September 21, 2011 | Subscribe Now By Caroline McDonald, PropertyCasualty360.com

NU Online News Service, Sept. 21, 11:26 a.m. EDT

Lloyd’s today announced an interim loss before tax of £697 million ($1.12 billion at current exchange rate) for the 2011 first half, compared to £628 million ($980.3 million) in profit for the same period a year ago.

The loss represents the costliest first six months on record for major catastrophes for the insurance industry, and Lloyd’s says 2011 already is likely to be the second most expensive year ever for insurers.

Lloyd’s Chief Executive, Richard Ward, says in a statement, “These are tough times for the insurance industry, but we are well positioned to handle them. Despite incurring $10.8 billion in claims from the costliest first half-year on record, Lloyd’s entered the second half of the year with $92 billion in net assets to support our business and pay claims.”

He adds, however, that “while interest rates are low and equity markets are volatile, we can’t rely on investment income to subsidize our underwriting; we must decline under-priced risks.”

Luke Savage, director, finance, risk management and operations for Lloyd’s tells NU Online News Service that at $60 billion, catastrophe losses for this year’s first half already exceed those for all of last year—which were around $42 billion.

“In that context, it’s what we’re here to do—to pay claims when bad things happen,” Savage says.

“Whilst it has been a tough first year, compared to our peers, we think we’ve actually done pretty well,” Savage says. “It’s been more or less an earnings event rather than a capital event and whilst we’ve got very tough times ahead,” Lloyd’s is still “strongly capitalized—in fact more strongly capitalized than we were at year-end.”

Lloyd’s says its conservative investment mix has resulted in a positive return of £548 million ($883 million), despite the continuing volatility in financial markets. 

Lloyd’s says it has been stressing underwriting discipline in the industry, which Savage believes has helped the situation.

While it’s difficult to “pin down the impact of the central oversight” which Lloyd’s exerts, he says, looking at its combined ratio of 113.3 compared to peer groups, “It looks like we’ve come through in good shape compared to our peers. We like to think underwriting discipline played a big part of it.”

Regarding whether the first-half events will turn the market, Savage says, “We don’t think what we’ve seen so far is turning the market. Off the back of the catastrophes we’ve seen some strong rating improvement” in the geographies and classes impacted, including New Zealand property and Japanese property and some improved international reinsurance rates, he notes.

More recently, he notes, there have been some small improvements in U.S. reinsurance rates due to tornado activity, but overall, “in other geographies and other classes, rates are at best hovering and indeed, in U.S. casualty we see them still drifting slowly downwards.”

Savage adds, “I’m not sure what it would take to turn the market as a whole, but it doesn’t look like we’ve had it yet.”

Because 43 percent of Lloyd’s business is in U.S. and Canada, he says, normally the majority of losses would have reflected hurricane and/or earthquake losses from that region. This year, however, “The big losses have been largely from outside the U.S.,” including the Japanese quake and tsunami, the Christchurch, New Zealand quake and Australian floods. In the U.S., losses have been confined to tornadoes, he says.

Lloyd’s financial strength ratings were reaffirmed by A.M. Best ‘A’ (Excellent), Standard & Poor’s ‘A+’ (Strong) and Fitch Ratings ‘A+’ (Strong).