Lloyd’s has today released results for the market for the year ended 31 December 2016. Overall, at £2.1 billion, Lloyd’s profit is down by 1% from the result for 2015.  The higher cost of catastrophic losses and the weaker rating environment resulted in a lower contribution from underwriting, but this has been compensated for by higher investment income. The market, which reports in sterling despite 65% of premium income being in US dollars, has benefitted from a one-off foreign exchange gain as the pound fell against the dollar during 2016.

Results at a glance:

 

 

2016

2015

Change

Gross Written Premium Income

£29,862m

£26,690m

+12%

Net Earned Premium Income

£22,660m

£20,565m

+10%

Claims incurred

£12,987m

£10,262m

+26%

Net operating expenses

£9,205m

£8,256m

+11%

Investment income

£1,345m

£402m

+235%

Profit

£2,107m

£2,122m

-1%

Claims ratio

57.3%

49.9%

7.4 points worse

Expense ratio

40.6%

40.1%

0.5 points worse

Combined ratio

97.9%

90.0%

7.9 points worse

 More Major Claims

The weakening of the claims ratio reflects worse catastrophe loss experience during the year.  The cost of major claims to Lloyd’s increased to over £2 billion (from £733m in 2015), with the most significant events being the Fort McMurray wildfire in Canada in May, and Hurricane Matthew, which struck parts of the Caribbean and southern states of the USA in September and October. The cost of major losses is the market’s highest since 2011, which was hit by earthquakes in Japan and New Zealand and floods in Thailand.

Prior Year Releases Continue

Although there was a smaller release from reserves at this year-end when compared to 2015, this still represents a material part of the result, contributing £1.16 billion, and reducing the combined ratio by 5.1 points. The reserve release in 2015 was £1.6 billion, reducing the combined ratio by 7.9 points. The market has released reserves in each of the past twelve years. There were some areas where claims’ reserves needed strengthening, most notably in the direct and reinsurance sectors of UK motor business, where the reduction in the discount rate used in settling large personal injury claims means that future court awards are likely to be much higher.

Reinsurance Performs Best

In general, reinsurance business has fared better than direct insurance classes.  In the three key areas of property, casualty and specialty reinsurance an underwriting profit (i.e. result before investment income) was achieved.  The results for direct insurance were more mixed, with underwriting losses reported in property, casualty, marine and motor.  Only marine and energy made a positive contribution to profits in direct insurance lines.  In both cases, this reflects the contribution of reserve releases, since the accident year loss ratios were 106% and 107% respectively.

Higher Expense Ratio

There is a small increase in the expense ratio, although smaller than in recent years.  Lloyd’s costs have increased considerably in recent years, in part owing to increased costs of regulation and issues such as Solvency II. Part of the increase is due to the changing mix of business, with less reinsurance business (typically paying smaller commissions) and more direct business. This change is slightly offset by the weaker overall profit reducing the level of profit commissions charged by managing agents and coverholders.

Significantly Improved Investment Returns

The most significant change is in the investment income, which rose almost threefold. The result reported by Lloyd’s includes a notional return on members’ funds at Lloyd’s, as well as a return on the central assets of the market (including the central fund).  Although there was volatility, investment markets generally were strong. The return on syndicate investments was 2.0%, and worth £810m to the market, up from 0.8% in 2015.

The full market report is available here and the analysts’ presentation pack here.

Lloyd’s to open EU insurance company in Brussels

Lloyd’s has also today revealed that it will establish a reinsurance company based in Brussels that will allow syndicates to continue to underwrite business in all 27 member states of the EU and the three members of the EEA after the UK has left the EU.

Business from the EU accounts for 11% of Lloyd’s gross premium, although of which half is subject to the passporting rules of the single market.  Although the UK government triggered the Article 50 process on 29 March, the UK continues to be a full member of the EU for the next 24 months and so there is no impact on policies currently in force.  More details on Lloyd’s plans in Europe can be found here.

Syndicate supported by third party members continue to out perform

We are collating the individual syndicate results from the syndicate reports and accounts. Syndicates supported by third party members have outperformed the average for the market as a whole over a prolonged period.  We have seen nothing to suspect that this will not again be the case in 2016.

Certainly, as far as the more traditional three year accounting (which determines payment of profits to third party members) the third party syndicates have outperformed, with the average result for an Argenta client on the 2014 account being more than 20% better than the market average.

The same is true for the 2015 account at the twenty four month stage, where third party members advised by Argenta have a forecast result anticipated to be 40% better than the current market average. The 2015 account forecasts do not yet incorporate any movement on the reserves for business written in 2014 and earlier years, while the bulk of the investment income is earned when the year has received the premium to close the previous year of account. We therefore anticipate that there could be considerable movement on this account before closure.

 Managing agents are not required to make a formal estimate for the 2016 account until the end of the fifth quarter. These will be released to us by the middle of May (along with an update on the 2015 account). A small number of managing agents have elected to release preliminary forecasts for 2016 after twelve months.

A full list of results and forecasts, including aggregates for the market and for aligned syndicates is available here.