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Lloyd’s market reliant on “declining” reserves: Peel Hunt

12th January 2017 - Author: Luke Gallin

After speaking with the Lloyd’s of London marketplace during its Lloyd’s Insurers Tour in early January, analysts at Peel Hunt have said that the market is relying on reserve releases for profits, and it might not take much more in the way of rate declines before the market ventures into unprofitable territory.

Following discussions with underwriters at the specialist Lloyd’s of London insurance and reinsurance marketplace, Peel Hunt cites that overall, the market expects the soft re/insurance industry landscape to persist through 2017.

“There are no real signs of a stabilizing reinsurance market at present,” said Peel Hunt, in its January 2017 Lloyd’s Insurers market communication.

With returns across the global insurance and reinsurance landscape being under pressure for some time, driven in part by competition and an influx of capacity, companies have been seen to aggressively utilise reserves in order to bolster quarterly underwriting profits. This, combined with a lack of large losses, has enabled companies to report profitable, albeit reduced results.

However, reserves releases have been said to be declining for some time now, and analysts at Peel Hunt underlined the Lloyd’s market’s reliance on reserves for profits.

“The Lloyd’s Market as a whole generated a 98% CoR (combined ratio) during H1 2016, with reserve releases cancelling the impact of property catastrophe losses. Hence, the market is relying on reserve releases (which are starting to decline) to generate a positive margin, which was not the case back in 2014/15,” said Peel Hunt.

The decline in reserves for reinsurers has been discussed a number of times in recent months by numerous industry players, and the general view seems to be that reserves are declining and it might not be too long before companies simply aren’t able to rely on reserves for revenue income.

Adding pressure to thinning reserves is the continued rate declines across the sector and the possibility of more normalised catastrophe losses, two trends that Peel Hunt suggests could turn the Lloyd’s market unprofitable in the future.

“It would only take low single-digit rate declines to tip the market over the 100% break-even level in our view unless underwriting strategies are vigorously adapted,” said Peel Hunt.

“It only takes a modest spike in catastrophe and large manmade losses to reduce earnings materially as the loss absorption of attritional underwriting profits reduces,” added Peel Hunt.

With the softening landscape expected to persist in 2017 and possibly into next year Lloyd’s insurers and reinsurers will likely come under increasing pressure, and could find it difficult to achieve profitable returns, especially if they are unable to call on reserves as much and catastrophe losses return to more normal levels.

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