Lloyd’s reports strong performance despite worst hurricane season on record

November, 2004 – Lloyd’s, the world’s leading specialist insurance market, today reported the market’s financial result for 2005.

Financial highlights:

• net claims of £3,309m from most severe hurricane season on record will be met with negligible impact on Central Fund;

• market loss limited to £103m1 through rigorous performance management;

• continued improvement in Lloyd’s solvency ratio to 379%2 (2004: 300%); and

• further increase in central resources for solvency purposes to £1,838m2 (2004: £1,663m)

Commenting, Lloyd’s Chairman Lord Levene, said:

“2005 was the worst year on record for natural disasters, costing the insurance industry far more than the impact of the 9\11 attacks on New York. For Lloyd’s to emerge from such a year with just a small loss represents an excellent performance by the market. That outcome would have been unthinkable just a few years ago, which is the true measure of the progress Lloyd’s has made.

“There are many lessons for the industry from a year of unprecedented devastation from natural perils. We must not fall into the trap of thinking that 2005 was a freak year which could never happen again. We must continue to improve the way we model potential risk and spread our exposures. We must only accept risk at an adequate price and on the right terms.

“Lloyd’s has every reason to be confident about the future. We are in sound financial shape but we are also alive to the constant challenges from a highly-competitive global insurance market. There is a strong determination within Lloyd’s to deliver the continuous improvements in our competitiveness and efficiency that will keep this market at the forefront of specialist insurance.”

Luke Savage, Lloyd’s Finance Director and Acting Chief Executive said:

“Last year demonstrated yet again some of the fundamental strengths of the Lloyd’s market, with the rating agencies reaffirming Lloyd’s “A” rating, at a time when many insurers were facing downgrades.

“Our risk modelling and risk management arrangements helped ensure that every Lloyd’s insurer was able to trade on through the hurricanes, which meant there was a negligible impact on Lloyd’s Central Fund.

“We signalled last November that given the extreme impact of those hurricanes it was unlikely the Lloyd’s market would report a profit for 2005, and the result we are announcing today is in line with those expectations.

“Conditions remain profitable, and the market is well placed to take advantage of current opportunities. We showed last year that the market also has the flexibility to respond quickly to changing circumstances. The Lloyd’s market, therefore, has every reason to be optimistic about prospects for 2006.”

In 2006 Lloyd’s has the capacity to write £14.8bn of business, an increase of 7% on 2005 (£13.8bn). This compares with the position before the hurricanes when, with rates softening, it was expected Lloyd’s capacity would reduce by around 7% in 2006. This change in approach demonstrated the ability of the Lloyd’s market and the Franchise Performance team to react speedily to changing market opportunities.

The increased level of central resources is now in line with Lloyd’s aspirations. However, the appropriate level for the market will be kept under constant review.

Results for year ended 31 December 2005

Lloyd’s balance sheet ⁴

Lloyd’s profit & loss accounts ⁴

Footnotes
¹ The Market loss is stated pre-tax on a pro forma basis

² Unaudited figures

³ Prior year restated with adoption of UK GAAP

⁴ The balance sheet and profit and loss account�are stated on a pro forma basis.

⁵ Prior year restated with adoption of UK GAAP.

^{6 (i)} Technical account ⁽ⁱⁱ⁾ Non-technical account ⁽ⁱⁱⁱ⁾ Return on syndicate assets and members’ funds at Lloyd’s.

Chairman’s statement

The events of last year yet again demonstrated the value of insurance and the value of Lloyd’s. In the aftermath of hurricanes Katrina, Rita and Wilma, we upheld our reputation as the world’s leading specialist insurance market, and reinforced our commitment to help a devastated region to rebuild.

In a year in which the industry saw record claims from natural catastrophes, and the biggest single catastrophic event in its history, Lloyd’s was able to cope with these events in the normal course of business and emerge with a small market loss. This was a significant achievement.

Despite the large hurricane claims, we avoided any significant impact on the Central Fund. Lloyd’s further strengthened its central resources, and the rating agencies reaffirmed the market’s ‘A’ ratings.

This demonstration of our strength was the result of a team effort across the market. I would, however, like to mention the contribution of the Franchise Performance Directorate. The value of their work within the Lloyd’s market has now been clearly proven.

The market’s performance was further evidence of the changes we have implemented in recent years to rebuild on firm foundations in the wake of 9/11. Since that time, we have implemented a new Franchise structure, introduced a new flexible capital structure and put a clear focus on profitable underwriting.

And this is just the start.

A strategic plan to ensure our competitiveness

In January we published a three-year plan which encapsulated the various initiatives we have undertaken and that we are planning to ensure Lloyd’s future competitiveness. In a nutshell, it is about working with the market to develop a modern, efficient, profitable place to do business.

We are under no illusions about the challenges that we face in the future, but our recent record and ability to adapt to new circumstances make us confident that we can deliver this plan. Much has been achieved during the course of 2005 but, as the plan makes clear, there is still more to do. Top of our agenda for the year ahead is the reform of our business processes, which must be modernised if the Lloyd’s market is to remain competitive in future.

Ultimately, the success of this market will be based on a partnership. We have worked closely with the market to develop the three-year plan, and it will take a joint effort to make sure that Lloyd’s is the marketplace of choice for insurers, policyholders and capital providers.

Global development: a foothold in China

Lloyd’s global brand and network of licenses remain the jewels in our crown. The brand was significantly enhanced in November last year when we received the go-ahead to establish an on-shore reinsurance operation in China. The license will give Lloyd’s access to one of the world’s fastest developing economies.

Arrivals and departures

We move into this critical phase with strong management, and we welcome a new Chief Executive, Richard Ward, who comes with a track record of building consensus and driving change. The task for Richard and his colleagues is to create a successful platform for insurers, in the face of increasing competition for the business. That means making sure Lloyd’s raises its game, to deliver the best service with openness and transparency.

Much of the regained strength and confidence of Lloyd’s was developed under the leadership of Nick Prettejohn, through the personal input he made. In thanking him for all he did, I would also like to wish him every success in his new role at Prudential.

I am very grateful to Luke Savage for his hard work as Acting CEO over the past four months. He will now be able to concentrate his efforts, once again, on finance and risk management. I would also like to express my particular thanks to John Coldman who completed his term of office as Deputy Chairman earlier this year and who has always given me the greatest encouragement and assistance.

Strongly placed to meet the challenges ahead

Lloyd’s remains in a strong competitive position with a powerful global brand and strong market-wide security ratings. The marketplace remains a centre of expertise, capable of underwriting complex risks that others simply cannot cover. It is critical that we build on these foundations and deliver the three-year plan to ensure the future of the market.

I would like to thank my Deputy Chairmen and my colleagues on the Lloyd’s Council and Franchise Board for their commitment and hard work during a notably demanding year. It is also a credit to the staff in the Corporation and the businesses in the market that we were able to meet the challenges of the past year and deliver a particularly tough agenda.

Extracts from Statement by Luke Savage, Finance Director and Acting Chief Executive:

If ever there was a year in which Lloyd’s demonstrated strength in the face of adversity, it was 2005.

In 2005, faced with the most expensive year for natural catastrophes in the history of our industry, the Lloyd’s market proved its resilience and financial strength, once again reinforcing our reputation for paying valid claims.

Hurricanes Katrina, Rita and Wilma were three of the 10 largest storms in US history, with an insured loss estimated at over $65 billion. Inevitably, they had a significant impact on the financial result of the market; but the ability of all syndicates to trade forward without calling on the Central Fund is clear evidence of the progress we have made in recent years.

We made further progress in our continuous efforts to create a modern, transparent and efficient platform. Key achievements included gaining our China licence, improvement in our risk management capability, the implementation of a new capital regime and exceeding our targets on contract certainty.

These achievements have not gone unnoticed. In an atmosphere of frequent and widespread downgrades, Lloyd’s ratings were reaffirmed by all three rating agencies with whom we have an interactive relationship.

Despite recording a strong performance in the first half of 2005, the combined impact of hurricanes Katrina, Wilma and Rita, totalling £3.3 billion net, resulted in the market reporting a small overall loss of £103m and a combined ratio of 111.8%.

The industry continues to see good opportunities at Lloyd’s and many of our biggest insurers have expanded their businesses here in 2006. Capital providers responded in a disciplined way to limited rate increases, putting £1.2 billion of new money into the market. Capacity also increased in line with new business opportunities to £14.8bn, a 7% rise on the previous year.

Franchise performance: a focus on underwriting profit

Over the course of last year, we continued to invest in the development of the market’s risk management capability. The series of Realistic Disaster Scenarios were further developed, and two new events were created. This included a $60 billion Gulf of Mexico loss exercise which forced the market to look at their exposure and where necessary adjust their underwriting and reinsurance programmes. Without this exercise our Katrina losses would have been greater. Nevertheless, the hurricanes were a harsh reminder of the importance of exposure management and that catastrophe models are only as good as the assumptions that lie behind them.

The Franchise Performance Directorate continued their mandate to improve the professionalism of underwriting in the market through performance management and a focus on underwriting for profit.

We have seen a measured market response with syndicates taking advantage of business opportunities where rates have improved after the hurricanes, while cutting back in unaffected lines where rates are softening.

We remain committed to improving the market’s exposure management and monitoring and preserving the integrity of the risk management framework.

Capital advantages

Over recent years, we have worked to reform our distinctive structures and processes to bring them in closer alignment with our peers. In 2005 this work continued, as we implemented a new risk-based capital regime, in line with the FSA’s new Individual Capital Adequacy Standards (ICAS). Capital for each member or syndicate is now based on the unique risk characteristics of the business, rather than market average assumptions. This means significant benefits: capital is better aligned with risk, our central assets are protected, a competitive return on capital is achievable and we provide a level of security well beyond the requirements of our current rating level.

Business process reform: much achieved, much to do

Although the market has long agreed on the need to improve its service standards and business processes, 2005 was the year when contract certainty moved to the top of boardroom agendas.

The definition of contract certainty and measurement targets were agreed; and practical help was provided in the form of a code of practice and contract certainty checklist. This enabled us to achieve a success rate of more than double the year end target of 30%. The average quality of the LMP Slip, the document that records the detail of risks and forms the basis of a contract, also rose from 70% to 97%.

During 2005, the drive to introduce electronic data placement changed direction. The technological landscape has evolved, and market requirements have changed. This has led to the development of alternative solutions and negated the need for Lloyd’s to build central infrastructure. Indeed there was a growing consensus that the market was better equipped to solve the problem of electronic data placement and that the Franchisor’s role should be standard setting. In light of this, we took the decision to close Kinnect.

Lloyd’s remains committed to the introduction of electronic data placement and will continue to encourage and support the development of electronic trading platforms, business to business systems and the use of data transfer standards.

We achieved a lot during 2005 but the clock is ticking and challenges remain. Improving our business processes remains a top priority for Lloyd’s and our businesses. We simply cannot afford not to do it.

Changes, challenges and the future

In 2005 we worked closely with the market to develop a three-year Strategic Plan. Building on our recent achievements, this is designed to take the market to the next level in terms of performance, by ensuring:

• a clear and transparent performance framework;

• a strong capital framework;

• a secure, highly-rated market;

• outstanding market access; and

• efficient business processes.

Our vision is to be the platform of choice for insurers and reinsurers. Although Lloyd’s is in a strong position, there is no room for complacency. We must act now to ensure that the Lloyd’s platform is as competitive as possible.

A number of organisational changes were implemented during 2005 to ensure we have the best structure to deliver on our plan. These included the rationalisation of Corporation directorates and the creation of a Franchisee Relations Department.

As I come to the end of my brief tenure as Acting CEO, I would like to thank everyone within the Corporation and market for their hard work in what has been an exceptionally challenging year.

Lloyd’s web site: www.lloyds.com

Lloyd’s is the world’s leading insurance market with a capacity to accept insurance premiums of more than £14.9 billion in 2004. It is the world’s second largest commercial insurer and sixth largest reinsurance group. In 2004, 66 syndicates are underwriting insurance at Lloyd’s, covering all classes of business from more than 190 countries and territories worldwide.