Lloyd’s 2020 interim results
Posted 10/09/2020 – Insights
Lloyd’s has announced a loss of £0.4bn (pre-tax) for the first six months of 2020, driven by £2.4bn in COVID-19 losses contributing 18.7% to the market’s combined ratio of 110.4%.
Excluding COVID-19 claims, the market’s combined ratio has shown substantial improvement at 91.7%, down from 98.8% in H1 2019.
The key figures reported in Lloyd’s 2020 interim results are:
• Aggregated market loss of £0.4bn (June 2019: profit of £2.3bn)
• Gross written premiums of £20.0bn (June 2019: £19.7bn)
• Net investment income of £0.9bn, 1.2% return (June 2019: £2.3bn, 3.2% return)
• Combined ratio of 110.4% (June 2019: 98.8%)
• Net resources of £32.8bn (December 2019: £30.6bn)
• Central solvency ratio of 250% (December 2019: 238%)
Excluding COVID-19 losses, the market delivered an underwriting profit of £1.0bn, demonstrating a significant improvement in Lloyd’s underlying performance. This is supported by 7.1 percentage point improvement in the attritional loss ratio which has dropped to 52.6% in the first six months of 2020 (H1 2019: 59.7%), with prior year development remaining stable at 0.5% (H1 2019: 0.4%).
Gross written premiums of £20.0bn represent a 1.7% increase over the same period in 2019. However, eliminating foreign exchange rate movements, overall premium increased by just 0.1%. Positive rate momentum accelerated in the first six months of 2020, with the market achieving average risk adjusted rate increases on renewal business of 8.7%. This was offset by an 8.6% decrease in business volumes across the market, reflecting the market’s focus on the quality of the business it renews and underwrites.
The H1 2020 expense ratio dropped marginally from 38.1% to 37.7%, with the Future at Lloyd’s programme central to tackling total acquisition costs and administration expenses. In the first six months of 2020, the market’s net resources increased by 7.2% to £32.8bn as at 30 June 2020 (FY2019: £30.6bn), reinforcing the exceptional strength of Lloyd’s balance sheet with a central solvency ratio of 250%.
Confirmation that the Lloyd’s market overall generated a loss for the first six months of the year was of little surprise. The current estimate for COVID-19 related losses has remained stable, with a gross loss of up to £5.0bn and a net loss (i.e. after reinsurance recoveries) of £3.0bn, which is in line with projections published in May that set out a net loss range of £2.5bn to £3.5bn. The incurred COVID-19 losses included in these interim results amount to £2.4bn, with the balance of £600m on the ultimate estimated loss of £3.0bn expected to be substantially booked by the end of 2020. It is worth reminding Members that this loss will be spread out between 2019 and 2020 on a three year account basis, rather than the burden falling solely on a single year (as will be the case substantially for insurers who operate annually accounted results).
It is pleasing the underlying underwriting performance of the market (i.e. excluding the one-off impact of the pandemic) appears materially better than the 2019 interim results, with a 7.1 percentage points improvement in combined ratio to 91.7% and largely achieved by rate increases of 8.7%, which Lloyd’s CEO John Neal reported “are exceeding plan every quarter … furthermore these rate increases are accelerating.”
Of further reassurance is the consistency of prior year releases, which grew by 0.1 point to 0.5 point and suggest syndicates continue to provide strong reserving performance.
The interim results also demonstrate the success of the Performance Management Directorate’s measures over the last three years to force syndicates into non-renewing underperforming business areas, with gross income of £20.0bn unchanged on that written for the first six months of 2019, despite rate increases of 8.7%.
On a final note, Lloyd’s was pleased to report its capital resilience during a turbulent six months period for investment markets. The successful capital raising carried out by the market as part of its mid-year coming-into-line exercise has produced a Solvency II ratio of 250% (as set against a minimum requirement of 200%) and demonstrates a healthy level of capital headroom. In Lloyd’s estimation the solvency ratio could fall to 187% in the unlikely event that (i) a set of natural disasters equivalent to Hurricanes Harvey, Irma and Maria in 2017 takes place in the second half of 2020 and (ii) no additional capital from Members was raised in the November coming-into-line exercise. Whilst investment income is reduced on that produced in the 2019 interim results (2019 being an exceptional year in this regard), Lloyd’s CFO Berkhard Keese reported that the Central Fund is now 90% fixed income and therefore “can weather whatever comes in the second half.”