Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.
“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”
European banks and their regulators are trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Siemens AG (SIE), European’s biggest engineering company, withdrew short-term deposits from Societe Generale SA, France’s second-largest bank, in July, a person with knowledge of the matter said yesterday.
Lloyd’s, which holds about a third of its 2.5 billion pounds ($3.9 billion) of central assets in cash, has stopped depositing money with some banks in Europe’s peripheral economies, Savage said, declining to name the countries or institutions.
“We have a very conservatively positioned balance sheet,” Savage said. Lloyd’s also holds about a third of its assets in mainly U.S. and U.K. government bonds and a third in corporate bonds, he said.
The ECB today allotted $500 million to one bidder in a regular seven-day liquidity-providing operation at a fixed rate of 1.07 percent. Last week, the Frankfurt-based ECB loaned $575 million to two euro-area banks, the first time financial institutions had requested the currency since Aug. 17. The ECB doesn’t identify the banks it lends to.
Today’s loan “is the rolling-over of previous lending of dollars and isn’t very significant,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “The three-month dollar lending offered by the central banks is taking the edge off this problem to some degree.”
The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 95.6 basis points below the euro interbank offered rate, or Euribor, at 11:13 a.m. in Frankfurt, indicating a premium to buy the dollar. It widened to as much as 112.5 basis points earlier this month, the most since Dec. 2, 2008, according to data compiled by Bloomberg.
Lloyd’s, founded in a London coffee house in 1688, swung to a 697 million-pound pretax loss in the six months to June 30 after the most expensive first half for natural disasters on record. The market made a profit of 628 million pounds in the same period a year earlier, the London-based market said in a statement today.
“These are tough times for the insurance industry, but we are well positioned to handle them,” Chief Executive Officer Richard Ward said in the statement. “While interest rates are low and equity markets are volatile, we can’t rely on investment income to subsidize our underwriting. We must decline under- priced risks.”
Insurers’ profits have been hurt by natural catastrophes, including the earthquake and tsunami that struck Japan in March, causing record insured losses of $70 billion in the first half of the year, according to broker Guy Carpenter & Co. At the same time, record low interest rates are crimping investment returns.
Investment Income Falls
The insurance markets made 548 million pounds on its investments in the period, 8.2 percent lower than in the first half of 2010 as interest rates in the U.K., U.S. and the euro zone neared record lows.
“I cannot see any reasonable prospect of making decent investment income in the medium term,” Savage said.
Lloyd’s had a combined ratio of 113.3 percent in the first half, meaning for every pound it took in premiums, it paid out 1.13 pounds in claims. That worsened from 98.7 percent in the first half of 2010.
The loss was “much better than our peer group exposed to the same catastrophes,” Savage said. Bermuda insurers’ combined ratio was 117 percent for the period and U.S. reinsurers posted a ratio of 116 percent, Lloyd’s said.