Lloyd’s delivers an encouraging half-year statement despite Covid-19 losses.
It seems that many sections of the press are focusing on the overall loss of £438m and a combined ratio of 110.4%, but looking beyond the headlines, the Lloyd’s H1 2020 results include some very encouraging figures. The benefit of three years of rate growth and underwriting performance actions are flowing through the bottom line for the first time. There are improvements to both the underlying loss ratio and also to the expense ratio. Given the distribution of Covid-19 losses across years of account, with the lion’s share falling to the 2019 year of account, we remain optimistic that, subject to catastrophe experience in the rest of the year, the 2020 year of account should deliver a profit. The prospects for the 2021, with increasing momentum to the rate increases already prevalent in all lines of business, are perhaps the best in two decades.
Lloyd’s H1 2020 results
Lloyd’s has released results for the first half of 2020. The dominant factor throughout is the impact of the Covid-19 pandemic, both on the working practices of the market and also in the claims incurred in consequence of the worldwide series of restrictions on individuals and businesses.
The market fell to an aggregate loss of £438m (compared to a profit of £2,325m in the same period in 2019) and recorded a combined ratio of 110.4% (98.8% in the first half of 2019). Claims for Covid-19, across a number of different policy types, came to £3.0 billion and increased the loss ratio by 18.7%. Although there can be no escaping the magnitude of Covid-19 losses for Lloyd’s as a whole, nevertheless, encouragement can be taken both from the underlying combined ratio, which improved by more than 7 points if Covid-19 claims are excluded, and also in the attritional loss ratio (excluding the cost of catastrophe claims), which improved from 59.7% to 52.6%. The impact of the improving rating levels is beginning to feed through to the bottom line.
Rate levels started to improve following the three hurricanes to strike the US in the second half of 2017 (Harvey, Irma and Maria) and there are many classes of business which have achieved three years of rate improvement. Lloyd’s own performance management actions, including the focus on improving or removing under-performing lines of business, the so-called Decile 10 process, are now showing dividends.
Lloyd’s estimates the total claims payments to its policyholders arising out of Covid-19 losses at £5 billion, of which around 40% is expected to be recovered from reinsurers, leaving a net loss to the market of £3 billion. In May, Lloyd’s issued a preliminary estimate of a net loss of £2.5 billion to £3.5 billion and the overall loss remains in line with the earlier guidance. Reported losses are currently £2.4 billion with the market holding an aggregate provision for losses incurred but not reported (IBNR) of £600m. More than 40% of losses are from event cancellation policies, and one quarter of claims relate to property policies. The geographic distribution of losses broadly mirrors the footprint of Lloyd’s worldwide business, with 58% relating to USA (but including those policyholders with global risk programmes), 16% to the UK and 7% in Europe.
Although under annual accounting principles, all of the Covid-19 loss is reported in the 2020 reporting year, for underwriting members, the loss is distributed across the three open years of account. With almost a two-thirds share of the total, the 2019 account has the largest exposure to Covid-19 related losses for Argenta supported syndicates. Net Covid-19 claims are estimated at an average of 5.2% of capacity for Argenta advised clients. As the average forecast loss to Argenta advised clients is 1.4% of capacity, the underlying profitability is apparent. The 2020 account bears almost a quarter of the overall claims costs, at an average loss on capacity of 1.7% to our advised clients. Although this will obviously affectthe final result, we are still optimistic that 2020 will end in an ultimate profit to members even though there has been some catastrophe loss experience in the second half of the year and business remains heavily on risk. A further 12% of the Covid-19 loss is attributable to the 2018 year of account, which translates to an additional loss of 1% of capacity. Lower interest rates also reduce overall results across years of account.
The momentum of improving rates continues to increase. As noted above, 2020 is the third consecutive year when rate improvement has exceeded business plan expectations, with the market achieving 11 consecutive quarters of rate increases. Syndicates are reporting positive rate change on renewal business of 8.7% on average. Underwriters expect this to continue; the average expected rate change across the syndicate business plans we have received for 2021 is 8.6%. Almost all classes of business (the only exception we have found is terrorism) and all geographies are reporting rate improvement. Most underwriters that we have spoken to feel that the momentum is increasing by the month.
The market reported reserve releases of £67m, improving the combined ratio by 0.5%, in line with the £52m release (improving combined ratio by 0.4%) at this stage last year. Overall, Lloyd’s continues to believe that the reserve strength of the market is very good.
The investment performance was much lower than in the same period last year, although the recovery of asset prices in the second quarter meant that there was an overall positive contribution of £904m, down from £2.3 billion. Investment performance in 2019 was exceptional. The market collected £3 billion to fund Covid-19 losses and the ability to recapitalise is seen as a key differentiator and strength of the market. Capital and solvency positions are sufficiently robust to withstand significant catastrophe events should they occur in the second half of the year.
John Neal, who is both Lloyd’s CEO and acting as interim Performance Director pending the appointment of a Chief of Markets, also used the H1 results presentation to set out the priorities for the market in the coming months.
On Covid-19, Lloyd’s has been part of the insurance industry response to the pandemic and has published a report called “Supporting global recovery and resilience for customers and economies” alongside an open source framework for systemic risk. It has also proposed three frameworks that could provide protection for further waves of this disease, or other future pandemic, ReStart, Recover Re and Black Swan Re.
There is no let-up in John Neal’s focus on returning the market to long term and sustainable profit. That focus is now starting to deliver results as shown by the H1 figures. Performance improvement continues to be a priority for the 2021 business planning cycle, although with the improvement in rating levels there will be some scope for volume increases beyond rate linked premium growth for better performing syndicates.
The market’s response to the pandemic, where it has continued to function efficiently despite the move to remote working will be built upon. Alongside the newly and safely reopened underwriting room is a virtual underwriting room. There will be an update to the Blueprint for the Future at Lloyd’s which will be published in November.
Further, Lloyd’s continues to transform its culture. There is a market wide target that 35% of leadership roles will be filled by women and there are actions to improve the experience of black and minority ethnic market participants. A second culture survey will be conducted in October.
A quick refresher, the combined ratio is calculated as the sum of aggregate claims in the period and of aggregate expenses (including internal administration costs and acquisition costs such as brokerage paid to intermediaries) all divided by net earned premiums in the period. A combined ratio of 100% indicates that the company is breaking even from its underwriting operations, although may be profitable depending on the performance of the investment portfolio. Combined ratios of less than 100% indicate profitable underwriting. The attritional loss ratio is calculated as the aggregate net losses less any claims arising out of catastrophes divided by the net premium. It gives an indication of the underlying profitability of an account.