While Lloyd’s overall results in the second half were hit by £2.4 billion ($3.12 billion) of COVID-19 claims, the market’s underlying underwriting performance saw a “huge improvement,” which Chief Executive Officer John Neal said is a “real testament to the performance management measures,” which have been put in place over the past three years.
Lloyd’s made a loss of £400 million ($520 million) during the first half, with a combined ratio of 110.4%. Without pandemic-related losses, the combined ratio would have been 91.7%, an improvement from the combined ratio of 98.8% reported for the first half of 2019. (A combined ratio above 100% indicates an underwriting loss).
During a press briefing to discuss Lloyd’s half-year results, Neal said, the improvement in the underlying performance indicates a marked improvement in the attritional loss ratio. (Attritional losses, which are caused by non-catastrophe claims, are attributed primarily to premium price deterioration.)
Neal pointed to an improvement of 7 percentage points in the attritional loss ratio, which dropped to 52.6% in the first half of 2020, compared to 59.7% during the first half of 2019. The market’s expense ratio, which has long hovered around 40% and is deemed to be too high, came down slightly during the first half to 37.7% from 38.1%.
He said it’s important that the market “gets into a rhythm of continuous performance improvement and management. It’s not once and done. We’ve got to maintain this good progress that we’ve made into the long-term, if we are to return Lloyd’s to long-term sustainable profitability.”
Over the past three years, Lloyd’s has focused on performance management of syndicates’ in the market because of losses it reported in 2017 and 2018. Books of business were re-underwritten and underwriters pulled out of unprofitable lines. Lloyd’s returned to a profit of £2.5 billion (US$3.2 billion) in 2019.
Neal said this hard work is starting to pay off. “We expect to see further improvement through 2021, as the market works on delivering [business and capital] plans that we consider to be logical, realistic, and achievable.”
Positive Rate Movement
Of course, a major indicator of long-term sustainable profits are premiums priced above the cost of risk. Positive rate movement is further good news for the market, said Chief Financial Officer Burkhard Keese, who also spoke during the press briefing.
He noted that average risk-adjusted rate increases on renewal business came to 8.7% during the first half. “These increases are exceeding plan every quarter. Furthermore, the rate of increase is accelerating in 2020 and it’s happening across the vast majority of classes and geographies.”
“We’re moving into the fourth consecutive year of price increases,” Neal said, which are expected to continue through 2021.
“So, as we do that, it’s important that we get the [business] plans right for 2021, so we don’t undo all of the good work that we’ve done through 2018, 2019, and 2020,” Neal added. Yes, growth can be supported but it has to be “the right risk at the right price,” he said.
Keese said the reduction in non-profitable business volumes has led to an 8.6% decrease in premium. “This shows our ability to drive unprofitable business out of the market,” he added.
This has been one of the most challenging six months faced by Lloyd’s, with COVID losses affecting both asset and insurance side of the business, said Keese.
“Despite this double hit to our resources, Lloyds stood up well. The market’s even better priced portfolio will support its future profitability and will increase its resilience,” he added. “The improved underwriting result demonstrates clearly the ability of the market to restore underwriting discipline and performance.”
The most important message from his presentation, Keese said, is that if the market sticks to its strategy of profitable growth and disciplined underwriting, “we can steer it to profitable territory.”
Despite the underwriting rigor, Neal said new business written will grow in 2021 to somewhere between £12 billion and £13 billion ($15.5 billion and $16.8 billion). “Two years ago, we were talking about £7 billion [$9 billion], so it’s almost double what it was two years ago.”
He said the right balance is being achieved by giving the right flexibility for new business growth. “If we make assumptions on what 2021’s going to look like, and those assumptions prove to be too conservative, then we’ve said to businesses, ‘Come back and talk to us again. If you think you can present a better plan, and there’s better rate increases, better price for exposure, then of course, we’ll sit and listen.”
He said it’s important to ensure this marketplace has the opportunity to make money in not only in 2021 and 2022, which it should, but also to be able to sustain that profitability into future years.
Potential Losses Ahead
Could Lloyd’s survive a second lockdown? Neal affirmed that the market’s capital position could cope even with another group of natural catastrophes in the second half, such as 2017’s Hurricanes Harvey, Irma and Maria in 2017.
As for the lockdown, and required virtual trading, Neal said, Lloyd’s made it work. “It’s harder and it’s not perfect… We can take some terrific lessons from COVID in terms of the flexibility we created in our work environment.”
However, he emphasized, “there is a need and there is a value proposition in physical interaction and connection, and that does make it easier and better for us to do business. So yeah, we can cope, but it’s not ideal.”
After locking down in March, Lloyd’s returned to its underwriting room in London on Sept. 1. At the moment, Neal said, footfall is increasing, but it’s currently only in the hundreds, which he expects will increase during September and October. (In a normal, non-pandemic world, Lloyd’s can see footfall of around 5,000 people per day).
Currently, the underwriting room is operating on a staggered basis — for example, with direct property underwriters on one day, and specialty lines on another. “At the moment, it’s different lines of business on different days. I think we probably can move to a broader capability, all products in the marketplace, pretty soon,” Neal explained.
*This story ran previously in our sister publication Insurance Journal.