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Hiscox questions Lloyd's capacity strategy

Robert Hiscox, a former deputy chairman of Lloyd's and one of the most strident voices in EC3, has called the reduction of only 2 percent in the Society's capacity for 2008 "disappointing".

The chairman of Bermuda-headquartered Lloyd's (re)insurer Hiscox Ltd was speaking as the firm announced record full-year profit before tax of £237.2mn, up 18 percent, driven by the stellar performance of its Global Markets division.

Hiscox said: "Any management, including the management of Lloyd's, who sees a rising income in an area of falling rates ought to ask serious questions. It was disappointing to see the capacity of Lloyd's reducing only 2 percent for 2008 (an actual increase at constant exchange rates) when most of the seasoned underwriters like us were reducing by 20 percent."

The company reduced the capacity of its Lloyd's Syndicate 33 from £875mn last year to £700mn for 2008.

Hiscox added: "The insurance cycle is alive and definitely kicking and it would appear that some insurers are, as usual, suffering from rapid and severe memory loss. How can they forget 2005 when years of premiums were wiped out?"

He continued: "Rates are reducing rapidly in obvious areas where there are large premiums to be competed for and the lust for non-catastrophe exposed business is turning underwriting discipline to jelly. I sometimes wonder whether underwriters who have made a 10 percent profit and then reduce rates by 10 percent think they are going to make 9 percent, instead of the obvious nil."

Hiscox's Global Markets division - which writes the company's composite business on its Lloyd's Syndicate 33 - made a profit before tax of £155.6mn, up from £90.7mn in the prior-year period, while reducing its written premium income by £32.6mn to £676.4mn and reducing its combined ratio by 9.4 percentage points to 81.7 percent.

The insurer also revealed that its Lloyd's Syndicate 33 would return a profit of 2.7 percent of its £774mn capacity for the hurricane impacted year of 2005.

In addition it increased Syndicate 33's profit forecast for 2006 to a mid-point of 20.75 percent of capacity and gave an initial profit range of 7.5-15 percent of capacity for last year.

In total the company's gross written premium climbed slightly from £1.13bn in 2006 to £1.2bn last year, while its net earned premiums rose from £888.8mn to £965.2mn.

The group's combined ratio fell by 4.7 percentage points to 84.4 percent.

Hiscox, said: "This is another record result driven primarily by the excellent performance of our Global Markets and Bermuda businesses. We will continue to develop our UK and international network to distribute our specialist products which will provide further stability to the group."

Hiscox's UK and Europe division grew its gross premium by 13.7 percent to £302.3mn with profits falling £11.3mn to £21.8m following the impact of Windstorm Kyrill and the UK floods.

The company's investment income was up to £100.8mn last year from £78.5mn in the prior-year period and it said it had "managed to avoid the worst damage from the sub-prime crisis affecting the world".

Hiscox said that its funds were predominantly invested in cash and short duration bonds and has "negligible exposure" to sub-prime securities, all of which remain AAA rated.

Hiscox added: "After a period of grace during which the banks had re-established a reputation for financial discipline, control of risk and expertise in passing that risk off to others (and insurers were widely assumed to have taken the risk off them), there is a measure of schadenfreude in their current turmoil."

Hiscox continued: "Critics have wondered why the insurance industry has been unable to quantify its losses almost immediately after major catastrophes, telling us that the banks can mark-to-market every night and know their exact exposure at any time. Not so, it would appear. It is a serious crisis, the full extent of which I do not think we have yet seen. In our underwriting books we have a very limited exposure that we have reserved fully."

The company's shares have fallen 1.8 percent to 270p in trading on the London Stock Exchange.

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