London Views
By LEN WILKINS
London Correspondent
At first sight a profit of $1.9 billion for Lloyd’s for the first half of the year seems great, even with Covid, but in London there is a saying, “Lies, big lies and statistics.”
What saved Lloyd’s in the first half was a dramatic turnaround in underwriting profit which reached $1.32 billion against a $1.79 billion loss in the same period of 2020. Profits were driven by rate increases in the January renewal season and across the board generally. Rate rises of 9.9 percent were reported for the first six months of 2021 on all major classes of business, and Lloyd’s shed around six percent of its business, which was underperforming, to improve profitability.
Long-term Lloyd’s investors will look at these figures with a jaundiced eye. At the same time as the half-year profits were released, estimated figures for the results for the 2019 and 2020 underwriting years suggested that Lloyd’s overall market results for 2019 at the worst would be a 7.15 percent loss and at best a 1.10 percent loss. For the 2020 underwriting year things are better with a worst-case loss of 2.52 percent and a best-case profit of 3.77 percent.
It seems likely that investors will pay out for 2019 losses, but may reap rewards for 2020 and 2021.
Lloyd’s got to its $1.9 billion profit by aggregating the three open underwriting years of 2019, 2020 and 2021 to produce one figure. Take 2019’s likely loss, 2020’s likely small loss/breakeven and 2021’s potential profit and combine them to produce the $1.9 billion profit.
Gross written premiums for the first half of 2021 increased to $28.3 billion (2020, $27.6 billion), helped by higher customer retention and new business, as well as rate increases. The combined ratio for the first half is below the important 100 percent figure, at 92.2 percent, and below 2020’s 110.4 percent. Lloyd’s calculated that, without Covid claims, the 2020 combined ratio would have been 97.0 percent. Whatever figures one uses, the result demonstrates the substantial turnaround of Lloyd’s profitability and performance even though the figures were boosted by a prior year release of reserves which helped the combined ratio by 0.9 percent.
An increased income is not the only improvement to boost the combined ratio. The figures are helped by a notable reduction to Lloyd’s attritional loss ratio and its expense ratio. The attritional loss ratio of 50.5 percent shows a 2.1 percent reduction from the first half of 2020, while the expense ratio of 35.8 percent shows a 1.9 percent improvement, demonstrating Lloyd’s commitment to reducing costs.
Property business did a major turnaround. After producing the majority of 2020’s $1.38 billion underwriting loss, it produced a profit of $386 million for the first half. Casualty business was the only class to stay in the red with underwriting losses of $61 million, a decrease from 2020’s loss of $533 million. Reinsurance underwriters turned 2020’s loss of $353 million into a $275 million profit for the first half. Lloyd’s has not increased its overall Covid reserves which stay at a gross $8.0 billion and a net $4.7 billion. Lloyd’s syndicates were notified of $3.86 billion of claims to date, of which $3.04 billion have been paid.
The increase in profits helped Lloyd’s maintain its strong capital and solvency position. Net resources increased by $3.59 billion to $50 billion, producing a central solvency ratio of 218 percent and a market solvency ratio of 170 percent. Possibly the only disappointing figure for the first half was Lloyd’s investment income, which remains under 1.0 percent, at 0.8 percent and produced a useful, if disappointing, $0.83 billion against $1.24 billion in 2020.
Gallagher buys Willis Re
Arthur J Gallagher finally got its hands on Willis Re in a $3.25 billion payment. A further $750 million is payable in 2025. Willis was unhappy to lose one of its star players, especially to a major rival. The deal was originally set up to win regulatory approval for Willis’s proposed merger with Aon, a merger that has now collapsed. This must be a bitter blow to Willis, especially as Willis Re produced $10 billion of premiums a year.
Willis in many ways had no choice in the matter. The staff of Willis Re wanted to merge with Gallagher. Already, some had joined Gallagher, and Willis faced a mass walkout to Gallagher had the deal not gone ahead.
The purchase was met with satisfaction among the world’s reinsurers. Aon and Willis are the world’s two biggest reinsurance brokers. Adding Willis Re to Gallagher won’t facilitate Gallagher overtaking the other two, but it will produce another major player and stops a mega broker from dominating the world’s reinsurance market. The effect of the merger on this year’s renewal season, remains to be seen.
Lloyd expects loss for 2019
Those who joined a Lloyd’s syndicate in 2020 hope for a small profit for the 2020 underwriting year and a bigger one for 2021. Pity then the unfortunate investors who joined a year earlier and will have to pay losses for the 2019 underwriting year. Unlike the recent half-year figures, which are an aggregation of all Lloyd’s open years, the underwriting year figures represent pure underwriting results for a particular year from incoming premiums and outgoing claims and don’t include any other income or expenditure, such as investment income or release of reserves from previous years.
For the 2019 underwriting year Lloyd’s best estimate is a market-wide loss of at least 1.1 percent. The mid estimate is a loss of 4.13 percent, and if the worst happens, the market will suffer a 7.15 percent underwriting loss. The figures are based on the estimates on every Lloyd’s syndicate.
Thirty-two nonaligned syndicates released individual results. Using the worst case figure only six of these syndicates anticipate an underwriting profit, while two hope to break even. The worst performing syndicate is Astra’s Syndicate 6123 which expects a 39.06 percent underwriting loss even though 12 other syndicates indicate double-digit losses. Of the six syndicates forecasting profits Chaucer’s Syndicate 1176 expects a 25 percent underwriting profit, while MAP Syndicate 6103 expects a 20 percent profit. No other syndicates predict double-digit profit. The remaining syndicates all forecast losses on the worst case figures.
Using the mid-case estimates for the 2019 year, there are 14 profitable syndicates, with Chaucer’s Syndicate 1176 expecting a profit of 30 percent. Three other syndicates hope for double-digit profit, while 10 expect single-digit profit, and one syndicate hopes to break even. That leaves 17 syndicates predicting losses, with eight of these expecting double digit hits. Using the best-case figures, 19 syndicates anticipate a profit, and two hope to break even. Chaucer’s Syndicate 1176 forecasts a 35 percent profit and leads four syndicates which are also in double-digit territory. Of the 11 syndicates predicting a loss, seven expect double-digit losses. The 2019 year will close in a few months, so 24 of its 36 months of development have already happened. This means that any dramatic change in the figures is unlikely.
For the 2020 underwriting year, there are 31 nonaligned syndicates, and the investors, or Names, for Lloyd’s 2020 underwriting year have reason to be happy. While the worst-case figures still suggest a market loss of 2.52 percent, the mid estimate is a profit of 0.63 percent and the best is a 3.77 percent profit. With 18 months more development to run, there is still a chance for these figures to improve – or deteriorate. Four syndicates anticipate profit based on the worst-case figures, while three anticipate breaking even. QBE’s Syndicate 386 anticipates an 18.76 percent profit, while one other syndicate expects a double-digit profit and the other two a single-digit profit. The difficulties of setting up a new syndicate are shown by the forecast losses from Asta’s Syndicate 2288, which expects a loss of 68.58 percent. Thirteen other syndicates forecast double-digit losses, and eleven predict single-digit losses.
The mid-case estimates for 2020 show two syndicates making a double-digit profit, 10 forecast single-digit profit, and four expecting to break even. Leading the pack of profit-making syndicates is Chaucer’s Syndicate 1176 with a predicted 25 percent profit. Eight other syndicates expect double-digit losses, with Asta’s Syndicate 2288 still out in front with a predicted 63.58 percent loss. Seven others expect single-digit losses.
Finally, the best-case figures suggest 10 syndicates will produce double-digit profit, with Chaucer’s Syndicate 1176 predicting a 35 percent profit. Eleven syndicates expect a single-digit profit, while two hope to break even. That leaves seven syndicates producing double-digit losses, with Syndicate 2288 still leading the pack with a 58.58 percent loss and one syndicate with single-digit losses.
Lloyd’s CEO wants staff back
The back to work hype running through the U.K. has reached the London market with Neal telling market participants they have a duty to get their staff back to the office to help develop younger employees. Traditionally, new entrants to the market have learned the technical knowledge they need from their seniors by watching and helping them in the day-to-day tasks. That’s difficult to do when everyone is working from home.
The problem facing London is that not everyone wants to return. The time saved by not commuting and the money saved in travel costs are huge incentives to staying at home. Step one in the market’s plan to get its workers back is to appeal to them to help get new entrants up and running. Step two will be financial. There are rumors of salary and incentive cuts as employees’ savings are kicked back to employers.
The trading capacity at 1 Lime Street is around 7,000 people. Currently, use is between 35 percent and 45 percent of normal levels, but Lloyd’s hopes this will double shortly as staff are encouraged to return. Since mid-July Lloyd’s has removed its class of business timetable (which allocates different days to different markets) along with its one-way systems, social distancing requirements at boxes and the former requirement to wear masks in all public areas now is a personal choice.
Lloyd’s to speed up claims process
One of the major aggravations in insurance is slow claims payments. In the past, Lloyd’s has not been the quickest at divvying up money, but changes were made in the last few years and steady progress continues. There is news of two projects underway in Lime Street to speed things.
The first relates to the claims payments for delegated authorities. A few years ago, Lloyd’s realized that one way to achieve premium growth and to obtain business from around the world was to push delegated authorities as a means of placing business in Lloyd’s. To make these delegated authorities more popular, Lloyd’s intends to improve things further by launching a Faster Claims Payment pilot.
Over the next three months, nine market participants will work with Lloyd’s to address speed of payments. Incredibly, the pilot is designed to test the ability to pay claims within minutes, rather than days.
The second project is a two-year partnership with geospatial insurtech McKenzie Intelligence Services (MIS). The agreement provides the Lloyd’s market with access to multisource intelligence, including world-class satellite imagery through the Global Events Observer (GEO) platform, which will help deliver faster claims decisions and payments for customers.
The GEO platform will provide the Lloyd’s market with real-time analysis of global perils, including storms, wildfires and floods. The data will allow the Lloyd’s market to instantly assess damages at a time when physical access to the risk location may be limited following a natural catastrophe.
Lloyd’s says satellite imaging, combined with other intelligent data sources, will allow it to assess damage to insured infrastructure and businesses and support customers around the world during periods of crisis. Reduced operational costs will also help the market. The platform should help with reserving and claims management, as well as underwriting.
The system was developed by MIS as part of the Future at Lloyd’s program, so the insurance lab already produces helpful systems for the market.
Ida losses to hit profit not capital
Losses from Hurricane Ida will not cause too many problems for London and will hit profits but not capital. The way catastrophe losses are aggregating upward this year is beginning to worry reinsurers. Ida claims will include losses from the Caribbean as well as the U.S., but those claims are just part of the losses London market reinsurers paid. Paid losses include $13 billion for European floods. Overall, catastrophe losses for the first half will reach at least $40 billion for reinsurers.
Losses from Ida are expected to be in the region of $25 billion, but this may rise upward as flood claims arrive. Lloyd’s Chairman Bruce Carnegie-Brown recently told Reuters that Lloyd’s expects to pay 10 percent of all insured losses from Ida.
London reinsurers will pay their share of claims, but will use the losses to remind the primary market, brokers and reinsurers worldwide that come January renewal rates will have to reflect these losses.
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