Lloyd’s has reported results for the market as at 31 December 2017. As widely predicted, following the three major hurricanes to make landfall in the USA as well as many other catastrophe losses, the market has recorded an overall loss for the year. The aggregate loss before tax is £2 billion, compared to a profit before tax of £2.1 billion in the year to 31 December 2016.

The combined ratio (claims and expenses divided by net earned premiums) was 114% - at 100% an insurance company is breaking even from its underwriting activities and at higher ratios it is losing money. The combined ratio in 2016 was 98%. A large part of the year on year deterioration was major loss activity; Hurricanes Harvey, Irma and Maria cost the market £3.6 billion, with other losses including the wildfires in California, earthquakes in Mexico and Cyclone Debbie adding a further £900 million to the losses incurred by the market in the year.

2017 ranks behind 2011 (earthquakes in New Zealand and Japan and floods in Thailand) and 2005 (Hurricanes Katrina, Rita and Wilma) as the most expensive years for the market in terms of catastrophe losses. With rating levels at a low level in almost every area of the market, there was also an increase in the attritional levels of claims activity.

Releases from reserves have contributed meaningfully to the overall result for 2017, although the amount has fallen markedly in recent years. 2017 benefitted from a release equivalent to 2.9% of net premium, down from 5.1% in 2016.

All areas of the market recorded an underwriting loss on the accident year, with only the energy market moving into overall profit after prior year movements.

 

 

Accident year

Prior year reserve movement

Calendar year

Reinsurance

121.7%

(4.5%)

117.2%

Property

131.5%

(3.9%)

127.6%

Casualty

103.7%

(0.6%)

103.1%

Marine

121.8%

0.6%

122.4%

Energy

107.7%

(21.1%)

86.6%

Motor

114.4%

7.9%

122.3%

Aviation

100.6%

1.6%

102.2%

Life

132.4%

1.4%

133.8%

Market

116.9%

(2.9%)

114.0%

 

The premium income of the market was up 6% at constant rates of exchange, 12% adjusted for the impact of exchange rates. Rates generally were down for renewal business, with the increase in premiums accounted for by growth in lines of business including cyber and warranty & indemnity. Four new syndicates commenced underwriting in 2017.

Lloyd’s underwriting performance compares unfavourably to its peer group of thirteen insurance and reinsurance companies operating in the US, Bermudian and European insurance markets. Lloyd’s has traditionally outperformed this group, although the differential fell to just 0.7% on the combined ratio in 2016. In 2017, only Swiss Re (at 115.4%) and AIG (at 129.3%) delivered a worse overall underwriting performance. Four of the peer group managed a combined ratio of less than 100% in 2017. Although Lloyd’s can point to a larger position on US catastrophe exposed business than competitors being behind the underperformance, there is a great deal of work being undertaken in the market to remediate lines of business that are marginal even without catastrophe experience and this is the key area that Lloyd’s needs to address in order to restore its underwriting advantage over key rivals.

The Lloyd’s market is heavily dependent on broker distribution and therefore operates with a higher expense base than most rivals.  The business mix has changed in recent years, with an increase in the proportion of direct insurance at the expense of reinsurance.  Acquisition costs have increased, while increased regulatory costs have pushed up syndicate expenses. Overall there was a small improvement in the expense ratio in 2017, down from 40.6% of net premiums to 39.5%, although the improvement was entirely in the syndicate operating expenses as acquisition costs continued to increase (up from 26.6% of net premium to 27%). The Corporation of Lloyd’s made some cost savings in the year with a reduction in headcount, but the introduction of electronic placing support and the London market’s target operating model (‘TOM’) are the principal tools by which the market seeks to lower the cost base further.

On an underwriting year of account basis, the 2015 account has continued to improve.   The final result for the market is a profit on capacity of 6.3%, up from the forecast released at the end of September 2017 of a profit of 4.7% of capacity. Third party members underwriting through members’ agents continue to have results which are much better than the market average.  The average result for a member underwriting through Argenta Private Capital is a profit of 9.3% of capacity.

The forecast result for the 2016 account has deteriorated on the previous quarter, and is now projected to be a loss of almost 4% of capacity at the market level, again with third party members underwriting through members’ agents enjoying a result considerably better than the market average.  The average Argenta portfolio shows a forecast loss of 0.4% of capacity at the twenty four month stage. We would anticipate that this result will improve in the final year before closure as the majority of syndicates would ordinarily expect a release from reserves held for closed years to contribute positively to the final result.

The prospects for the 2017 underwriting year are less good, and given the level of catastrophe losses sustained by the market, we can anticipate an overall loss. Managing agents are not required to make a formal forecast for the open year until it reaches the 15 month stage, which is at the end of this month. These forecasts will be released to us during May. We indicated a loss of around 5% of capacity for the average Argenta portfolio at the end of last year and will be reviewing this forecast on the basis of year end data (which we receive this week, along with the overall results for the market). We expect to send this to clients in the weeks after the Easter break. At this stage, we have no reason to suspect that the longstanding outperformance of third party members over wholly aligned syndicates should not persist in 2017 and beyond. We would expect that Argenta members’ results both on a GAAP accounted basis and on a year of account basis will be better than the overall market average.

Lloyd’s today also released the results and updated forecasts for all syndicates with third party capital and the results and forecasts in aggregate for aligned syndicates. Until now, the results we have reported have been based on communication from the individual syndicate managers. There are a few small discrepancies, largely owing to managing agents reporting to us to a single decimal place and to Lloyd’s to two decimal places. The updated schedule of syndicate results and forecasts can be found here.

The complete Lloyd's accounts and the analysts' slide pack can be found here