Lloyd’s counts the cost of glut of natural disasters

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A STRING of natural disasters led by the Japanese tsunami and earthquake sent insurance market Lloyd’s of London crashing to its costliest six months on record, as it posted a first-half loss of £697m.

The specialist insurance market’s loss compared with profits of £628m a year earlier, reflecting a total of £6.7bn in claims during the first half, making it the costliest six-month period in Lloyd’s 323-year history.

The unprecedented claims total included £2.7bn in catastrophe-related claims, more than 10 times Lloyd’s average disaster loss during the first six months of the year.

Insurers have been battered by a glut of natural disasters between January and May, resulting in many posting heavy half-year losses.

As well as the devastating Japanese earthquake and tsunami in March, insurers have been hit by New Zealand’s earthquake, heavy flooding in Australia and tornadoes in the US.

Lloyd’s said 2011 is already shaping up to be the second most expensive year ever for insurers. However, the insurance market, which is made up of 88 underwriting syndicates, said it is strong enough to cope with a potential further spate of big claims.

Its central capital reserves – Lloyd’s fund of last resort used in the event that individual syndicates are unable to meet their obligations – was up 10 per cent on the year at £2.47bn. Lloyd’s did not have to call on its reserves, despite the unprecedented cost of meeting the claims.

“We go forwards into the second half of the year as strong as we’ve ever been,” said Lloyd’s finance director Luke Savage.

He added the outcome for 2011 as a whole will depend on whether the June-to-November US hurricane season inflicts further losses on the industry, and also how Lloyd’s investment portfolio performs amid unsettled financial markets. This year’s hurricane season has been the most active on record, but with the exception of Hurricane Irene, no major windstorm has hit the US mainland.

Lloyd’s outgoing chairman Lord Levene said: “2011 has already been one of the most challenging years on record for the insurance industry with major natural catastrophes devastating communities in Australia, New Zealand, Japan and the US.

“Lloyd’s ability to pay billions in claims to help these communities rebuild is unquestioned and the fact that we have managed to do so without any call on our central capital reserves is testament to the market’s exposure management.”

Lloyd’s had investment income of £548m in the first half, down from £597m a year earlier and £708m in 2009.

Lloyd’s has been gradually withdrawing cash deposits away from banks in heavily-indebted peripheral European countries, Mr Savage added. “The cash by and large is placed with high credit quality banks, we’re not using peripheral country banks,” he said.

Chief executive Richard Ward said: “These are tough times for the insurance industry, but we are well positioned to handle them.

“Despite incurring £6.7bn in claims from the costliest first half year on record, Lloyd’s entered the second half of the year with £57bn in net assets to support our business and pay claims.

“However, while interest rates are low and equity markets are volatile, we can’t rely on investment income to subsidise our underwriting, we must decline under-priced risks.”

The £1.2bn of predicted claims from the Japanese tsunami and earthquake made it the fourth biggest event to impact on the London-based market.

Launched over a coffee

Lloyd’s of London traces its origins to a 17th Century London coffee house where merchants met to insure ships. Edward Lloyd’s coffee house became recognised as the place for obtaining marine insurance.

Now 323 years old, the specialist insurance market is not a company. It is a market where its members join together as syndicates to insure risks. It is made up of 88 underwriting syndicates. Lloyd’s was responsible for the first smallpox insurance in 1901. Lloyd’s underwrites a wide range of businesses and projects across the globe, including oil rigs, transport networks, satellites, Wimbledon and the Oscars.