Difficult global insurance and reinsurance market conditions over the past few years intensified in 2016 fuelling additional earnings pressure on both listed Lloyd’s insurers and the overall, Lloyd’s of London marketplace. And analysts at RBC Capital Markets feel that those with less correlation to Lloyd’s market trends are likely to produce better results, in the near-term.
The combined ratio of the Lloyd’s market deteriorated further in 2016 to 98% as slightly higher losses combined with continued downward pressure on pricing, reducing profitability in a highly competitive and overcapitalised industry.
In a recent note that explores the health of the Lloyd’s marketplace in 2016 and into 2017, RBC Capital Markets highlights that overall, profitability was weak in 2016, especially as major losses as a percentage of earned premiums were in line with the ten-year average.
Interestingly, RBC’s analysis of the marketplace in relation to Lloyd’s listed insurers reveals that players with less correlation to Lloyd’s market trends could benefit from stronger results than the overall market, in the near-term at least.
“When we compare the overall Lloyd’s market performance to the performance of the listed Lloyd’s insurers, we can clearly see that the listed Lloyd’s insurers performed better overall than the Lloyd’s market,” says RBC.
Although combined ratios across the market weakened further, returns do remain in profitable territory, although reported Q1 2017 combined ratios from firms with Lloyd’s units look to have weakened further, year-on-year.
“As a result, we believe that those companies with businesses outside of Lloyd’s or those that are less correlated to Lloyd’s market trends should produce slightly stronger results than the Lloyd’s market in the near term,” says RBC.
RBC’s analysis explores the performance of 100 Lloyd’s Syndicates, which shows that 51% of syndicates by number recorded an underwriting profit in 2016, down from the 70% recorded in the previous year. By premium tells a similar although less dramatic story, with 60% of businesses reporting an underwriting profit in 2016, compared with 88% a year earlier.
Furthermore, the combined ratios of for 71 Syndicates weakened in 2016, ranging from 35% to 252%, although for the major Syndicates of the listed Lloyd’s companies the combined ratio performance was, overall, “far stronger than the market in aggregate.”
“One finding that we did find surprising was that a number of syndicates that had combined ratios above 100% in 2015 grew their portfolios further and some even saw further deterioration in underwriting profitability year on year,” explains RBC.
A somewhat worrying trend highlighted by RBC. Breaking the figures down, RBC explained that the majority of Syndicates that recorded an underwriting loss in 2015 actually grew their top line by more than 10% in 2016, with 12 Syndicates that made underwriting losses in 2015, falling to an underwriting loss again in 2016.
This suggests that perhaps some in the marketplace are showing less discipline than required in the softening re/insurance environment, but also highlights how the continuation of deteriorating price metrics and high competition is increasing pressures on Lloyd’s Syndicates and the market as a whole.
2016, notes RBC, was a turning point for the Lloyd’s market. A key performance indicator of Lloyd’s is to record a better combined ratio than its primary competitor group, which, the marketplace has been able to do, for the most part, since 2011. However, with catastrophe losses not being above the average, when compared to premiums, “the difference between the combined ratio of Lloyd’s and the competitor group is smaller than we would expect it to be.”
Times are going to remain challenging for the Lloyd’s market as a whole and listed Lloyd’s insurers, although it’s clear that RBC feels greater profitability, at the moment and for the near-term, can be found in business outside of Lloyd’s or with firms less correlated to broader Lloyd’s market trends.
