The Lloyd’s market achieved its first underwriting profit in five years last year, according to a new note from Moody’s.
The agency said that the improvement reflected the market’s efforts to increase its prices, cut costs, and withdraw from unprofitable business. These factors have strengthened the market’s underlying underwriting performance, which excludes volatile large claims, reinforcing its capacity to absorb such losses when they occur.
These headwinds, said Moody’s, can help Lloyd’s sustain its underlying underwriting performance and further gains can be expected this year.
Moody’s said: “The market’s return to profitability in 2021 shows it is fixing its Achilles heel. Even with last year’s turnaround, Lloyd’s five-year average return on capital is just 0.3%, held back by a succession of major claims. Underlying performance improvements have strengthened the market’s ability to absorb large losses. Lloyd’s has also reduced its natural catastrophe exposure, protecting its earnings as climate change makes extreme weather more frequent. Lloyd’s position as the world’s biggest (re)insurance subscription market, its global licence network, and strong asset quality will also continue to support its credit strength.”
Moody’s pointed several factors behind the market’s successful year in 2021. These include a much-improved return on capital despite lower investment income and higher natural catastrophe losses, an improved ability to handle large losses, and robust capitalisation.
It added: “Over the last few years, profitability has been Lloyd’s key weakness. Between 2017 and 2020, the market accumulated total underwriting losses of around £7.8bn, driven in part by a series of major natural catastrophe claims. However, it decisively bucked this trend in 2021, reporting an underwriting profit of £1.74bn, its first since 2016, despite another round of above average catastrophe losses. At the same time, Lloyd’s 2021 ‘accident year’ underwriting result, which excludes releases of unused prior year claims reserves, reached a 10-year high of £1.2bn, the first positive result since 2015.”
However, not all is golden on the horizon, said Moody’s. The Russian invasion of Ukraine is considered to be an earnings headwind, along with inflation.
Moody’s wrote: “However, the Ukraine crisis will lead to potentially significant losses for Lloyd’s in certain ‘specialty’ insurance lines such as aviation, marine, trade credit and political risk. It could also adversely affect investment returns in the event of prolonged financial market volatility. While inflation is supporting price rises, persistently high inflation could also hold back profitability by pushing up claims expenses over the coming years.”