The positives in the 2019 results centred around releases from back years' reserves for the 15th consecutive year, a lower level of major losses and lower operating expenses, which taken together, drove an improvement in the whole market's underwriting figures. The most significant factor was the largest ever investment return on the market's central assets, creating a £2.5bn overall result for the year, the best result for the whole market since 2014.
The full 2019 report available here states "...[there is] still more to do and we continue to maintain our focus of delivering sustainable, profitable growth across the market."
Summary of 2019 result
Gross Written Premium £35.9bn
Underwriting loss £(0.5bn)
Investment income £3.5bn being 4.8% on assets – seven times last year’s yield; the best ever.
Pre-tax profit total £2.5bn
Trends seen in the 2019 results
Obviously these results are for the aggregate Lloyd’s market and do not tie up with Members’ 2017 closed year of account results or the estimates on the open years of Account 2018 to 2020 but they do cover factors that will influence these open years.
1. Lower major losses
Impacts upon 2019 were the major losses (Dorian, Faxai, Hagibis et al) of £1.8bn (net of reinsurance) as well as strengthening of US casualty and aviation reserves. This is below Lloyd's five year and 15 year average. See further detail here Link to the analysts presentation . 2019's total industry wide level of insured losses is thought to be US$56bn.
2. Improved loss ratios
Lloyd’s Combined Operating Ratio (“COR”) for 2019 was 102.1% - a 2.4%pp improvement on 2018’s number – COR is in simplistic terms the sum of losses plus expenses as a percentage of premiums and other income. Lloyd’s is very aware that this COR number has to improve and in that respect increased rates, discipline about the selection of business and cutting expenses are all crucial and will be maintained during 2020 with Lloyd's setting a target COR of below 100%.
3. Improved trading conditions
Rate increases of 5.4% were recorded on renewal business (the ninth consecutive quarter of positive rate increases) and ten classes of business all achieved positive risk adjusted rate in 2019. Premium income was reduced by some 8% in the more challenged classes of business.
4. Improved expenses
The expense ratio dropped slightly from 11.9% in 2018 to 11.2%. The acquisition ratio was similar to 2018's at 27.5%. Total operating expense ratio for 2019 therefore 38.7% (2018: 39.2%).
5. Discipline on syndicates
Market discipline was applied to the market centrally by the Performance Directorate through the Decile-10 measures as well as controlling the lower quartile syndicates' 2020 business plan in a tougher regime.
John Neal mentions in the full report "Targeting the best performing syndicates the space to grow, while at the same time rooting out unsustainable business across the poorest performing classes and syndicates." £4bn of under-performing business was jettisoned by syndicates during 2019 which will have helped the loss ratios.
Releases from syndicates' reserves continued for the 15th year running with £232m released but the amount was down compared to 2018's level of £976m as a result of having to top up US casualty and Typhoon Jebi reserves. All syndicates hold reserves at or above an independent signing actuary’s best estimate. Over 93% of syndicates hold reserves in excess of the signing actuary’s view.
Having syndicate reserves at "better than best estimate" means that they are held at the 50th percentile and so releases should occur in every second year.
7. Lloyd’s central solvency and coverage ratio
Lloyd’s 2019 “Solvency Capital Requirement” (SCR) of £1.5bn was covered 238% by eligible assets of £3.574bn. Lloyd’s updated the coverage and values at 19 March to allow for the recent market reductions; the numbers were estimated to be £3.458bn being 205% coverage of the later SCR of £1.688bbn. Thankfully, as a whole, Lloyd’s has a low exposure to equities.
Lloyd’s expects a profit in 2020: “All of these factors help build confidence that a return to underwriting profit will be delivered in 2020, subject to major claims experience.”
Lloyd’s 2017 Account and 2018 Account estimate
The aggregate Lloyd's market result for 2017 was -7.97% (previously -11.78% to -6.16%)
The estimate for 2018 is -8.75% to -2.67%.
No estimates yet produced for the 2019 Account.
Among his opening remarks at the presentation of Lloyd’s results, John Neal, Lloyd’s CEO, observed “Taken in isolation any one of market volatility, insurance losses or operational challenges can usually be managed but when taken together and occurring simultaneously and globally this represents a challenge of unprecedented scale for our industry.”
John Neal went on to mention that up to 14 different classes of business might respond to COVID-19 losses.
Lloyd’s does not want to publish an estimate too early. It has asked managing agents to deliver their best estimates by the end of the month and Lloyd’s will publish an aggregate number by May.
Speaking to the FT on Thursday, Bruce Carnegie-Brown, Lloyd’s Chairman, highlighted the principle for the insurance industry in not paying any other than valid claims: policyholders have to specifically opt to buy cover and pay the premium accordingly.
Leading up to the announcement of the Lloyd's results, and reported widely since, substantial pressure
is being applied to the insurance industry both in the UK and the USA
to widen the coverage ordinarily given on physical damage policies to treat the presence of the virus as constituting damage to the insured property and therefore permitting business interruption claims.
We are cautiously optimistic that virus exclusion clauses will hold up and Hampden Underwriting Research will write more on this in due course.