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Summary

Lloyd’s has today announced an overall loss of £(0.9)bn for the 2020 calendar year (2019: profit of £2.5bn), equivalent to a negative return on capital of (2.8)% (vs. 2019 +8.8%). This result constituted a combined ratio of 110.3% (2019: 102.1%) and an investment income of £2.3bn (2019: £3.5bn).

Major claims contributed 23.0% to the combined ratio (2019: 7.0%), of which COVID-19 related claims accounted for a significant portion, at 13.3% points (or £3.4bn).

Premium

Gross written premium (GWP) reduced slightly (by -1.2%) to £35.5bn (2019: £35.9bn). Although 12% of underperforming business was removed, rate increases of +10.8% were achieved, far ahead of planned rate increases of +4.6%.

Underwriting performance

The 2020 calendar year combined ratio of 110.3% (2019: 102.1%) was driven by a higher volume of major losses, including COVID-19. The attritional loss ratio and acquisition expense ratio both improved and prior year releases doubled, despite the need for syndicates to boost their casualty reserves.

Component ratio 2020 2019 Change for the better / worse 
Attritional losses 51.9% 57.3% 5.4 points
Major losses 23.0% 7.0% 16.0  points
Acquisition expenses 26.1% 27.5% 1.4 points
Administrative expenses 11.2% 11.2% no change
Prior year releases 1.8% 0.9% 0.9 points
Combined ratio 110.3% 102.1% 8.2 points

Net major losses for 2020 totalled £6.0bn (2019: £1.8bn). In addition to the net COVID-19 reserve of £3.4bn, large losses resulted from Hurricanes Laura and Sally together with the severe convective storm, or derecho, in the American Midwest. The 2020 calendar year was reported to be the fifth most expensive year on record for major losses.

Acquisition costs (i.e. brokerage) saw a small reduction of 1.4% points to 26.1% (2019 27.5%), taking the combined expense ratio (including administrative expenses) down to 37.3% (2019: 38.7%). Whilst this is a positive movement, Lloyd’s admits that more needs to be done to reduce the expense burden of the market.

The 1.8% point contribution from the prior year releases was double the 0.9% reported for the 2019 year. Releases were made across all lines of business other than casualty, where there was a strengthening of reserves of £0.3bn. However, some strengthening was required against estimates for prior year catastrophe events, including the Hurricane Irma (2017), Typhoon Jebi (2018) and the Typhoons Hagibis and Faxai (2019).

Class of Business 2020 2019 Change for the better / worse 
Share of Lloyd’s Market Premium Accident Year Prior Year Release Calendar Year Combined Ratio Calendar Year Combined Ratio
Reinsurance – Property 19% 112.8% 2.8% 110.0% 106.2% 3.8 points
Reinsurance – Casualty 9% 113.0% 2.3% 110.7% 104.1% 6.6 points
Reinsurance – Specialty 6% 101.1% 6.0% 95.1% 105.8% 10.7 points
Property 26% 135.4% 3.5% 131.9% 99.8% 32.1 points
Casualty 26% 105.2% -5.1% 110.3% 105.7% 4.6 points
Marine, Aviation & Transport 8% 98.2% 8.5% 89.7% 108.5% 18.8 points
Energy 4% 99.2% 8.2% 91.0% 97.3% 6.3 points
Motor 2% 95.5% 2.2% 93.3% 98.8% 5.5 points

Just the Marine, Aviation & Transport, Energy and Motor classes had accident year combined loss ratios of less than 100% (i.e. were profitable). Prior year reserve releases from the specialty reinsurance brought that class into profit for the calendar year. Property insurance, being the largest class, at 26% of Lloyd’s premium for 2020, saw the worst accident year combined loss ratio at 135.4%.

 

Alpha comment: it is not surprising that Lloyd’s has reported an overall loss in a year that was hit by both the unprecedented loss of COVID-19 and a high incidence of major natural catastrophes. However, whilst rate increases were seen across the whole market to varying degrees, and 12% of the worst performing income was removed, the underlying performance of the overall book remains disappointing.

 

  1. Rate rises. In aggregate, syndicates benefited from price increases of 10.8%, which is more than double that anticipated in their original business plans. This builds upon the rates rises of 5.7% seen in 2019 and 3.3% in 2018. All classes saw rate rises this year, of up to 5% for Motor and Life business, 5% to 10% for the reinsurance and energy books and over 10% for the property insurance, casualty and marine, aviation & transport books.

 

  1. Underlying attritional loss ratio improvement. The market has reported an overall improvement to the attritional loss ratio of 5.4 points to 51.9%. Whilst this will be partly due to rate rises and the removal of the poorest performing business from the market, this will also inevitably be flattered by the reduced economic activity and lower claims activity in certain classes in 2020, due to COVID-19. The consequence of the various lockdowns and the impact that they have had upon human activity have meant that there have simply been fewer claims across classes such as aviation, casualty, marine and motor.

 

  1. Major Losses. 2020 was a very expensive year for the global (re)insurance market. COVID-19 is reported to be a gross loss to Lloyd’s of £6.2bn of which £1.2bn has been paid to date. The net reserve for COVID-19 is now £3.4bn, within the range £2.5bn – £3.5bn issued last year. However, depending on how long the UK lockdown lasts into 2021, this total loss could climb to £3.8bn over time. Major losses were equivalent to 23% of premium (or £6.0bn) for 2020, far greater than the major loss bill reported for the 2019 year and far in excess of the 15 year average for the market which stands at £2.1bn. Lloyd’s reported that, excluding COVID-19 (at 13.3% of premium), the market would have seen a 97% combined ratio, which would have been better than 2019. However, this takes no account of the benefits of COVID-19 on the underlying attritional loss ratio this year, so we consider that it is an unhelpful comparison.

 

  1. Reducing expenses. The message from Lloyd’s in recent years is that an expense ratio of around 40% is unsustainable. We have seen some further improvement in the expense ratio this year, which now stands at 37.3% of premium, but this was not in the administrative expenses so is still very much work in progress and more needs to be done to reduce this burden.  The entire saving came from a 1.4% point reduction in brokerage.

 

  1. Trading Conditions. The market in 2021 is seeing its fourth consecutive year of rate rises and John Neal reported that we are now in very strong rating conditions. We believe more needs to be achieved on pricing, particularly on the reinsurance side (which represents 34% of total Lloyd’s premium) which has not made money since the 2016 calendar year. We need to be targeting an overall combined ratio closer to 90% in order for the market to make a good return, (a figure which several of the Alpha supported syndicates were closer to). We were disappointed that the message from Lloyd’s did not focus more on the need to return the whole market to a strong and stable profitable position.

 

Alpha conclusion: we are disappointed that today’s announcement of a £(0.9)bn loss for the 2020 year for Lloyd’s as a whole was not accompanied by a stronger message that more needs to be done on premium rates and expenses, in order to secure the future profitability of our market. Instead, we were given the positive spin of an improved underlying performance of the market (but only if the COVID-19 loss is removed from the picture), which does not help to highlight the need for further rate increases to continue. The first quarter of 2021 has seen a major US winter storm, Uri, in Texas, as well as the recent Ever Given marine loss in the Suez Canal, together with the consequences of the third UK lockdown. These factors ought to reinforce the need in underwriters’ minds for premium rates to continue to rise in 2021, particularly with little or no prospects for investment income, rather than focusing on a market position which excludes the losses (but not the benefits) from COVID-19. We may be seeing our fourth consecutive year of rate increases, but the market certainly needs that and more, to return to solid and sustainable profitability. That said, the majority of those syndicates supported by third-party capital continue to outperform significantly the Lloyd’s market as a whole.

 

Please click here for a full report of Lloyd’s 2020 Annual Results and here for access to the analysts presentation delivered this morning by John Neal (Chief Executive Officer) and Burkhard Keese (Chief Financial Officer).