Review
Chief Executive’s statement
Our results again demonstrate the quality of our underwriting businesses as well as our focus on risk management. The outlook for 2009 and 2010 underwriting is improving and we expect to see good opportunities for growth supported by a robust balance sheet and superior financial strength ratings.
Financial results
Compared to the exceptional performance recorded in 2007, our 2008 results at first sight look lacklustre. Taken in context, however, the 2008 results are highly creditable and demonstrate again the quality of our core underwriting business and risk management.
2007 benefited from exceptionally low levels of claims incidence whereas 2008 witnessed the second worst year for industry catastrophe losses with Hurricane Ike estimated to be the third most costly US hurricane in history. Underwriting nevertheless generated a profit of £222.2 million in 2008, compared to £355.0 million in 2007. The combined ratio was again excellent in the circumstances at 76%.
The effects of the sub-prime crisis and subsequent credit crunch have resulted in volatile and difficult financial markets which led to significantly lower investment returns. We were pleased to have a positive contribution from investments having taken a more cautious stance, but at £18 million in 2008 compared to £157.0 million in 2007, the impact on Group profitability was material.
In 2001 we set our 15% return on equity cross cycle target. With rates again turning upwards, we believe that a full cycle has now passed. While 2008 return on equity was 7.8%, the average return on equity over this cycle was 22.4%, well above target. We are maintaining this 15% target for the next cycle.
The combination of 2008 catastrophe losses and financial market turmoil has had the effect of halting the decline in rates experienced in 2007 and 2008 and we are experiencing price improvements in a number of business classes. We therefore consider the outlook for underwriting to be strong.
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