The Lloyd’s of London insurance and reinsurance market announced its half-yearly results today and reported improved profits, but a decline in gross written premiums, as the world’s oldest re/insurance market navigates the challenging environment.
Lloyd’s reported gross written premiums of £14.86 billion for the first-half of 2014, down from £15.49 billion for the same period a year earlier. However the market was more profitable, reporting profit before tax grow of £1.67 billion, compared to just £1.38 billion the year before. Much of the improved profit may be due to investment income bouncing back and more than doubling, rather than more profitable underwriting it should be noted, although low catastrophe losses also clearly helped.
However the challenging market conditions are beginning to bite, providing a reminder that nobody is immune in the soft and competitive reinsurance environment. Despite Lloyd’s specialty focus, which you might have thought would insulate it to a degree, the markets cost of underwriting has also increased, as losses and expenses took the combined ratio to 88.2%, up from 86.9% for the prior half-year.
Losses from aviation incidents hit the Lloyd’s market in the first-half, with the chairman, John Nelson, and chief executive’s, Inga Beale, statement explaining; “In terms of claims, the first half of this year has been a relatively benign period for major catastrophes. The most notable claims have arisen from the unusually high incidence of aviation losses, which have been sudden and tragic. The global aviation hull war market accounts for around $65m of premium per annum; yet already in 2014, claims could exceed $600m for the insurance industry.”
The occurrence of unexpected claims and losses such as these is a reminder of the need for underwriting discipline, particularly in the current market environment.
The statement continued; “In a period when premium rates have generally fallen, most notably in the reinsurance space, this is a reminder of why pricing must reflect the underlying risks which are being written.”
The Lloyd’s market is feeling the pressure and the growth of insurance-linked securities (ILS) and alternative capital, as well as new start-ups all help to put increased strain on the markets underwriting profits.
“Pricing continues to be under pressure from the additional capital which has entered the industry as a result of the long period of low interest rates – this has led to an increasingly competitive environment,” the statement explained.
However Lloyd’s has reacted well and with discipline to these threats, the chairman and chief executive explained, adding; “The market has reacted well, demonstrating underwriting discipline with overall premium growth being restrained while we are experiencing these challenging conditions.”
Lloyd’s CEO, Inga Beale praised the markets ability to navigate the challenging reinsurance environment; “This is an excellent set of half year results for the Lloyd’s market. This is in large part down to the market’s expert underwriting. Continued innovation, combined with robust oversight and financial strength, all ensure the successful operation of the market despite challenging conditions.”
Chairman John Nelson added; “The Lloyd’s market continues to remain in a strong financial position, and this solid foundation means Lloyd’s is in a great position to continue to expand in both established and high-growth economies around the world.”
The decline in premiums written will be a reaction to the challenging market environment. It’s not as if a shortage of capacity could lead to less premiums being written, rather this has to be a sign that the Lloyd’s market players have pulled-back on some competitive lines of business at the renewals in the first-half of 2014.
It will be interesting to see how that trend carries through the mid-year renewals and this coming January and whether Lloyd’s can use its strength of expertise to trigger innovation to build out new product offerings which can foster growth.
The statement published this morning said; “We also remain committed to building the foundations for future growth in economies which are currently underinsured. We also remain committed to finding ways to innovate new forms of cover to meet the changing risks of business.”
Nobody is immune from the current structural change which is affecting the reinsurance market. Even the largest of markets, of which Lloyd’s is one, are challenged and pressured by the market environment. It is to be hoped that Lloyd’s can live up to its promises of the Vision 2025 strategic thinking, to embrace innovation, new products and also new forms of convergence capital, to help it find avenues for growth and to remain relevant over the longer-term.