The Lloyd’s of London insurance and reinsurance marketplace reported a £2.3 billion profit before tax for the first-half of 2019, but the investment return drove all of that as underwriting again failed to deliver and actually declined in the period.
CEO John Neal cited an improving underwriting outlook, as attritional losses declined, but overall the Lloyd’s market reported a combined ratio of 98.8%, up on the 95.5% from the prior year, reflecting still challenging performance in the marketplace.
The investment return came out at an impressive 3.2%, delivering £2.3 billion of investment profit which accounts for the entire half-year result.
Unrealised gains due to reducing US and UK bond yields and strong returns from equities helped to deliver the impressive investment performance in the period.
But, and perhaps a little concerning for the market, the underwriting contribution to pre-tax profits was just £0.1 billion, down from £0.5 billion in the prior half-year.
Gross premiums written were up slightly at £19.7 billion, compared to H1 2018’s £19.3 billion, although the market points to more discipline within it as removing foreign exchange effects and growth from new syndicates suggests that actually year-on-year premiums fell by 2.6%.
Lloyd’s said this is due to a 6.5% reduction in business volumes, which were due to underwriters adjusting their books to improve performance. The market also saw average risk adjusted rate increases of 3.9%.
Lloyd’s also cites the reduction in attritional loss ratio, which fell year-on-year, as evidence of greater discipline in the marketplace.
However, the accident year ratio H1 2019 was 99.2%, only very slightly better than the 99.3% at June 2018 and Lloyd’s noted an increase in attritional losses on older underwriting years, slightly offset by improvement in the attritional ratio for the youngest 2019 underwriting year, when compared to the prior year experience.
Major claims added 1.4% to the combined ratio in H1 2019, compared with 0.6% in H1 2018, largely due to claims within aviation lines of business.
However, the property lines of business saw lower than average catastrophe losses in the first half of 2019, which suggests a higher catastrophe experience would have very quickly driven Lloyd’s to an underwriting loss for H1.
In fact, Lloyd’s notes in its interim report that the property segment was “the only sector to experience an accident year ratio below 100%” during the period, which is telling of the work that still needs to be done to get Lloyd’s into a more profitable position.
The reinsurance segment actually fell to a loss at Lloyd’s for the period, which it seems was largely due to reserve strengthening.
Lloyd’s managed to reduce its operating expense ratio by 1.2% in the period, from 39.3% in 2018 to 38.1% in 2019. In the main this was due to the continued effort by the market to manage its expenses, Lloyd’s said, which contributed a 1.5% reduction.
Also of note, Lloyd’s reported a strong balance-sheet, with net resources reaching £32.4 billion, up from £28.2 billion at the end of 2018, while the central solvency coverage ratio reached 266%, up from 249% at the end of 2018.
So there are some signs of better performance in Lloyd’s, but the fact the underwriting result has declined so much even in a period of low catastrophe losses may be cause for some concern and highlight the need for a continued focus on performance in the market.
John Neal, Lloyd’s Chief Executive Officer, commented on the results, “We are pleased to report a profit during the first six months of 2019. It is encouraging that the Lloyd’s market is showing increased discipline in 2019 as evidenced by a reduction in gross written premiums and an improvement in the attritional loss ratio for the current underwriting year. However, we recognise the importance of continued focus on performance management to maintain this momentum throughout the rest of 2019 and beyond.
“At the same time as ensuring that our market can deliver sustainable, profitable growth, we need to make some brave choices on how to meet the expectations of our customers and all our stakeholders in the future. The Future at Lloyd’s strategy will ensure that our marketplace is ready for these challenges and opportunities ahead of us, with the first blueprint to be published on 30 September.”
Neal is clearly still bullish about the Lloyd’s market’s prospects, feeling that the results reflect some improvement in overall performance.
But they reflect the amount of work left to do, with performance still a key issue the market needs to resolve.
“This is a once-in-a-generation opportunity for the evolution of the Lloyd’s market place, and an exciting time for Lloyd’s to show leadership on the three key fronts of performance, strategy and culture. We are making good progress, with essential and valued support of all of our stakeholders,” Neal said, commenting on the work being undertaken to modernise Lloyd’s.
