The profitability of London market and Lloyd’s insurers is expected to remain under pressure in 2018, despite the fact that rates improved slightly following the catastrophe losses in the second quarter of 2017, according to Fitch Ratings in a new report.

After last year’s losses, the market did see some improvement in rates, said Fitch, pointing to the fact that Brit, Lloyd’s of London and Beazley reported overall rate increases on their renewal portfolio of 3.5 percent, 3.0 percent and 3.0 percent, respectively, in the first quarter of 2018, compared with decreases of 2.2 percent, 2.0 percent and 2.0 percent in the first quarter of 2017.

Capitalization in the London market remains very strong, with excess capacity in the market fueling competition, according to the report titled “London Market Insurance – Autumn Dashboard.” “As a result, we expect pricing to be broadly flat in the absence of significant losses in 4Q18.”

Catastrophe losses from this year’s third quarter events are likely to be within annual catastrophe budgets for London market insurers given the benign first half of the year, said Fitch, citing the examples of Hurricane Florence in the U.S., Typhoons Jebi, Mangkhut and Trami in Asia and the earthquake and tsunami in Indonesia.

However, any further large losses in 4Q 2018 could put further pressure on earnings, the ratings agency said.

This year, London market insurers’ combined ratios benefited from the low level of catastrophe losses in 1H 2018, said Fitch, noting that major losses contributed only 0.6 percent to Lloyd’s of London’s combined ratio in 1H 2018, which is significantly below the 15-year average.

Brexit Impact

In preparation for Brexit, London market insurers with EU operations have set up subsidiaries in the EU so they can continue writing EU business after they lose their passporting rights. However, the legal ability of UK-domiciled insurers to pay claims on existing policies written in respect of EU business after a no-deal Brexit remains unclear, Fitch affirmed.

“In the event this is declared to be illegal, such policies would need to be transferred to an EU subsidiary by means of Part VII transfer (a transfer scheme allowing an insurer to transfer policies to another insurer), which many insurers will not be able to achieve prior to March 2019,” said Fitch. (Editor’s note: Although the UK is set to leave the EU on March 29, 2019, there plans to implement a two-year transitional period to prevent a chaotic Brexit.)

Lloyd’s

In the attempt to improve underwriting results, Lloyd’s initiated a market-wide profitability review in the first quarter of this year, asking syndicates to review the worst-performing 10 percent of their portfolios and to provide remediation plans, Fitch continued. Given that this is a multi-year project, Fitch does not expect meaningful improvements in profits to materialize before 2019.

High Expense Ratios

Fitch said that expense ratios remain high for London market insurers, despite a number of initiatives designed to improve market efficiency and reduce back-office costs, which will take time provide benefits. (Editor’s note: TOM is a program that aims to modernize the market and make it easier to do business in and with the London market. A big part of the program is the Placing Platform Ltd., or PPL, which aims by 2019 to have 100 percent of risks entering the market placed electronically through the platform.)

Investment Returns

Fitch said that investment returns fell significantly during the first half for London market insurers, mainly as a result of rising interest rates in the U.S., as higher yields led to capital losses on fixed-income portfolios.

*This story appeared previously in our sister publication Insurance Journal.