London Views
By LEN WILKINS
London Correspondent
As predicted, Lloyd’s swung back into the black with an overall profit of almost $3 billion for its 2021 full year, against 2020’s loss of $1.17 billion.
The wine bars and pubs around Lime Street have been very, very busy. With a combined ratio drop to 93.5 percent (2020: 110.3 percent), there was a lot to celebrate, especially as the underlying combined ratio dropped to 82.3 percent (2020: 87.3 percent).
The turnaround came because Lloyd’s concentrated on what it does best – making an underwriting profit. By focusing on underwriting profitability and ditching loss-making business, Lloyd’s got things right. The market took advantage of favorable trading conditions to achieve premium growth.
Lloyd’s premiums grew by 10.9 percent to $50.96 billion, reflecting the continuing trend of 16 consecutive quarters of positive rate movement. There was an underwriting profit of $2.21 billion.
Lloyd’s paid gross claims of $25.87 billion in addition to the $3.77 billion already paid for Covid-19 claims. Lloyd’s now believes it has paid 86 percent of all Covid-19 claims notified to date, but all Covid-19 losses are not over.
The cost of doing business at Lloyd’s is another area it is working on, so the small reduction in the market’s expense ratio, which is down to 35.5 percent (2020: 37.2 percent), was encouraging if a tad disappointing. With Blueprint Two and Lloyd’s focus on sustainable performance and investment in digitalization, the market’s expense ratio should fall further and faster.
More good news is that the market’s already strong capital and solvency position continues to improve. Net resources increased by $3.38 billion and reached $47.6 billion. Lloyd’s central solvency and market solvency ratios are now 388 percent and 177 percent, respectively, showing a jump from 2020’s figures of 209 percent and 147 percent. Market security and the opportunity for the market to grow were boosted by the announcement last year of a landmark $845 million five-year protection for its Central Fund.
The significant turnaround in Lloyd’s performance is thanks to improving market conditions, higher premiums, Decimal 10 thinning out the nonperforming book of business and trimming expenses. If there was any disappointment, it was the performance of the market’s investment income, which was $1.17 billion, representing a 1.2 percent return against 2020’s $2.99 billion and a return of 2.9 percent.
Neal suffers serious injuries
Neal is in the hospital following a collision March 26 with a car while riding his bike. A spokesperson for Lloyd’s stated, “John sustained serious injuries and is undergoing treatment in hospital, however he is expected to make a full recovery.”
While he recovers, Lloyd’s will be led by Burkhard Keese, chief operating officer and chief financial officer and Patrick Tiernan, chief of markets. They will be supported by Lloyd’s executive committee and Lloyd’s chairman Bruce Carnegie-Brown.
Activists shut Lloyd’s for the day
Environmental activists forced Lloyd’s to close 1 Lime Street after they blocked all 25 entrances to the building and scaled the outside walls to unfurl banners demanding Lloyd’s stop insuring coal, oil and gas projects. Organized by a campaign known as Extinction Rebellion, the activists descended on Lloyd’s at 7 a.m., before the arrival of underwriters, and used super glue, chains, and bike locks to block access in and out of the building. Some of the activists dressed as rats in suits, claiming Lloyd’s is putting “profits before planet.”
Lloyd’s sent emails around 10 a.m. to everyone who works in the market telling them of the protest and asking them not to approach the building and to work from home for the day. The email insisted the activists did not disrupt trading as everyone in the market went back to lockdown mode and worked electronically. Anyone who was already in the building was asked to vacate the premises and was guided safely out of the building by Lloyd’s security.
How big is Ukraine loss?
With Lloyd’s direct exposure to Ukraine, Belarus and Russia at one percent of its income, no one is expecting a market-breaking loss. Lloyd’s predicts a single digit loss, albeit in billions of dollars. Direct and indirect claims are expected to fall within manageable tolerances and will not create solvency challenges, and Lloyd’s continues to work in step with governments and regulators around the world to support and implement a complex series of sanctions on Russia.
Lloyd’s expects its aviation, marine, credit, and political risk insurance markets to bear the brunt of any claims. Credit insurance policies, which cover nonpayment by borrowers in everything from trade credit to bank finance, are expected to be the biggest source of claims. An executive group now meets daily in Lloyd’s to monitor the situation and to ensure that Lloyd’s complies with the sanctions and other government-imposed actions. So far, the expected cyber-attacks haven’t happened, but there are a number of nervous insurers and reinsurers worrying that they will happen and will be big.
There are two big problems in calculating these losses. The first is what losses the primary market will claim from Lloyd’s as their reinsurer. The second is which losses will be paid. Is Ukraine a war loss? Do primary policies contain war exclusions? Does a cancellation notice have to be served and was it served? Insurers are expected to spend a lot of time in courts arguing over these points, and lawyers don’t come cheap.
Lloyd’s message to the market is to concentrate on the day job since Lloyd’s biggest worry is potential losses and insufficient rates from inflation, cat risk and the cost of doing business.
The London company market is in a different position than Lloyd’s because it writes a different book of business. The company market stands to pay direct and reinsurance losses from Ukraine and other areas, and has a major aviation exposure.
In a commentary on April 1 reinsurance renewals, Gallagher Re said the aviation insurance market could pick up significant claims for aircraft leased to Russian interests. The leasing companies gave cancellation notices on their leases as required by government sanctions, but Russia retaliated by passing a law that states all foreign leased aircraft still in Russia after the termination of Western leasing contracts will remain in Russia and will be re-registered as Russian aircraft. This vast loss could shake the foundations of the aviation insurance market in London with 500 aircraft being involved.
The value of the aircraft remaining in Russia is around $10 billion, although some sources claim the actual figure is more likely to be between $25 billion and $30 billion. With worldwide aviation premiums believed to be in the region of $6.5 billion, these losses could be a major blow to the aviation market.
Already the world’s top aircraft lessor AerCap submitted a $3.5 billion insurance claim for more than 100 jets stuck in Russia, and other lessor companies will follow.
The stage is set for a lengthy legal wrangle between lessors and insurers. The reason this is a problem for London company insurers and not Lloyd’s is that the claim is under the company’s all risks contingency policy, which does not have a cancellation provision and no aggregate cap. Lloyd’s aviation war insurers deploy annual aggregate caps and have a seven-day cancellation clause. Expect many legal arguments over who and what are covered. Insurers hope they can argue that government sanctions will block any payout.
Meanwhile S&P forecasts insured aviation losses of $16 billion to which can be added losses for a further $4 billion from marine hull, war, political risks and political violence.
Part of the reason the $16 billion figure raises eyebrows is that most senior Lloyd’s executives played down the likely costs of the conflict to their underwriting portfolios. However, there is no getting away from the fact that a market loss of this scale would have a serious impact on Lloyd’s because Ukraine is very much a specialty market loss.
Bad old days for Atrium underwriting
The old days of Lloyd’s drinking culture and bad behavior seem years ago, but news emerged recently that Lloyd’s fined Atrium Underwriters more than $1.3 million together with costs of $728,000 over charges of bullying and harassment. This is a record fine by the Lloyd’s Enforcement Board (LEB) and the first for a nonfinancial infraction. The fine stems from an annual “boys night out” over a number of years up to 2018.
Lloyd’s found that during these nights out, male staff members, including two senior executives, engaged in “unprofessional and inappropriate conduct” which included initiation games, heavy drinking, and inappropriate and sexual comments about female colleagues. The comments were discriminatory and harassing. Lloyd’s found that there was “a culture” which tolerated the unacceptable conduct, that some of this conduct was led, participated in, and condoned by the two senior members in attendance.
Lloyd’s issued a market bulletin from the LEB which reveals that the misconduct of one Atrium employee was well known in the company and included a systematic campaign of bullying against a junior employee. The LEB found Atrium did not protect the staff member despite an internal investigation disclosing serious misconduct. Atrium did not discipline the offending employee but reached a settlement and allowed him to resign. This was motivated in part by the desire of a senior manager to protect Atrium from bad publicity as well as the desire to limit the impact on the business unit involved, Lloyd’s said.
Andrew Brooks, chairman of the Lloyd’s Market Association, which represents underwriters, said that the enforcement action and the levy “send an unequivocal message: Bullying, harassment and other forms of inappropriate behavior have no place in the Lloyd’s market.”
Schroders becomes investment partner
Lloyd’s announced the appointment of Schroders Solutions as the investment partner of its new investment platform. Having looked at the way the market is performing and taking into account the amount of new business that should follow the introduction of Blueprint Two, Lloyd’s is aware it needs investment expertise.
Lloyd’s chose Schroders because the open-architecture firm manages $195 billion of global assets for insurance companies and has long-standing partnerships within the Lloyd’s market.
The new platform will consist of a series of select investment funds across asset classes, made available to Lloyd’s market investors who can freely invest in and allocate among them. Third-party managers will be selected for each fund and will be advised by Schroders Solutions. Lloyd’s Central Fund will act as a co-investor, catalyzing the launch of the funds while enhancing the risk return profile of the Central Fund.
By consolidating market investment funds under one umbrella, participants will benefit from collective economies of scale, thereby lowering costs. As a reflection of Lloyd’s core values and purpose, ESG criteria are embedded in the platform funds to support the delivery of net zero objectives for investors and the Lloyd’s market.
U.S. broker ups London presence
U.S. broker Brown and Brown Inc. is upping its presence in the London market by buying Global Risk Partners. The deal is subject to regulatory approval and is expected to be completed in the third quarter of 2022.
The move will establish Brown and Brown as a major player in the U.K. retail insurance market as well as its position in the London and European markets. As the sixth largest broker in the world, Brown and Brown posted revenues of $3.05 billion last year. No stranger to the U.K. or Europe, Brown and Brown already owns Irish broker O’Leary Insurances and has a presence at Lloyd’s with Decus Insurance Brokers Ltd. This deal is Brown and Brown’s second of the year. In February, it entered into an agreement to acquire BdB Ltd, a U.K.-based specialist wholesale broker providing access to specialty products in the U.K. and Europe.
Global Risk Partners controls or influences business totaling $2.34 billion and has grown by involving itself with a number of acquisitions last year, including the acquisition of Marsh Networks and WTW Northern Ireland. At nine years old, GRP is one of the top three independent brokers in the U.K., with more than 2,100 employees.
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