Letter sent to members

Sterling’s sudden slump against the dollar has prompted Lloyd’s to write to members warning them to raise more capital to shore up against the fall. Business plans for 2009 calculated the exchange rate at $1.99 to £1, but the rate now stands at about $1.50 to £1.

“This represents an increase of some 20% in overall market exposures given that about 60% of technical provisions and planned premium for next year are based on US dollars,” said Luke Savage, director of finance risk management and operations at Lloyd’s.

He told members that the purpose of the letter was “to highlight the need for businesses to review their exposure and associated capital requirements, particularly where capital is deployed predominantly in sterling”. The result, he said, was a currency mismatch against exposures.

Lloyd’s said the exact shortfall for each syndicate would differ, depending on results for the second half of 2008, its exposure to the US dollar and the constitution of the funds at Lloyd’s.

Savage said Lloyd’s would contact members directly where it estimated a shortfall and would agree the level of action required case by case. He further asked that syndicates revised their accounts by taking into account sterling’s devaluation.

Hardy responded by raising its 2009 underwriting capacity for syndicate 382 from £185m to £250m.

“Much of our revenue comes from abroad and is denominated in currencies other than sterling,” said Barbara Merry, chief executive of Hardy.

“Business planning for the current year was done in June last year. At that time, the weakening of sterling had not been anticipated, but now, as currency exchange rates have changed, volumes have increased so we have subsequently had to increase capacity,” she said.

“At the same time, with current trading relatively strong, we have added in a buffer so that we will be in a position to take advantage of opportunities that may arise.”