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Apr 03, 2023

Hampden Research - Lloyd's 2022 results and April 2023 renewals summary

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Market Update

Lloyd’s 2022 Results

Lloyd’s recently reported its annually accounted results for 2022, which had a Net Combined Ratio of 91.9%, making it the best year since 2015. Despite global catastrophe losses of $125bn including Hurricane Ian and the war in Ukraine together accounting for a major loss ratio of 12.7% points, the underwriting profit (excluding investment return) was £2.6bn.

However mark to market investment losses of £3.1bn due to higher bond yields contributed to a bottom line loss of £0.8bn. As much of the investment loss is unrealised, Lloyd’s expects to benefit from both higher yields on repriced bonds held to maturity and higher yields on newly invested premiums in 2023 with an investment return target of more than 3% on c.£80bn of assets in 2023.

Reserving strength was shown with the prior year release improving to 3.6% points of combined ratio (2.1% in 2021) and the expense ratio improved to 34.4% compared with 35.5% in 2021.

The combination of rate increases and better terms and conditions has improved the attritional loss ratio from 57.6% in 2018 to 48.4% in 2022, which has enabled Lloyd’s to make an underwriting profit and absorb losses from Hurricane Ian, which caused the second-largest insured loss on record in after the 2005 Hurricane Katrina.

Quarter 1 2023

Hampden considers the 2023 market conditions to be the best for at least two decades. Return on Capital is expected to benefit from both improved underwriting margins and improved investment returns due to higher interest rates achieved.

The reinsurance market has undergone a “hard reset” at 1 January 2023. Hampden’s expectation is that rate increases will continue in most classes with higher reinsurance rates leading to higher insurance rates particularly in the property classes where rates have re-accelerated in the last quarter of 2022.

The strong pricing environment is expected to continue due to a unique combination of factors:

1. Reduced risk appetite from investors has constrained market capacity;

2. Interest rate increases have increased the cost of capital and reduced supply due to mark to market losses;

3. Demand for coverage has increased due to inflation-driven higher values of insured assets;

4. Rising costs from natural catastrophes have led to a fundamental reassessment of pricing for risk transfer reflected in particular in reinsurance pricing.

The significant increase in global property catastrophe rates at 1/1 is anticipated to continue for the foreseeable future. Following a rise of 10.8% in rates in 2021, Guy Carpenter reports the global property catastrophe rate on line index to have increased 27.5% at 1/1, as seen on the chart below.

Catastrophe reinsurance rates in the US rose by 40-60% in 2023 (on a risk adjusted basis). US property insurance rates have re-accelerated in the final quarter of 2022 by a further 11% from 8% in the previous quarter. This marks the 21st consecutive quarter of rate rises.

The 1/4 Japanese renewals are forecast to follow the strong 1/1 market for US and European renewals, although rate increases will not be as high as Japan has not suffered from the same level of inflation as the US or UK with inflation falling to 3.3% in February 2023. Firm order terms have not been published yet but reinsurers were focussing on pricing in renewal discussions and pushing for rate increases of 25% to 35% on wind cover and seeking to raise the lower layers of wind programmes from 1.5% rate on line to at least 2%. Reinsurers were also looking to enforce minimum rate on line terms on earthquake covers.

Post script – 3rd April

Information from brokers’ reports indicates that both the Japanese and US reinsurance renewals continued to experience price increases, restructuring of treaty programmes and tighter terms and conditions on property cat business.

While the renewal negotiations were less gruelling than the January season nevertheless the price increases were substantial as underwriters continued to concentrate on achieving adequate pricing for the exposure.