Hardy Underwriting revealed the extent of Lloyd's determination to ratchet up its capital requirements by explaining that Syndicate 382's risk based capital ratio (RBC) is likely to climb from a current 42 percent to 58.3 percent next year.
In conjunction with UK regulator the Financial Services Authority, Lloyd's has made it clear that it is looking to increase the RBC ratios of many of its trading units - effectively reducing the capital leverage of syndicates by demanding they put up additional funds to write the same level of business.
As a general rule, RBC ratios tend to be higher the more volatile the syndicate, although highly focused syndicates - such as Hardy with its helicopter pedigree - are also more heavily weighted. Nonetheless, the insurer noted that "on average, RBC ratios have been increased across the market and that 58.3 percent is below the average ratio for corporate members at Lloyd's who are dedicated to a single syndicate".
Hardy added that in accordance with FSA requirements, Hardy (Underwriting Agencies) Ltd is developing its own individual capital assessment ('ICA') model and it could be influential in providing a more appropriate and consistent capital requirement for the Hardy Group in the future.
The group also revealed last week that it was seeking to reduce capacity from £115mn to £100mn next year on the back of softening rates. Nonetheless, the insurer revealed a 43 percent increase in pre-tax interim profits to £9.26mn and a 119 percent increase in basic earnings per share to 28.3p.
The bottom line was helped by a 23 percent increase in gross written premium to £51.69mn and a supercharged combined ratio at Syndicate 382 of just 78.7 percent, a marginal improvement on 2003's figure of 79.8 percent.
The six-month return on equity also improved, doubling to 15.8 percent, while the company's net tangible assets increased slightly to 161p per share against 2003's figure of 156p.
The sale of Hardy's stake in fellow Lloyd's underwriters Atrium for a total of £11.6mn led to a special dividend of 25p per share. The insurer said the Atrium investment was becoming a "double-edged sword" where increases in the value of the investment were undercut by the size and concentration of Hardy's exposures.
Chairman Peter Hardy said the low combined ratio for Syndicate 382 was "testament to continuing strong underwriting performance" but said the most important feature of the accounts was the sale of the Atrium stake.
He added: "We are beginning to achieve our strategic objective of building a more substantial, well-diversified business. At heart, Hardy is a niche player and so our key characteristic of seeking to underwrite in specialist, high margin classes where we can influence price and conditions by leading, remains fundamental to our approach. We have proven expertise in managing the underwriting cycle and not damaging capital in more challenging market conditions and we are aware of the need to keep an eye on the costs. I believe that the performance of our underwriting and management teams will continue to impress.'
On the impact of this year's fiercer than expected hurricane season, Hardy said losses were likely to be "contained within normal forecast limits" and that it expected to maintain the final dividend.
But the insurer was less optimistic on the ratings environment, where it said there was evidence of "weakening" prices. It observed: "While the overall Lloyd's rating profile appears to be already down by 10 percent to 15 percent, our own profile on renewal business is down by only 1 percent to 2 percent. This is because we are not heavily involved in a significant proportion of Lloyd's overall business and we believe our rather small size allows us to more easily target some niches where increases are still being seen."
Aviation, bluewater marine and US D&O were under most ratings pressure, while accident and health, financial institutions and political risks were all still enjoying healthy rates, said Hardy.