A modest combined ratio improvement is expected at Lloyd’s in 2023, KBW’s analysts predict following the specialist re/insurance marketplace’s recently-reported 2H22 results, which also included persistent rate increases, sustained y/y core combined ratio improvement and investment losses y/y due to mark-to-market accounting rules.
For the second half of 2022, Lloyd’s interim performance report revealed higher gross written premiums (GWP) to £22,670 million, from £18,751 million in 202.
Improved combined ratio to 92.2% from 94.6% in 2022 – expense ratio improvement (33.6%) outpaced a higher core loss ratio (48.1%) – and investment losses were £6 million, compared to the £320 million reported in 2021.
Additionally, KBW noted, the overall renewal rate increases decelerated, it has been doing so since 2H20 when it was at its highest since 1H17 at 13.3%. For 2H22 it went down to 6.0% compared to 9.2% reported in the same period the prior year.
Analysts also tracked the 2022 risk-adjusted rate increases by line of business; all lines’ rates are still rising (5/10%), with Energy at a slower pace (0-5%).
KBW said: “We expect accelerating rate increases for lines exposed to rising reinsurance costs (primarily catastrophe-exposed property and aviation) and/or the Russia/Ukraine conflict (including aviation and several specialty lines).”
Lloyd’s semi-annual combined ratio (which includes of reserve development and catastrophe losses) declined by 230 bps y/y, which according to analysts, reflects lower attritional and catastrophe losses and higher reserve releases y/y. The trailing 12-months’ combined ratio declined sequentially.
Also, the semi-annual and trailing 12-months’ core combined ratios both fell y/y in 2H22 – which shows improvement -, reflecting the continuing (and compounding) benefits of earned rate increases, tighter terms and conditions, and tougher underwriting standards.
“We emphasise that assuming the risk of major claims is an important component of Lloyd’s business model. We believe that core combined ratio trends are an important aspect of the market’s performance, but they do not provide a complete picture, especially when weather-related losses are growing,” said KBW.
In the report, analysts also noted that Lloyd’s 2H22 ‘major claims’ ratio exceeded its longer-term average and median, mostly reflecting Hurricane Ian losses.
KBW thinks that rapidly-rising reinsurance costs – particularly for cat-exposed property risks – and heightened risk awareness for lines of business impacted by the Russia/Ukraine conflict (and – possibly – more recent bank-related turmoil) will translate into sustained price discipline.
They also noted that prior-period reserve release ratios were up y/y but remained below pak levels. KBW attribute the increase to solid initial reserving for recent years’ losses; besides Specialty Reinsurance and Casualty, all lines’ reserves developed favourably in 2022, notwithstanding some adverse development on recent catastrophe loss reserves.
Lloyd’s -£6 million total investment return for 2H22 mostly stemmed from bond portfolio valuation losses, reflecting mark-to-market adjustments incorporating rising interest rates, analysts added.
“Although Lloyd’s syndicates’ individual annual gross written premiums are disclosed, consolidated parent company totals (which exclude both GWP double-counting – when one syndicate reinsures another – and premiums written on behalf of third-party capital providers) are not, limiting our ability to accurately quantify our covered companies’ Lloyd’s exposure,” analysts concluded.
Adding: “We expect modest combined ratio improvement at Lloyd’s in 2023, as catastrophe-exposed property and some specialty lines’ (re)insurance rate increases reaccelerate, although much-improved profitability and higher interest rates point to persistently decelerating casualty rate increases.
“We expect Outperform-rated ACGL, AIG, CB, HIG, RE, RNR, and WRB to benefit from both direct exposure to Lloyd’s and similarly favourable pricing and core underwriting margin trends in domestic specialty P&C lines.”
