Lloyd’s reports $1.2 billion loss for 2020 underwriting year

London Views
By LEN WILKINS
London Correspondent

Lloyd’s annual report for 2020 shows a $1.2 billion loss as net COVID-19 claims reached $4.42 billion which caused the market to hit a combined operating ratio of 110.3 percent against 102.1 percent for 2019. The $1.2 billion loss in 2020 compares to the $2.93 billion profit in 2019.

Without COVID-19 adding 13.3 percent to the market’s combined ratio, Lloyd’s underwriting result would show an underwriting profit of $1.006 billion and a 97.0 percent combined ratio.

COVID-19 claims totaled $8.25 billion; reinsurers are left with some $3.83 billion to pay. Apart from COVID-19, there were losses from worldwide natural catastrophes which added $3.325 billion in claims.

A few years ago, Lloyd’s published one set of results after the expiry of each underwriting year. This meant while Lloyd’s reported on what happened three years ago, the rest of the world used more up-to-date figures. Lloyd’s now publishes two sets of figures: the traditional underwriting year results and the annual results, which represent results for the aggregate Lloyd’s market and include release of previous years’ reserves and investment income; whereas, the underwriting year figures are straight premium against claims. The underwriting year figures sway the aggregate figures.

Premiums reached $47.14 billion in 2020 against $47.75 billion a year earlier, partly due to rate fluctuations and Lloyd’s decision not to renew underperforming business. With increases of 10.8 percent, rates were on the rise during 2020 and continued the trend into 2021.

Lloyd’s net resources grew to $45.14 billion from $40.75 billion a year earlier. Its central solvency coverage ratio fell to 209 percent from 238 percent, and its market-wide solvency ratio is now 147 percent, down from 156 percent a year earlier. As expected, investment income continues to disappoint and returned 2.9 percent, or $3.06 billion, which is off 2019’s $4.65 billion.

In May 2020, Lloyd’s told the market its estimate for COVID-19 claims net of reinsurance was $3.32 billion to $4.65 billion, an increase over initial estimates due to lockdowns in the U.K. and elsewhere. In addition, there were losses imposed by the High Court and Supreme Court judgments.

In this annual report, Lloyd’s estimates that net of reinsurance the loss to the market will be around $4.79 billion, and then adds that, with social distancing expected to continue in the U.K. until July 2021, the final figure could rise to $5.05 billion. Lloyd’s calculations are based on figures that suggest 67 percent of the losses are on an IBNR basis and cannot be considered certain. Of the $2.66 billion claims notified, $1.60 billion have been paid to date.

With Lloyd’s producing underwriting losses for the fourth consecutive year, one would expect gloom and doom; instead, there is optimism in Lloyd’s and the rest of the London market. Excluding COVID-19 losses, Lloyd’s made an underwriting profit of $1.06 billion. The underlying combined ratio dropped (that’s attritional loss ratios, expense ratio and prior year releases) to 87.3 percent.

Add the double-digit premium increases at the 2021/2022 renewal season, and one can see why the Lloyd’s market is quietly confident. Lloyd’s has reported 13 consecutive quarters of rate increases, and these increases exceed Lloyd’s plan for each quarter. Lloyd’s said all classes of business and geographies achieved positive rate increases, and the first quarter of this year saw double digit rate increases.

While COVID-19 is still with us, its loss exposure is dwindling as the renewal of each policy sees new and comprehensive pandemic exclusions added. Major losses caused by claims for event cancellation have been paid, and premiums for these risks increased substantially while cover was reduced. The final cost of COVID-19 might still increase, but it will be well within the market’s ability to handle. Without the cost of additional COVID-19 claims, underwriting profits should boom.

Ever Given to hit Lloyd’s two ways

Lloyd’s underwriters will pay at least $100 million for their share of the losses caused by blocking the Suez Canal, and the tab could be a lot more. It’s too early to pick a figure, but Lloyd’s Chairman Bruce Carnegie-Brown said Lloyd’s is on the hook for between 5.0 percent and 10 percent of all losses, and the market expects a “large loss” from the Suez Canal disruption and from all the other vessels trapped in the canal. Apart from direct claims, Lloyd’s can expect to pick up a loss from the reinsurance of the Protection and Indemnity Club that insures ship owners’ liabilities.

Ever Given’s owners insured their liability exposure with the U.K. P&I Club. These clubs are specialist mutual insurance clubs that cover ship owners’ liabilities and one quarter of any collision liability that the ship might incur. The major P&I clubs have grouped together in an association known as the International Group of P&I Clubs. The group has a joint reinsurance policy, believed to be the largest in the world, which buys cover up to a limit of $3.1 billion. Reinsurance recoveries cannot be made until a claim exceeds the $100 million deductible, but this loss is going to go way north of that. The concern for Lloyd’s is that a major share of the policy is placed in both Lloyd’s and the London market. Each individual P&I club pays the first $10 million of each claim itself, but losses above this figure, up to the deductible, are pooled across the international group members.

The loss is probably going to keep lawyers happy for months. Ever Given’s owners can expect to receive claims for every ship and cargo impacted by the delay, and there were over 400 of them. These claims will be hurriedly passed on to the U.K. P&I Club.

The Suez Canal Authority was first in line with a claim for $1 billion in compensation. The authority lost a week’s income and incurred expenses in freeing the vessel. While under the standard condition of carriage Ever Given’s owners are not liable for any delays to the cargo their vessel was carrying, this doesn’t apply to the other vessels impeded by the incident. Insurers can expect claims from ship owners for loss of income and cargo owners for damage caused by delay and the supply chain interruptions from the loss of use of their cargo.

While liability underwriters are looking with horror at the situation, there also are some claims heading to the marine market for the recovery and damage to the Ever Given. The vessel is insured with Japan’s MS&D Insurance Group for around $140 million and reinsured in the world’s marine market. The initial loss will be for inspecting the vessel’s hull for any damage, and the cost of any repair will be added. The big loss here is expected to be the salvage award made to SMIT Salvage, probably by arbitration, with the award based on the skill of the salvage company, the time taken, the equipment used and the degree of expertise needed.

While salvage losses in the Suez Canal are notoriously expensive, the ship’s insurers will be relieved to know the Ever Given’s owners have declared General Average. This is a marine principle which ensures the cost of any salvage is shared by the ship and the cargo owners.

Meanwhile, the Ever Given is anchored in the Great Bitter Lake, roughly halfway along the canal. The Suez Canal Authority said the Ever Given could remain in Egypt until the ship owner agrees to pay compensation.