rates may materially fluctuate from the rates prevailing at 31 December 2006 (£1 = US$1.96, £1 = €1.48)

Chairman’s statement

Recently I spoke at a conference in the Gulf and was introduced by the Minister of Finance who began with these words:

“In this part of the world, the oldest, best known, and most respected name in insurance is Lloyd’s, no one else comes close.”

Such spontaneous comment cannot be bought and is hard to achieve. In the last few years, our reputation has been restored, thanks to a lot of hard work and dedication from those who work in the market and in the Corporation.

The opportunities which this provides in growing our existing markets and developing new ones are being seized. I do not believe that we would have succeeded in launching our operation in China without the name recognition that we have worldwide, and further opportunities beckon.

While on the topic of reputation, I would like to pay tribute to the work of the Trustees and management of Equitas who worked so hard on the landmark deal that enables us to close a chapter in our history. We have been firm in our view for a long time that Equitas was being well run, and presented no threat to Lloyd’s. However, it was seen by many as a cloud that hung over us, and was always in the minds of the rating agencies. The transaction which Equitas has agreed with National Indemnity will, when finally implemented, remove that cloud, end the contingent legal liabilities of Lloyd’s and bring finality to members reinsured by Equitas. This is a welcome and major boost to the standing of Lloyd’s in the commercial and financial arenas and was clearly recognised at our EGM, when over 99% of the capacity-weighted vote supported the decision of the Council of Lloyd’s to contribute to this deal. Phase one of the transaction has now been completed, providing Equitas with an additional $5.7bn of reinsurance cover and work has commenced on phase two.

But Lloyd’s does not operate in a vacuum. It is a major component of the Financial Services industry of the UK. Indeed, we represent over 50% of the total London market business. Last year, the Chancellor of the Exchequer singled out the Financial Services industry as the largest contributor to the UK economy, recognising what many of us had been saying for some years. I am presently chairing a group which will present to the Chancellor our thoughts on how the non-life insurance industry can maintain and enhance its position, and become even more competitive.

We are not complacent at Lloyd’s and although we enjoyed an excellent year in 2006, like any global business we face challenges, not least the permanent shadow of the insurance cycle and the increasing threat of climate change.

We have demonstrated that we can adapt, change and react to changing circumstances and meet the challenges that face us. But there is still much that remains to be done.
The work which Richard Ward is leading, as you will see from his report, is critical for our future. We must be more efficient to be more competitive, we are relying on the whole market to make every effort along with us to do this and to do it quickly. We have made significant progress but the pace of change must be accelerated if we are to realise our vision of being the platform of choice. Our Three-Year Plan 2007-2009 launched last December sets out the steps we are taking to ensure this.

We have also been undertaking work to ensure that the market is attractive to new entrants. Over the past year, we have seen new syndicates enter the market and I led a review of the Annual Venture which recommended new ways in which private capital can invest in Lloyd’s.

It seems to be fashionable, even sometimes by those in Government to heap criticism on the FSA. We take the contrary view. They carry out an essential and complex task well, they are always ready to listen, and one of the reasons our reputation around the world remains so high, is in part, because it is known that they are there to regulate us.

No Chairman’s statement would be complete without thanking those who contribute to our success. I would particularly like to thank those members of Council who have recently completed their terms of office, in particular Bronek Masojada, who has been a source of invaluable and instantly available advice to me in his role as Deputy Chairman.

In March of this year, we also say goodbye and thank you to Sir Brian Hayes who has served as Lloyd’s Members’ Ombudsman since 1994. During the past 13 years he has played an important role in seeking to ensure that the Society maintains the highest standards in its dealings with its members. He is succeeded by Sir Robin Mountfield.
Finally I would like to thank all of those who work for the Corporation under Richard’s leadership. I know that they are proud of this institution, and we are proud of them.

Peter Levene, Chairman
28 March 2007


Chief Executive Officer's statement

Lloyd’s has a clear vision - to be the platform of choice - and a clear strategy to achieve it.

Over the course of 2006, we made significant progress towards this goal and the market remains in a strong competitive position.

Interest from new sectors, record capacity levels, rating agency affirmations and a number of new syndicate start-ups were positive acknowledgements that Lloyd’s is an attractive place to do business. 

Lloyd’s, like any global organisation, cannot afford to stand still and we have shown time and again that we can adapt and change. To meet the challenges we face and compete successfully in the global insurance industry, however, we have to continue to change the way we think and act.

We recognise that underwriters, brokers and policyholders have a choice as to where they operate and place their business and that Lloyd’s is not the only market where large and specialist insurance is placed. 

We have developed a rolling Three-Year Plan to address the structural issues and trends within the market and the wider industry to ensure that we become the true platform of choice. 

Against the backdrop of an increasingly demanding regulatory environment, greater customer expectations, mobility of capital, a rise of regional markets and a complex underwriting cycle, the delivery of this plan remains fundamental to Lloyd’s future.

Another exceptional year but for a very different reason

After two exceptional years of hurricane activity, 2006 was also an exceptional year but for very different reasons. A lack of catastrophe activity and rate increases in windstorm affected lines combined to produce a profit of £3,662m.

A combined ratio of 83.1% and a return on capital of 31.4% compare well with our peers. This result is clear evidence of the flexibility, responsiveness, resilience and underlying financial strength of the Lloyd’s market. 

However, while there were significant underlying improvements in the way that businesses in the market manage risks and reserves, we cannot be complacent or fool ourselves into believing that market or weather conditions will not change. With an increasing trend for more frequent and severe natural catastrophes overlaying the peaks and troughs of the insurance cycle we must continue our focus on underwriting for profit. 

Lloyd’s remains a well diversified market but we cannot escape the fact that what we have seen is a ‘tale of two markets’. Although rates increased in wind-exposed business, particularly in the USA, other lines of business showed signs of softening. This dichotomy makes good cycle management and underwriting discipline more important than ever. 

There is clear evidence that the market, having worked with the Franchise Performance Directorate over a number of years, is now better prepared to manage the insurance cycle. Through a combination of underwriting for profit rather than market share, the use of state-of-the-art modelling tools and better availability and application of data, it is hoped that the market can shield itself from the worse effects of the cycle.

The platform of choice

During 2006, we made significant progress towards meeting the goals set out in ‘Building the Optimal Platform’ published in January 2006. There are a number of areas, however, where we need to accelerate the pace of change.

Our strategy centres on the five key benefits of operating at Lloyd’s (see pages 24 and 25). We regularly test our strategy against market feedback and changing external circumstances and we published the latest version of the Three-Year Plan at the end of December 2006.

Performance framework

We want a clear and transparent performance framework that supports the achievement of superior operating returns for all of the businesses that operate in the market.

Our relationship with the market has evolved over the last three years to one of commercial partner. Last year, we introduced a set of Franchise Standards on underwriting, claims and risk management to help each market firm understand the minimum level to which they are expected to perform. Together with the market we are looking at further areas where minimum standards would be appropriate.

During the year under review, we continued our work to improve the ability of the businesses in the market to manage their exposures and risks. We introduced a Risk Management Toolkit which supports and promotes best practice risk management. In addition, we continued to update our suite of Realistic Disaster Scenarios, including introducing a $100bn hurricane scenario and an aviation terrorism scenario, thereby further testing the Lloyd’s market’s resilience to extreme catastrophic events.

Business efficiency – operations and processes

We have to deliver more efficient business processes at a lower cost and ensure that the underwriters, brokers and policyholders who form the customers of this market are receiving the level of service they expect and demand.

Over the past year, the London market has demonstrated that it wants to change and there is clear evidence that  progress is being made, but the pace of change is still too slow.
At the end of the year, we repeated a customer satisfaction survey to test our service levels. Just under two thirds of those questioned believe that Lloyd’s processes have improved and our overall satisfaction score has remained a reasonably healthy 7.6 out of 10. However, there remain areas where our customers want to see improvement. These include speed of issuing contract documentation and underwriter availability.

There are three pillars to our strategy to address these issues:

• Electronic claims handling.
• Accounting and Settlement.
• Pre-bind quality assurance.

Last year we introduced an electronic filing cabinet, a document repository that enables claims and premiums to be handled quickly and efficiently without the need for paper files. Every managing agent is committed to processing their claims electronically, and currently a third of all managing agents are doing so. This is a major step forward in our drive for a paperless market and we aim to have all new claims processed electronically by the end of 2007.

By the end of the year 15% of all premium transactions were going through the repository and a quarter of all premium transactions in the London market were handled electronically by the end of February 2007.

We achieved a major milestone when we exceeded the target for 85% of all contracts being contract certain in December last year. We now want to embed contract certainty into business as usual activities and ensure that managing agents are making the right contract certainty, tax, regulatory and risk management checks before entering into contracts.

Although we deal in complex risks we do not need to operate a complex business model. In the last 12 months we have streamlined the complexity of our structure and processes and reduced the burden of operating within it. As part of this work we:

• Completed a duplication review to ensure that market firms were
    not subject to a dual compliance burden by Lloyd’s and the FSA.
• Sought to ease the reporting burden on businesses by limiting
    any changes to reporting requirements unless they simplify or
    reduce those requirements.
• Began work to simplify the framework of the rules and requirements
    for operating at Lloyd’s.
• Conducted a review of the impact of the Annual Venture and suggested
    ways to improve the current business planning timetable and update the
    existing agency agreement.
• Developed proposals to facilitate new syndicate start-ups and increases
    in capacity backed by unaligned capital at various points mid-year. In the
    past, new syndicates backed by private capital could only start underwriting
    on 1 January.

Capital advantages

2006 was the second year in which managing agents’ own capital assessments drove member capital setting. This process helped to embed risk management within the overall business process of each syndicate and enabled them critically to assess the capital required for their own risk profile. We implemented an enhanced ICA review process which provided us with an informed insight into the risks and capital requirements for each market business. In addition, we developed improved benchmarking options for assessing claims reserves.

We remain committed to reducing the cost of mutuality through improved performance and capital setting. Following the introduction of measures to strengthen the Central Fund, if conditions permit, we are aiming to reduce the Central Fund contribution rate for the 2008 Year of Account, a year earlier than originally planned.

During 2006, we worked closely with the market to create a less prescriptive environment for making investment decisions and removed a whole layer of complexity that applied to Lloyd’s compared with the company market: admissible asset rules for
syndicate investments have now been brought in line with the FSA’s requirements for all UK insurers.

Furthermore, the Central Fund investment strategy was reviewed and amended, following consultation with the market. A revised risk management framework was introduced and asset allocations were revised to optimise risk adjusted returns.

Through these measures we have made real progress towards the development and implementation of a flexible capital framework.

Security and ratings

The strength of the market was confirmed in 2006 with affirmations from all three rating agencies: A.M. Best, Fitch Ratings and Standard & Poor’s. Following the announcement of the Equitas and Berkshire Hathaway deal, Fitch Ratings placed Lloyd’s on Credit Watch Positive and Standard & Poor’s assigned a Positive Outlook. Just this week,
the first phase of the Equitas deal was completed and as a result Fitch Ratings upgraded Lloyd’s to A+. This upgrade will enhance the perceptions of Lloyd’s amongst insurance buyers, brokers and potential investors.

Market access

We continue to expand our global footprint and move into developing markets. The trend eastwards was highlighted by the regulatory approval of our reinsurance operation in China and the expansion of our platform in Singapore.

We began work to restructure our global network of offices and representatives to ensure that it is clearly aligned to managing agents’ needs and service requirements. This work is expected to be completed this year.

We also reviewed our distribution channels, particularly access options in the US, and began a project to streamline the broker accreditation process.

Our people

Our people remain our greatest asset and we continue to invest in their development, potential and their working environment. During the year in review, we began to develop a leadership programme and implement a working environment programme.

We have a demanding agenda to deliver in a fast-moving environment; the structure and culture of our organisation must be flexible and responsive, and our people accountable if we are to succeed in being the platform of choice. We will continue to make organisational changes to meet our business needs as they evolve and have introduced a change programme to help develop the behaviours and culture needed to deliver our objectives.

The year ahead

With market conditions changing, our focus remains on underwriting discipline. This will be supported by our continuing drive to modernise market practices, thereby helping to maintain our position as a recognised leader of specialist underwriting.

Conclusion

As I come to the end of my first year at Lloyd’s I would like to thank the staff at the Corporation and all those who work throughout the market for their support and hard work.
I would like to pay particular thanks to my Executive Team. They have provided strong leadership over the past year and have been instrumental in the delivery of our objectives.

Julian James, Director of Worldwide Markets, leaves Lloyd’s at the end of April. He has played a large role in developing Lloyd’s global presence and I am grateful for his hard work and dedication.

I have been impressed by the commitment and professionalism of everyone at Lloyd’s and I look forward to working with the Corporation and market over the coming years.

Richard Ward, Chief Executive Officer
28 March 2007