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Lloyd's of London says new EU base in Brussels will cost 'tens of millions'

Lloyd's of London's CFO John Parry said the cost of setting up a subsidiary in Brussels will be in the "tens of millions" of pounds rather than the "hundreds of millions" as he laid out plans by the 329-year-old marketplace to maintain access to the European Union market that makes up 11% of its premium income.

"The timetable is [to be] up and running in 2018," Parry said. "We want to be there so that brokers have assurance that they [can transact] renewal business on Jan. 1, 2019."

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British Prime Minister Theresa May gave notice March 29 of the U.K.'s intention to leave the European Union by April 2019.

Lloyd's said earlier in the day March 30 that it will set up a subsidiary in the Belgian capital to maintain easy access to European insurance markets after the U.K. leaves the EU. At present, Lloyd's conducts much of its European business through "passporting" rules that allow a financial entity regulated in one EU country to do business in another with minimal extra regulatory oversight.

Parry said Lloyd's would prefer the U.K. government to make a deal with the EU that guarantees that access. "There is a cost to setting up a subsidiary," he said. "It adds a bit of complexity too, [though] it remains perfectly achievable and will be a great way for the market to continue to transact business in the EU."

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Lloyd's is a unique creature in the international insurance markets, with a distinct structure that has long been accommodated by special provisions in U.K. law and regulation.

"One of the reasons for choosing Belgium is the bandwidth and the skills of the regulator," Parry said. "They seem to be quite well informed about Lloyd's. … We're different, but explaining that can take time, and time is not our friend here. We're not going to wait and see if mutual market access comes through."

Pressures on underwriting premiums

Lloyd's full-year 2016 report, which was released at the same time as the announcement of the location of the EU base, revealed pressure on underwriting results as intense competition for risk continued to drive down pricing.

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Although the net profit reported by the marketplace remained broadly stable year over year at just over £2.1 billion, the result was driven by a sharp fall in the value of the pound following the surprise decision by the British to leave the EU in a referendum last summer, and a better performance from investment returns, which ticked up to £1.35 billion from £402 million in 2015. Lloyd's conducts most of its business in U.S. dollars — the currency of choice for the international insurance and reinsurance markets.

The underwriting result, meanwhile, plunged to £468 million from £2.05 billion as the combined ratio worsened to 97.7% from 90.0%, still shy of the 100% that denotes an underwriting loss. The deterioration was due to a series of large losses including Hurricane Matthew and the Fort McMurray Wildfire in Canada, which ended a period of several years during which the marketplace benefited from an unusually benign environment for natural catastrophe losses.

"It's a very different £2.1 billion from last year's £2.1 billion," Parry said, adding later: "It's the underwriting profit number of less than £500 million that is the focus from us … going forward."

Return on capital fell to 8.1% from 9.1% over the period. Gross written premiums rose to £29.86 billion from £26.69 billion a year earlier, largely the consequence of the fall in the value of the pound.