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OPERATING AND FINANCIAL REVIEW / FINANCIAL PERFORMANCE / OUTLOOK
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CHARLES PHILIPPS CHIEF EXECUTIVE
“With our strong focus on profit and return on equity, and the proven
experience of our team, we are confident, without being complacent, of
being able to continue to deliver good returns relative to the industry.”
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2005 |
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We anticipate another year of strong performance
with a good return on equity in 2005. There are
a number of positive factors influencing financial
performance in this year.
Unearned premium reserve: the premium written
in 2003 and 2004, which remained unearned at
31 December 2004, amounted to £501 million,
up 16.6% over the equivalent figure at the end
of 2003. This premium has been written at very
good rates and, in classes other than airline
insurance, a large part of the associated risk will
expire at either the end of March or the end of
June. Subject to unexpected levels of
catastrophe experience between now and then,
the unearned premium reserve is expected to
contribute good margins to the 2005 result.
Consistent reserving strength: the 2004 result
included a release from prior year reserves of
£62.7 million for Syndicate 2001. We make
every effort to ensure that we maintain a
consistent prudency in our reserving and,
therefore, we would expect there to be a
further release of reserves which will benefit
the 2005 result if we experience normal
claims development on previously earned
premium.
Solid rating achieved on £267 million of 2005
premium written: we have written £267 million
of premium (net of brokerage) in the first two
months, which is approximately 34% of our
current plan for the year. Of the £231 million
of this which was renewal income, the average
rate reduction was only 3%.
This table illustrates that rating levels in most
classes have to date remained above or around
2002 levels.
RATING INDICES FOR MAJOR CLASSES
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Class |
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2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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Airline hull and liabilities |
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100 |
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242 |
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232 |
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194 |
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175 |
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Marine hull |
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100 |
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115 |
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148 |
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170 |
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183 |
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UK Employers’
liability |
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100 |
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115 |
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144 |
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158 |
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155 |
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Energy |
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100 |
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140 |
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172 |
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189 |
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165 |
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UK Professional indemnity |
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100 |
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110 |
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148 |
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178 |
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180 |
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US property insurance |
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100 |
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125 |
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171 |
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163 |
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143 |
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Non US catastrophe
reinsurance |
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100 |
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120 |
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157 |
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162 |
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146 |
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US catastrophe
reinsurance |
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100 |
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115 |
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146 |
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150 |
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143 |
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US casualty |
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100 |
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125 |
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170 |
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211 |
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230 |
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War |
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100 |
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250 |
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288 |
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244 |
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220 |
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UK Fleet motor |
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100 |
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121 |
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136 |
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142 |
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139 |
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Risk XL |
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100 |
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122 |
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190 |
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192 |
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171 |
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Note: This table is completed by our underwriters and covers their views of rate
movement from year to year. These views are supported by actual recorded renewal rate
movements on the underwriting system. Subjective judgement is used to account for
subtle changes in exposure or terms and conditions. Claims inflation is not systematically
taken into account in the calculation of these rate movements and therefore, particularly
in relation to long tail business, some of the benefit of rate increases has been eroded.
Among the classes where pricing is now below
2002 levels, airline hull and liability insurance
has little room for further decline before
margins fall into questionable territory. Rating
pressure in this class has been affected by the
paucity of major losses over the past four years,
with some in the industry suggesting that this
is a new trend which is set to continue owing
to increased safety measures, new equipment
and a more cautious culture. However, we
believe it is too early to form such conclusions.
International property reinsurance became more
competitive at the major January renewal season
as some companies sought to increase their
spread of risk, although rates are still technically
sound. For US property insurance, which came
under pressure in 2004, rate reductions
currently appear to be moderating a little which
is a good sign of discipline in the market.
Encouragingly, we are still able to find areas to
write new property business at attractive rates.
The renewal seasons for reinsurance risks
affected in 2004 by windstorms in Japan and
the United States are in April and July
respectively and we would expect pricing in
these areas to improve. We are also still seeing
rate increases in a small number of classes
such as marine hull and aviation products.
Offshore energy rates, which were reducing in
2004, are showing signs of greater stability
following the larger than originally anticipated
industry losses from Hurricane Ivan.
All in all, 2005 has every prospect of being
another good underwriting year.
Larger investment funds: the Group’s cash and
investments amounted to £1.3 billion at 31
December 2004. We believe the investment
outlook for this year to be reasonable.
Lower Lloyd’s costs: Our Central Fund
contributions have fallen by £8.2 million
for 2005.
The largest threats to our 2005 performance
are abnormal loss activity and the sterling/dollar
exchange rate, given that 52% of our gross
premium in 2004 was US$ denominated.
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