After Lloyd’s companies were hit with incurring material losses in 2017, the earnings outlook for coming years has turned optimistic with price increases expected to benefit existing books of business and new opportunities arising from increased exposure.
This will come as encouraging news to Lloyd’s firms’ after earnings have been hard hit in 2017 and the over 100 year-old re/insurer has struggled to reduce inefficient running costs and keep up with the demands of innovation.
JP Morgan analysts said with the exception of Lancashire “we believe the capital position at the end of the year will be broadly unchanged from its position at the start of the year.
“Shareholders have, in effect, endured a year without special dividends (or growth in book value), however we believe the outlook for the years ahead should be sufficient to compensate for this.”
However, JP Morgan warned that these potential increases may not be enough to compensate for the lost income in FY17.
“On average we estimate the loss accounts for around a year’s earnings (albeit before allowing for catastrophe budgets), and therefore the implied payback from a low-teen increase in net income would be 7-8 years – we do not view that as a favourable outcome,” said analysts.
The bigger opportunity may come from the potential to write more business, or retain more business, should the pricing conditions permit – rather than any upticks in pricing.
Any increase to premium volumes, however, are even harder to predict accurately than price hikes, being dependant on multiple factors and market players such as pricing level, the competitiveness of other market participants and the availability of retrocession.
The Lloyd’s companies have an excellent track record of managing the cycle in this way, and with catastrophe exposures having reached multi-year lows in 2017 we believe an improved environment would result in increased participation.
