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Lloyd's of London losses top $800M on catastrophes

Lloyd's of London losses top $800M on catastrophes

LONDON—Lloyd's of London was hit hard by 2011 catastrophe losses, but the market is well-positioned to absorb the impact, observers and Lloyd's say.

Analysts say Lloyd's £516 million ($818.8 million) loss for 2011, announced last week, was well within expectations, given a series of natural disasters that included the earthquake and tsunami in Japan; an earthquake that destroyed portions of downtown Christchurch, New Zealand; months of flooding in Thailand; and tornadoes that wreaked havoc in the United States.

In fact, Lloyd's loss is “not a bad result” in the context of record catastrophe losses, said Lloyd's CEO Richard Ward.

Lloyd's reported that it incurred total net claims of £12.9 billion ($20.5 billion) in 2011, including £4.6 billion ($7.3 billion) in catastrophe losses.

Last year was “absolutely the costliest on record” for Lloyd's in terms of catastrophe losses, but they still were less than 1% of Lloyd's assets, Mr. Ward said.

“In the context of $20 billion worth of losses, in the context of catastrophe claims of $7.4 billion—to report a loss of $800 million to the market is a pretty good result,” said Mr. Ward. “Not a bad result in the context of the major losses we had to deal with.”

He said Lloyd's is well-capitalized. “We continued to build our capital strength throughout 2011. Members' assets are sitting at near-record (levels). There will be no material impact on the Central Fund.”

Lloyd's £516 million loss for 2011 compares with a profit of £2.20 billion ($3.49 billion) for 2010. Its combined ratio deteriorated to 106.8% from 93.3% the previous year. Total resources of Lloyd's and its members at year-end stood at £58.87 billion ($93.42 billion) vs. £55.23 billion ($84.64 billion) a year earlier.

Mr. Ward noted that the global insurance industry had to pay out more than $100 billion in catastrophe-related claims last year. “That capital has to be replaced, and the way you do that is to increase rates,” he said.

“It would be nice over the next few months that we do see these green shoots of recovery in rates continue,” said Mr. Ward. “The general commentary in the market is no one is surprised by these results. They're not bad results given the scale of the losses.”

Analysts said the losses, though high, were expected.

“Despite record catastrophe losses and a pretax deficit, the capital strength of the Lloyd's market was maintained,” said Catherine Thomas, director-analytics for A.M. Best Europe Rating Services Ltd. in London. She noted that Lloyd's central assets reached a record £2.39 billion ($3.79 billion).

“It is noteworthy that in 2011, the majority of loss activity occurred outside the U.S.,” Ms. Thomas said. “Due to the nature of the events, many insurers struggled to estimate ultimate losses; and in the second half of 2011, there was material adverse development relating to the earthquakes in Japan and New Zealand.”

“From a rating agency perspective, we'll be considering things in a credit context,” said Martyn Street, director with Fitch Ratings Ltd. in London. “The loss, though significant, given the year we've witnessed, it is reasonable they are within our expectation from the events that occurred last year.”

“The market has the resilience to absorb losses,” Mr. Street said.

“The results for 2011 are within our expectation and are not by any means an outlier for the market as whole,” said Dennis Sugrue, a director at Standard & Poor's Rating Services in London.

“Obviously, there's going to be disparity a between the results of the separate syndicates,” he said. “Of the ones we follow, I don't think there are any material outliers from a rating perspective. We talked to Lloyd's and I think they're comfortable with where all the syndicates stand. The market as a whole is still in a strong position from a resource perspective. The losses were within what Lloyd's had planned for.”

Seventy percent to 80% of last year's cat losses were in Asia, Mr. Street said. “Some companies have been relatively unscathed, whereas others have endured quite significant losses.”

He also noted that losses increased as actual data was tallied for some events. “We'll be looking for how the market responds to this,” Mr. Street said.