Lloyd’s in 2019 underwriting loss, as Covid-19 shows in solvency measure

The Lloyd’s of London insurance and reinsurance market fell to an underwriting loss for the third consecutive year, reporting a combined ratio of 102.1% for 2019, while paying gross claims during the year that were higher than in the prior year.

Lloyd’s has struggled with its underwriting performance in recent years as major catastrophe losses and continued attrition across the market has dented the underwriting return.

A wide variation in performance exists within the market itself, but on a combined, market-wide basis Lloyd’s performance in terms of underwriting continues to struggle.

For 2019 Lloyd’s result, which was announced this morning, was helped considerably by its investment portfolio, as it reported a much higher 4.8% return on investments (up from 0.7% in 2018).

That helped the market report a £2.5 billion pre-tax profit for the 2019 underwriting year, much better than the £1 billion loss it reported for 2018.

That resulted in an 8.8% return of capital made by Lloyd’s for 2019, up on 2018’s 3.7%.

But, the Lloyd’s market is not an investment marketplace, it’s an insurance and reinsurance underwriting marketplace and for the third year running that side of the business proved unprofitable, with a combined ratio of 102.1% reported.

Of course, the three years in question have seen significant catastrophe loss impacts and Lloyd’s market shows how exposed it remains to global catastrophe risk, despite its broader specialty insurance and reinsurance underwriting.

For 2019, Lloyd’s reported £23 billion of gross claims, up on 2018’s £19.7 billion.

“Sustained rate increases and improving underwriting discipline” are helping the market, the results announcement said, but as yet the clear evidence of this remains absent from the figures.

Now, with the Covid-19 coronavirus pandemic threatening the insurance and reinsurance market, Lloyd’s is as exposed as anyone.

In addition, the Lloyd’s market is adapting to remote working and its trading floor is closed, resulting in different practices to placing risks in the market being required.

While Lloyd’s and the London market have managed to ramp up risk placements using their PPL technology, it remains the case that much of this activity is after the fact of placement as an administration and filing tool, rather than a real-time matching of risk and capital.

As a result, it will be interesting to see how the Lloyd’s market adapts and how effective it can be in remote operations.

The coronavirus pandemic is evident in another way at Lloyd’s as the market has revealed how the global crisis has affected its core solvency measures.

At the end of 2018 Lloyd’s central solvency and coverage ratio had reached 248%. By the end of 2019 that ratio had fallen to 238%.

But in 2020 the figure had already fallen to 205% by March 19th, a clear reflection of the impact of the Covid-19 outbreak on this key solvency metric for the Lloyd’s market.

“Although there has been a high degree of turbulence in the financial markets over recent weeks, as at 19 March Lloyd’s solvency ratio stood at 205%,” Lloyd’s explained.

It’s the first evidence of a specific solvency hit to the insurance and reinsurance market due to the financial market volatility. It remains to be seen how that impacts investment portfolios at the major re/insurers and Lloyd’s, which will depend on how market’s bounce back once the pandemic comes under greater control.

Encouragingly for Lloyd’s the net resources of the market had increased by 8.6% to £30.6 billion as of the end of 2019.

That figure will have fallen by now, as it likely includes the value of the investment pile. But it’s a healthy capital base for this key risk market.

The key to Lloyd’s future now lies in how it adapts to remote operations and whether it can sustain business as usual through key renewal cycles.

Of course, this also gives the Lloyd’s market a chance to evaluate the importance of an expensive base and a physical trading floor. If business as usual continues, despite the shuttering of the marketplace, it has to make you wonder whether some kind of virtualisation of the Lloyd’s model could be more profitable for the market in time.

The Future at Lloyd’s initiative continues, although has been honed to a fewer number of priorities right now, seemingly with a focus on digitalisation of risk placements and trading.

If that’s successful, it could just accelerate the increasing virtualisation of the Lloyd’s marketplace, as it’s hard to see a return to the old status quo if the current pandemic crisis is prolonged.

Commenting on the results, John Neal, Lloyd’s CEO, said, “Whilst we are pleased to be announcing Lloyd’s return to profitability in 2019 and continued progress across our priorities, our primary focus right now is on supporting our customers and business partners in their time of need. I am confident in Lloyd’s ability to meet the challenges before it, and in doing so demonstrate the market’s unrivalled ability to support people, businesses and countries around the world in response to the far-reaching impacts of COVID-19.

“As we focus on supporting our business partners and customers during this time, it has also never been more important to accelerate progress on our ambition to create the most advanced insurance marketplace through the Future at Lloyd’s. We have sharpened our focus for 2020, prioritising initiatives that will ensure around 80% of Lloyd’s business is digitally supported, together with fast- tracking claims processing improvements and building the foundational data and technology infrastructure to support Lloyd’s future ecosystem.”

Bruce Carnegie-Brown, Lloyd’s Chairman, also commented, “The beginning of 2020 has proved exceptionally difficult as COVID-19 spreads rapidly around the world with devastating consequences for families, communities and the global economy. Now more than ever, our customers need us to be ready to support them through these challenging times.
At Lloyd’s, we are laying the foundations to do this more effectively. By focusing on performance management, modernising the market and creating a market culture that will attract the best and brightest talent, we are making the market more resilient, more successful and better placed to meet our customers’ needs.”