Lloyd’s 2019 Annual Results
Posted 30.03.2021 – Insights
Lloyd’s has announced a pre tax profit of £2.5bn for the 2019 calendar year (2018: loss of -£1.0bn).
This result was made up of a combined ratio of 102.1% (2018: 104.5%) and an investment income of £3.5bn (2018: £0.5bn), which contributed to a return on capital of +8.8% (2018: -3.7%).
Gross written premium (GWP) increased slightly by +1.1% to £35.9bn (2018: £35.5bn). The originally reported figure of £35.5bn for 2018 can be adjusted upwards by +3.7% to £36.9bn, due to the impact of foreign exchange movements (+3.5 percentage points) and new syndicates (+0.2 points) so in real terms a reduction.
The 2019 calendar year combined ratio of 102.1% (2018: 104.5%) was driven by improvements in the loss ratio and expense ratio.
2019 saw only a small improvement in the attritional loss ratio but the major losses equated to just 7.0% in 2019, some 4.6 percentage points lower than in 2018 and 3.2 points lower than the five year average. Hurricane Dorian and Typhoons Faxai and Hagibis were the main contributors to the £1.8bn major loss bill.
Disappointingly, the acquisition costs increased marginally in 2019, but this was offset by a small improvement in the administrative expense ratio, bringing the overall expense ratio fractionally down by 0.5 percentage points to 38.7%.
The contribution from the prior years was considerably less than was seen in 2018. Just £232m was released in 2019 as compared to a prior year contribution of £976m in 2018. Reserve releases were impacted by the need for reserve strengthening particularly on Typhoon Jebi (in 2018) together with a more general shortfall on the US Casualty and Aviation classes. The release improved the combined ratio by 0.9 percentage points, as compared to an average 4.1 percentage point contribution over the last five years.
Whilst the improvement in the combined ratio is a move in the right direction, it is the third consecutive year of loss for the market.
With the notable exception of Casualty Reinsurance in 2018, none of Lloyd’s major classes of business have generated a profitable accident year combined ratio in any of the past four years. For 2019, three classes (Property, Energy and Motor) manged to produce a profitable calendar year result (i.e. with the benefit of prior year releases). Two classes (Casualty Reinsurance and Casualty) required a prior year top up in 2019.
These results show that, as with last year’s figures, the year-on-year improvement in underwriting owes in good part to a marked reduction in major loss activity. The attritional loss ratio remains stubbornly high, at 57.3% (2018: 57.6%). At this level, underwriters must rely upon an uncommonly low amount of major losses, plus strong prior year reserve releases to produce a combined ratio below 100% (i.e. an underwriting profit). Though the Lloyd’s market did benefit from a relatively benign year of catastrophe activity in 2019, producing a major loss ratio of 7.0% (10 year average: 10.2%), when combined with subdued prior year reserve releases of only 0.9% (5 year average: 4.1%), it produced a loss making combined ratio of 102.1% (2018: 104.5%).
Despite these underwhelming figures, there are several important factors which point to an improving outlook.
Rate rises. 53 out of the 61 major Lloyd’s subclasses posted rate rises in 2019. In aggregate, syndicates benefited from price increases of 5.4%, which is more than double the uplift planned for in their original business plans. This hardening of premium rates is in addition to price rises of 3% for 2018 and prices in 2020 continuing to rise (and in many classes accelerating).
Underlying attritional loss ratio improvement. Though the Lloyd’s market attritional loss ratio appears static in overall terms, green shoots of recovery can be seen in the 2019 performance of active syndicates (i.e. those which have not been placed into run-off). When one compares the attritional loss ratios of 2019 and 2018 for each of their ‘youngest years’ of exposures (i.e. for 2019 the premium ‘earned’ in 2019 and for 2018 premium ‘earned’ in 2018), the attritional loss ratio has improved by 1.7 percentage points, from 59.3% (2018) to 57.6% (2019), as compared to the 0.3 points improvement across all syndicates for all years of exposure. What this demonstrates is that the benefit of rate rises often takes time to filter through when emerging from a soft market (containing under-priced prior year exposures), but that a material improvement can be seen. It is for this reason that the Performance Management Directorate has signalled strongly that it will continue to apply tough scrutiny to syndicates’ business plans, to ensure that the positive effect of rate rises builds as we enter a new stage of the market cycle.
Rising underwriting standards. The benefit of the PMD’s tough approach can be witnessed in the performance of syndicates which have exercised proper underwriting discipline and risk selection, with the top quartile producing a combined ratio of 92% as compared to the bottom quartile combined ratio of 131%. This differential of 39 percentage points for 2019 compares to that of 52 points in 2018 and demonstrates a healthy rise in minimum standards as we enter improved pricing conditions.
Reducing expenses. The second major drive by the Corporation in recent years has been to improve the operational efficiency of the Lloyd’s market, hence the introduction of the Future of Lloyd’s programme. The 2019 results show a 0.7 percentage point improvement in administrative expenses, with much of the Future of Lloyd’s efficiencies yet to be implemented or potential cost savings realised. We hope that this position will improve considerably.
Please click here for a full report of Lloyd’s 2019 Annual Results and here for access to the analysts presentation delivered this morning by John Neal (Chief Executive Officer), Burkhard Keese (Chief Financial Officer) and Jon Hancock (the outgoing Performance Management Director).
Some of the less observant commentators have issued headlines focussing on the £2.5bn profit produced by Lloyd’s in 2019. What they fail to highlight is that had the investment income contribution for 2019 been the same for 2018, the Lloyd’s market would have made another loss. Nevertheless, a material rise in prices combined with a more consistent underwriting performance amongst the best and worst performing syndicates points to an improving market outlook following three difficult years. It is heartening to see so many of the Alpha supported syndicates in the top 10 performers for 2019 based on their annualised results.