Lower profits for Lloyd's in 2008

Despite the favourable results most Insurance syndicates at Lloyd’s of London are delivering to date in 2007, many are likely to reduce the amount of business they expect to write during 2008 warns Neil Coulson, a partner and insurance industry specialist at accountancy firm CLB Littlejohn Frazer, ahead of the market’s third quarter results announcement due at the end of November.

“Although Lloyd’s and other reinsurance businesses are expected to continue posting attractive results in 2007, the numbers mask a pattern of downward trends in premium rates . The predicted healthy results from Lloyd’s are mainly due to a benign claims environment over the last couple of years, a picture that could change in 2008. With dropping underwriting rates there will be less of a buffer if the pattern of claims shows an upturn and any profits for 2008 could be wiped out”, Coulson said.

"Syndicates will feel the squeeze from two directions in 2008. Underwriting rates are on a downward cycle in most areas. This means that syndicates will need to write more business to maintain the same level of sales turnover. The reality is that some previous business will no longer be attractive at lower rates. Syndicates may consider the risk of a loss on certain business too high for the prices being quoted and choose not to renew. The result is that syndicates will probably write less not more business. If claims also increase, then syndicates' profit margins will be squeezed from this direction also.”

“If you write less profitable underwriting business it will normally reduce your overall profits, unless you reduce costs or increase investment earnings. Although competition in the insurance market remains strong at present, a number of insurers have already announced plans to scale down their operations in 2008. This will focus attention on overheads and staff costs. As Lloyd’s syndicates outsource much of their sales processes to brokers some of their sales costs should reduce since they will pay less commission as they underwrite less business. It won't be a bloodbath but there will probably be a slowdown in the recently buoyant insurance recruitment market.”

“Investment return will become a more important part of syndicates' results in 2008 as underwriting becomes more marginal. However, interest rates are falling and the effects on investments of the sub-prime mortgage issue and loss in value of many hedge funds and investments stands as a warning against making overly risky investments. AIG and Swiss Re amongst others have recently noted losses from investments, but the more conservative approach adopted towards investments by most syndicates should avoid most of the severe investment losses.”

“The future is not all gloom. Despite the fact that underwriting rates are on a downward swing, the market is still pretty lively and opportunities exist for syndicates to make some money in 2008.”

“Syndicates are looking at their structures and readjusting in order to reposition themselves in the advent of Solvency II. The Franchise Board at Lloyd’s also ensures that syndicates keep a close eye on their aggregate exposure to losses and the increased risks they run as rates decline. The increasingly global nature of the insurance industry will also provide some opportunities to make money. Several syndicates have operational links with Bermuda and a number have opened suboperations in China, Singapore and Japan to chase better rates and more business, although pricing around the world is becoming more transparent.”

Coulson added: “2005 to 2007 were relatively benign years for Lloyd’s syndicates, with the exception of the 2005 hurricanes. Although some syndicates lost significant money in 2005 as a result of hurricanes Katrina, Rita and Wilma, most underwriting rates were high and, for hurricane-exposed business, 2006 saw significant rate increases. Despite the floods which hit large parts of the UK this summer, 2007 has seen few major claims this year. Lloyd’s is also not expected to have underwritten a lot of the US errors and omissions and directors and officers business that is exposed to claims arising as a result of the sub-prime related investment collapses. As a result of this the syndicate business earned in 2007 should be profitable for most classes and this should be supplemented by a continuing trend of releases from earlier year's reserves as time confirms that claims are developing favourably. This effect is likely to continue into 2008 for these low claim years.”