Lloyd’s result improves, book grows, capital builds

The Lloyd’s of London insurance and reinsurance market improved its result in the first-half of 2018 and underwriters in the market took advantage of rate rises following the 2017 catastrophes to increase the markets premiums written.

But the overall result for the Lloyd’s market suffered as the investment return was significantly lower than the prior year and the accident year underwriting result also declined.

Lloyd’s reported a return to profit after the major hurricane losses of 2017, with the improved combined ratio of 95.5% (96.9% for H1 2017), as well as growth in the underwriting book to gross written premiums of £19.3 billion (£18.9bn for H1 2017), both combining to drive a better underwriting result of £0.5 billion, up from £0.4 billion in the prior year.

However, underneath this the accident year ratio for the six months to June 2018 was 99.3% (up from 98.5% at the end of H1 2017), an increase the market said was primarily due to an increase in attritional losses offset by a reduction in major claims.

Lloyd’s Chief Executive, Inga Beale, commented on the results, “These results and return to profit demonstrate the strength of the Lloyd’s market following one of the costliest years for natural catastrophes in the past decade. Whilst these results are welcome, Lloyd’s continues to concentrate on improving the Lloyd’s market’s long-term performance by taking action to address underperforming areas of the market.”

However, pre-tax profits for the first-half of 2018 only came in at £600 million, half the prior years £1.2 billion, which is due to much lower investment performance for the period, with an investment return of 0.3% compared to the prior years 1.2% return.

As a result of this lower investment return the annualised return on capital of the Lloyd’s market fell to 4.3%, from 8.9% in the prior year.

That reflects a market place that may not be satisfying its investors, when the investment-side doesn’t perform and of course investors in Lloyd’s also take on all kinds of correlating risks as well as benefiting from the less correlated insurance-linked underwriting returns.

Despite the lower return, the Lloyd’s capital base reached a new high during the period, with net resources growing from £28 billion to £29 billion at the end of the first-half of 2018.

This indicates a wealth of capital, which could also indicate further price pressure will emerge as Lloyd’s contributes to excess capital in the insurance and reinsurance industry.

The growth in premiums underwritten was driven by improvements in pricing and growth in some profitable lines, the market said this morning.

In particular, Lloyd’s underwriters wrote more: Property insurance (particularly in US binding authorities); Proportional Treaty Reinsurance lines (notably Agriculture and US Catastrophe Excess of Loss); Casualty (notably Cyber); and Specialty (notably Political risks).

The market explained that a lot of the growth came from new product development and from traditional distribution channels (such as US surplus lines).

Of course a significant amount of this growth is therefore in property and catastrophe exposed underwriting business it seems, which could mean the market carries a little more exposure to peak perils. But that has been seen across reinsurance, as markets looked to take advantage of post-2017 price rises.

The market explained that, “Pricing is generally more stable with increases evident in 2017 hurricane-impacted lines of business.”

Lloyd’s aggregate risk adjusted rate on renewal business increased by 3.1% during the first-half of 2018 (up from H1 2017’s 2.3%).

Lloyd’s also saw some lines with premiums contracting or static, particularly in the areas where underwriting performance has not been so good, such as marine and aviation risks.

Performance is key for Lloyd’s as too is innovation and change right now. Despite the marketplace delivering an underwriting performance improvement, the return on capital is still not spectacular without the input of the investment side of the business.

Hence the focus on underperforming areas of the business recently, on which Beale said, “We continue to focus on improving the Lloyd’s market’s long-term performance by taking positive action to address areas of the market that are underperforming. While much of the Lloyd’s market is profitable, some syndicates and certain lines of business have a disproportionate negative impact on the market’s profitability. Syndicates are being asked to conduct in-depth reviews of the worst performing 10% of their portfolios, along with all loss-making lines, and submit their relevant remediation plans for approval as part of the 2019 business planning process. The review process is robust and well-governed and has been undertaken by an experienced team at Lloyd’s. We are working closely with syndicates to ensure policyholders are protected. ”

Beale explained that these efforts are already contributing to the improvement in underwriting performance seen this first-half.

“Although this reflects the progress that has been achieved, it should not mask the importance of continued, concentrated market-wide efforts to deliver long-term sustainable profit through the very challenging market conditions that are likely to persist for some time yet,” Beale continued.

But improvement of the underwriting performance at Lloyd’s is unlikely to be enough to keep the market a leading attraction for investor and corporate capital, in an insurance and reinsurance industry undergoing change.

Hence innovation and technology will play an enormous role at the heart of Lloyd’s going forwards, as long as the right initiatives are embraced and decisions taken.

Highlighting the importance of this work, Beale said, “The Corporation also remains focused on making the Lloyd’s platform more competitive. Alongside the success of the mandate for the placement of electronic risks, we have recently launched the Lloyd’s Lab, our new innovation accelerator, which will help Lloyd’s use technology to better serve our customers around the world. We have also worked tirelessly to secure the Lloyd’s market’s access to the EU27 and our Lloyd’s Brussels subsidiary will start writing business in the European Economic Area from 1 January 2019.”

The competitiveness of the Lloyd’s market is absolutely key to its future, as too will be the efficiency of its operations, its capital and how it attracts new capital as well, as growth should also continue to be a focus given the underinsured risks in the world.

To address that Lloyd’s needs to find ways to welcome capital more flexibly, hence the Lloyd’s initiative to look at the insurance-linked securities (ILS) market has been welcomed. (Update: Lloyd’s puts ILS investigations on hold for now.)

However, to-date that has only involved protecting the Central Fund, not addressing the ability of investors to more easily access the pure underwriting returns of the Lloyd’s marketplace.

We’d suggest that steps need to be taken to enable capital to flow more freely into the underwriting business of the market, allowing the world’s major institutional investors to harness and benefit from the less correlated aspects of Lloyd’s returns.

Capital wants to be seen as a partner, not just a source of protection and Lloyd’s underwriting reach, depth and heritage is a very attractive partner for the capital markets, ILS funds and investors.

Finding the best way to harness that should be a key strategic initiative for Lloyd’s going forwards, given the way the rest of the insurance and reinsurance market is moving today.

The improvement in result and growth in premiums at Lloyd’s makes the market a very attractive target for the investors looking to access risk-linked returns today.