Alpha comment: at first glance, these figures appear disappointing, especially when one looks at the combined ratio. This worsened, despite an improved rating environment. But for a very strong investment performance (which reflects only mark-to-market increases in the value of bonds and shares), the Lloyd’s market would have not produced a profit for the first six months of 2019. When delving deeper into the figures, there appear to be two mitigating factors which point to an underlying improvement in underwriting performance over the past twelve months; namely:
- The attritional loss ratio for business written in 2019 has in fact in improved by 2.9 percentage points, to 65.6%. It is the older year exposures (i.e. policies incepting in 2018 and prior) that were still on risk in the first six months of 2019 which deteriorated, to 57.7% (from an equivalent figure of 56.1% recorded twelve months ago).
- The H1 2018 combined ratio was aided by a very helpful 3.8 percentage point prior year release. By contrast, the 2019 interim results included a far smaller prior year release, of 0.4 percentage points. This lower figure is mainly due to the one-off impact of Typhoon Jebi, which was a H2 2018 loss event but was at the time under-reserved by not just Lloyd’s but the global (re)insurance industry. Jebi has therefore required Lloyd’s and others to revise their reserving position in recent months, to the detriment of H1 2019 results. Furthermore, Burkhard Keese, Lloyd’s Chief Financial Officer, commented that Lloyd’s holds a £1.9bn surplus in its reserves and that all Lloyd’s syndicates’ liabilities are reserved to at least ‘best estimate’, with 71% of syndicates above best estimate (i.e. more prudent still). This in his view bodes well for the prospect of good prior year releases in the future, absent any unforeseen ‘loss creep’ events along the same lines of Typhoon Jebi.
Lloyd’s 2019 interim results
Lloyd’s, the specialist insurance and reinsurance market, today (18 September) announced a profit of £0.6bn for the first half of 2018.
The key financial figures are:
- Aggregated market profit of £2.3bn (June 2018: £0.6bn)
- Gross written premiums of £19.7bn (June 2018: £19.3bn)
- Net investment income of £2.3bn, 3.2% return (June 2018: £0.2bn, 0.3% return)
- Combined ratio of 98.8% (June 2018: 95.5%)
- Net resources of £32.4bn (December 2018: £28.2bn)
- Central solvency ratio of 266% (December 2018: 249%)
Lloyd’s profit before tax for the period was £2.3bn (June 2018: £0.6bn), underpinned by a combined ratio of 98.8% (June 2018: 95.5%) and investment income of £2.3bn (June 2018: £0.2bn) as the market benefitted from unrealised gains on US and UK bonds as well as robust returns from equities over the first six months of 2019.
The quality of Lloyd’s balance sheet remains strong, with net resources growing to £32.4bn (December 2018: £28.2bn) and the central solvency coverage ratio increasing to 266% (December 2018: 249%). This financial strength was underscored by the recent affirmations of Lloyd’s ratings by Standard & Poor’s (A+ Strong), AM Best (A Excellent) and Fitch (AA- Very Strong).
Gross written premiums for the period to June 2019 were £19.7bn, representing a 1.8% increase over the same period in 2018. However, the elimination of foreign exchange rate movements and growth from new syndicates points to a like-for-like, year-on-year reduction in premiums of 2.6%. This is the net impact of a 6.5% reduction in business volumes as underwriters adjusted their books to improve performance as well as average risk-adjusted rate increases of 3.9%. The Lloyd’s market also saw a reduction in the attritional loss ratio for the current underwriting year (2019), compared to the 2018 underwriting year at the same point in time. Taken together, these changes reflect the strengthened underwriting discipline being applied to 2019.
Lloyd’s operating expense ratio reduced by 1.2% in the period, from 39.3% in 2018 to 38.1% in 2019. Lower administrative expenses, reflecting the continued effort by the market to manage its controllable costs, contributed a 1.5% reduction, whilst there was a small increase of 0.3% in the acquisition cost ratio from changes in the mix of business.
John Neal, Lloyd’s Chief Executive Officer, said:
“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.
“Lloyd’s has also not hesitated to put in place a robust set of actions to tackle unacceptable behaviour around the market and ensure that we set the tone for a culture that encourages the brightest minds to remain in and join our industry. The centrepiece of these actions is the Lloyd’s market-wide culture survey which has built the most comprehensive picture ever commissioned of the culture across the insurance industry. We will be announcing the results of that survey and the actions that we will be taking at the Dive In Festival on 24 September.”
Please click here for access to the full interim report.