Reserves running out warns Savage as Lloyd’s profit falls

Reserve releases from old underwriting years, which have helped bolster many insurers’ underwriting profits recently, are close to drying up, Lloyd’s finance director Luke Savage said.

Companies including Lloyd’s insurers have been benefiting from releases from the 2007 and prior underwriting years, where business is running off with lower loss ratios than was expected at the time.

“The 2007 and prior years can’t keep getting better forever and will run out of steam,” Savage said, speaking to Insurance Times on the morning that Lloyd’s released its results for the first half of 2010. “I wouldn’t like to guess whether that will be at the end of this year or next, but they can’t keep going for perpetuity.”

Once the 2007 and prior-year releases have been exhausted, later years are unlikely to offer the same prop to underwriting results. “The more recent years of 2008 and 2009 are not looking so good, in part because of the problems in the global economy,” Savage said.

Despite incurring an estimated net loss of $1.4bn (£884.3m) from the Chile earthquake and $300m-$600m for the Deepwater Horizon loss, which together added 17.1 percentage points to its combined ratio, Lloyd’s still made an underwriting profit, posting a combined ratio of 98.7%. Without reserve releases, which reduced the combined ratio by 4.6 percentage points, the combined ratio would have been an unprofitable 103.3%.

The catastrophe losses incurred in the first half of the year slashed profit before tax to £628m from £1.3bn. Claims incurred, net of reinsurance, increased to $5.4bn from $4.5bn. Annualised return on capital fell to 7% from 17.5% in H1 2009.

Despite the losses Savage described the performance as “respectable”, pointing out that the losses were almost six times the average seen over the last five years that Lloyd’s has been producing interim results.

He added that the first-half investment return of £517m, while lower than the £639m from the same period last year, was better than expected, as, given the credit concerns in countries such as Greece and Portugal, investors had been dumping euro-denominated bonds in favour of sterling and dollar-based notes.

“Because of our long positions in sterling and dollar, we did better on investment income than we would have expected,” Savage said.