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London market underwriting to remain under pressure through 2019: Fitch

14th October 2019 - Author: Matt Sheehan

Analysts at Fitch Ratings anticipate that underwriting earnings are like to remain under pressure for London market re/insurers through the remainder of 2019.

While improved pricing conditions are starting to benefit results, earnings are currently being offset by high expense ratios and lower scope for reserve releases, the rating agency said.

London market insurers generally reported weaker underwriting profitability for the first half of 2019 despite it being a benign period in terms of catastrophe losses.

Much lower reserve releases due to low creep on the 2018 cat losses also drove a deterioration in combined ratios for this segment.

Insurers had to materially strengthen reserves for Typhoon Jebi and Hurricane Michael in particular, Fitch noted, leading to significantly lower releases compared with the previous year.

However, results were supported by higher investment returns than in H1 2018, partly due to the reduction of US and UK bond rates, as well as the strong performance of the equity market during 2019.

Premium rates have also been gaining momentum following two years of above average catastrophe losses, especially on loss-affected lines.

In addition, pricing conditions are expected to improve further as the market-wide profitability review at Lloyd’s  helps to stimulate further underwriting discipline.

Lloyd’s of London reported an average risk-adjusted rate increase of 3.9% across the portfolio in H1 2019, compared to 3.1% in 2018.

Nevertheless, Fitch argues that areas of the market are still facing challenging pricing conditions that are likely to maintain pressure on earnings for many London market re/insurers.

Expense ratios also remain high in the London market, although Lloyd’s managed to report a slightly lower expense ratio of 38.1% in H1 2019 (versus 39.3% in H1 2018), driven mainly by a reduction in the administrative costs ratio.

Lloyd’s recently published the first blueprint outlining the first phase of its new strategy for change, which, among other things, will focus on continued efforts to make the market more cost-efficient.

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