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Investments offset underwriting decline at Lloyd’s of London

30th March 2017 - Author: Steve Evans

The Lloyd’s of London market announced its results today, revealing a decline in its underwriting profitability as the combined ratio increased to 97.9%, but pre-tax profits were flat at £2.1 billion as investment returns jumped.

Lloyd's of London insurance and reinsurance marketThe fact that underwriting has become increasingly less profitable at Lloyd’s of London, on a market-wide basis, was admitted by senior executives in late 2016.

The combined ratio of the Lloyd’s market declined by 7.9% from 90% in 2015, hitting 97.9% for 2016 as higher major claims of £2.1 billion struck the insurance and reinsurance players operating there.

That translated into an underwriting return of £500 million, down from £2 billion in 2015. This even while gross premiums written jumped to £29.9 billion, up from £26.7 billion, showing that the market continues to find new opportunities to deploy its capital.

However, 2016 while seeing higher catastrophe losses than recent years was only an average industry toll in terms of losses, suggesting that any above average year will see Lloyd’s move to underwriting un-profitability very quickly.

“Conditions over the course of the year were extremely challenging with continued downwards pressure on pricing whilst traditional and alternative capital remained attracted to the insurance industry,” Lloyd’s explained, as the evolution of reinsurance markets continues to weigh on its traditional model.

Offsetting the lower underwriting result at Lloyd’s was a significant jump in investment returns, as a downward shift in bond market yields and the benefits of currency fluctuations boosted its profits for the year. The investment return of 2.42% equated to £1.3 billion, compared to 0.7% and £400 million in 2015.

The overall return on capital at Lloyd’s declined to 8.1% for the year, down just one percent though from the 9.1% reported in 2015.

However both of these numbers are a significant departure from the return of capital of old, showing that the reduced margin in the insurance and reinsurance industry is eroding profitability and increasing the need for Lloyd’s to add efficiency to its operations and its capacity.

Chief Executive Inga Beale said that the Lloyd’s Corporation needs to focus on underwriting oversight and reducing its cost base.

Commenting on the results, she said; “This has been a year of challenge for the insurance sector with premiums once more under continued downward pressure. It is vital that the Corporation does everything it can to support the market and make the platform attractive, whilst demonstrating value for money.

“Our collective focus must be on providing customers with the products they want, embracing innovation and modernisation. The market has shown how well it reacts to the demands of its customers in a rapidly changing risk environment with the considerable increase in cyber coverage throughout 2016 a perfect case in point. It is critical throughout 2017 we continue to demonstrate that Lloyd’s is the home for creativity and expertise.”

Lloyd’s Chairman, John Nelson, added; “The results confirm that we must have an unrelenting focus on underwriting discipline through 2017. The challenge for all of us is to reduce the cost of conducting business because within the market this is impacting on already thin underwriting margins.

“This is my final set of annual results as Lloyd’s Chairman, and in the years since we launched our long term strategy Vision 2025, our global reputation and brand has significantly strengthened; we have substantially improved our global market access; our modernisation programme has real momentum; our increased financial strength and overall financial performance is a tribute to the underwriting skills in the Lloyd’s market. All of this puts Lloyd’s in a strong position both to take advantage of the long-term opportunities available to us globally in the specialist insurance market and to face the many challenges we have.”

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