Lloyd's of London on Wednesday posted its first pretax loss in six years after being hit by lower investment returns and major catastrophes, in what industry experts call the second-costliest year on record in terms of insured disaster claims.
The U.K.'s 324-year-old insurance and reinsurance market also said 2012 remains challenging for insurers with tough economic conditions globally. And despite the losses, insurance rates may rise only slowly because insurers have bulked up on capital, especially during years with smaller catastrophe claims.
For 2011, the Lloyd's market had a pretax loss of £516 million ($823.1 million), compared with a pretax profit of £2.2 billion a year earlier, consisting of the sum result of its members and itself as the managing corporation.
Lloyd's isn't publicly traded, though some of its members are listed companies, such as Hiscox Ltd., HSX.LN -1.76%Catlin Group Ltd. CGL.LN -0.17%and Hardy Underwriting Bermuda Ltd. HDU.LN 0.00%Its earnings are a collection of all members' results and it doesn't provide net profit figures.
The loss comes as industry estimates show that total claims from natural catastrophes last year were between $100 billion and $116 billion, the second-highest on record after 2005, when strong hurricanes in the U.S. pushed the figure to $120 billion.
Willis Re said catastrophe losses last year were worth at least $100 billion. Aon Benfield puts the figure at $107 billion and Swiss Re SREN.VX -0.77%puts it at $116 billion.
"Make no mistake, 2011 was a difficult year for the insurance industry," Lloyd's Chief Executive Richard Ward said. "Given the scale of the claims, a loss is unsurprising, but it reflects what we're here to do—help communities and businesses rebuild after disaster."
"However, I am disappointed that, given the exceptional level of catastrophes in 2011, insurance rates have not responded more positively. These events demonstrate the need for the industry to show discipline in terms of pricing," Mr. Ward said.
Lloyd's new chairman, John Nelson, noted that Lloyd's was able to make a profit in the second half of the year despite the floods in Thailand and continuing low investment returns.
"2012 remains challenging for insurers with tough economic conditions globally. It is vital that the market continues to take a disciplined approach to underwriting," Mr. Nelson said.
Lloyd's investment return fell to £955 million from £1.26 billion in 2010 amid poor investment markets. The group said its combined ratio worsened to 106.8% from 93.3%. A combined ratio is a measure of claims costs compared with premiums. A figure below 100% indicates an underwriting profit. Conversely, a figure above 100% indicates a loss. Lloyd's last had a pretax loss in 2005 worth £103 million. Before that was 2001 with a loss of £3.1 billion.
Lloyd's Finance Director Luke Savage said that 2011 was one of the costliest for Lloyd's. Despite that, insurance rates may only see sluggish growth.
"When you have major claims like earthquakes and windstorms outside the U.S., we tend to have a higher share of claims than from inside the U.S. Last year, there were major disasters in Australia, New Zealand, Japan and Thailand, so we picked up a higher share than we normally do," he said.
Savage said only a few lines of insurance are seeing increased rates but even those increases are "not enough."
"We've seen property treaty improving, as well as in energy, and there's a big improvement in U.K. motor rates, but that's just trying to claw back previous losses," he said.
"Beyond that, rates are still sluggish because of excess capital in the industry. It's going to be difficult to drive rates up, even though we don't think there's going to be much in the way of investment returns to support underwriting," Mr. Savage said.
Excess capital means that insurers have enough funds to back the offering of new insurance policies. That increases competition and makes it difficult to raise premium prices.
Mr. Savage said Lloyd's central fund—a pool of money used in case troubled member insurers have difficulty paying claims—has risen to £3.095 billion from £3.028 billion in 2010. "This shows we're in pretty good shape in a pretty disciplined market." Mr. Savage said Lloyd's managed to post a £181 million pretax profit in the second half of last year despite the floods in Thailand.
Shore Capital analyst Eamonn Flanagan said in a recent note that the strong level of capital of general insurance companies is like a "double-edged sword."
On the one hand, Mr. Flanagan said, tight management of capital has enabled the nonlife industry to endure the huge insured catastrophe losses in 2011. But on the other hand, "such financial strength has hampered attempts to push through much-needed hardening of premium rates in many key lines, especially liability, despite the low interest-rate environment."