Lloyd’s of London is expected to continue producing strong earnings and capital over the next 12-18 months, due to underwriting discipline, favourable market conditions and robust investment returns, according to Moody’s Ratings.
However, analysts have warned that its profitability could wind up falling short of the strong results seen in 2023 and the first half of 2024 because of higher catastrophe losses and continued reserve strengthening against casualty claims, which have been rising notably in recent years.
Lloyd’s underwriting profit for H1 2024 spiked to £3.1 billion from £2.5 billion a year earlier, which resulted in the market’s best interim performance in 17 years, reflecting Lloyd’s past efforts to push through price increases and reduce exposure to catastrophe losses and other major claims.
Analysts explained that Lloyd’s efforts to reduce its exposure to major losses and maintain cost discipline has helped the market achieve sustained underwriting profitability gains over the last four years.
“Prices across the Lloyd’s market have now risen for 26 consecutive quarters. The increase, driven by the commercial insurance and reinsurance markets, fueled a 55% increase in total premiums to c.£52 billion between 2018 and 2023,” Moody’s said.
As well as this, analysts also highlighted the effort that Lloyd’s has taken to appropriately reflect risk in pricing and reduce its exposure to major claims, which has ultimately helped improve the market’s capacity to absorb large natural catastrophe losses.
The agency also stated that the market’s bias toward commercial insurance and reinsurance gives it some protection against secondary perils.
“Prices in commercial insurance, which are often indexed to inflation, have kept pace with rising losses, in contrast to retail insurance. Reinsurers, meanwhile, have reacted to rising secondary peril claims by raising their loss thresholds and reducing their coverage of aggregate claims,” Moody’s added.
Moving forward, analysts flagged how H1 2024 saw Lloyd’s underwriting profit benefit from aggregate reserve releases across all business lines except aviation and energy.
Moody’s revealed that it expects lower inflation to support overall reserve adequacy in the months ahead, and that it sees Lloyd’s reserve margins as robust enough to absorb most potential claims increases. However, the agency warns that further strengthening of casualty reserves may be required because of recent rapid growth in casualty claims, which has been fueled by increased litigation and higher jury awards in the US.
Furthermore, Moody’s notes that Lloyd’s capitalisation has reached an all-time high, with market wide and central solvency ratios increasing to 206% and 520% respectively in H1 2024.
“In recent years, the market has strengthened its capital through additional contributions from members and reduced reliance on letters of credit. We expect its capital to remain robust, capable of absorbing above normal catastrophe losses,” the agency added.
