COVID-19 crisis overshadows Lloyd’s strong 2019 results

Lloyd’s had some exposure to event cancellation “but not as big as the Munich Res and Swiss Res of this world”, it is “not our overarching issue”.  John Neal, CEO of Lloyd's of London.

​· Pandemic narrows focus for Future of Lloyd's strategy
· COVID-19 hits Lloyd's assets hard
· Leaders engage with UK government for new Pandemic Reinsurance
· Lloyd's Neal on the Aon/Willis merger

Neal takes a pragmatic approach as the ‘coronacrisis’ prompts a priority review for the Future of Lloyd’s modernisation strategy.

As Lloyd’s published a £2.5 billion (pre-tax) return to profit in its 2019 annual results, chief executive John Neal acknowledged that COVID-19 means “our world and ways of working will change forever” as he discussed the impact of the pandemic.
Chief financial officer Burkhard Keese also confirmed that COVID-19 had hit Lloyd’s assets to the tune of £1.8 billion over the last few weeks.

Strong results as COVID-19 spreads

Lloyd’s substantial 2019 profit shows a real turnaround from its £1 billion loss in 2018, prompting Keese to highlight that it was “the first time since 2016 that Lloyd’s can report a profit”. The results showed an 8.8 percent return on capital described by Keese as a “significant improvement compared to 2018”. Its gross written premiums for 2019 rose slightly to £35.9 billion from £35.5 billion in 2018 and its combined ratio improved to 102.1 percent from 104.5 percent. While gross claims paid increased to £23 billion from £19.7 billion the year before.

However, the issue of COVID-19 hung like a dark cloud over what should have been a very upbeat briefing.

The market closed its physical underwriting room in the Lloyd’s building in EC3 on Thursday March 19 in response to the outbreak, forcing market participants to work remotely. The emergency trading protocol clicked into action and data from the electronic trading platforms PPL and DXC showed trading is continuing as normal, Neal said, although he added that “different people will have different experiences… but [on the whole] people are trading the business they would want to trade”. He added: “It will be interesting” to see how the electronic trading platform comes through this period.

“We’ve been talking to all of the participants in our marketplace, particularly the brokers who are right at the front end of processing, their processing volumes are up 20 to 30 percent in terms of electronic trading activity. Operationally we are in good shape, systems are working well.” But he added: “I’m not being light hearted about that, it’s harder the longer we find ourselves in a situation of remaining remote, but it is something we are keeping under close watch.”

Events cancellation ‘not our overarching issue’

Asked about the potential loss impact of cancelled events and whether the pandemic could derail the delivery of the Future of Lloyd’s strategy, Neal was pragmatic. He said they had identified 14 different categories of insurance that will be affected by COVID-19 claims. “We think event cancellation is the easiest one to get your arms around and address. It’s the next set of events, that’s the Olympics, Wimbledon, Glastonbury."

He said Lloyd’s had some exposure to event cancellation “but not as big as the Munich Res and Swiss Res of this world”, adding that this was “not our overarching issue”.

The Lloyd’s CEO said there were other lines that Lloyd’s was involved in that are likely to be affected. For example, medical malpractice, workers’ compensation and employers’ liability in relation to professions such as healthcare workers and airline flight attendants.

He added: “You’ve got potential lawsuits through general liability claims, which could be against cruise companies or hotels, then there’s political risk, assurity, mortgage, there’s a whole range of classes of business we think will be impacted. We do not see it being any different to any other form of catastrophic loss that the market would see. We do not see it as being out of line.”

He said they would communicate losses from COVID-19 in early May, adding that the lesson from 9/11 was not to rush to get figures out, because “it is important to get those numbers right”.

COVID-19 narrows Future of Lloyd’s focus

On the impact of COVID-19 on the Future of Lloyd’s modernisation strategy, Neal said it was felt it would be “inappropriate to be spending high sums of money in the face of economic challenges and at a time when the market is operationally under strain”. He explained: “What we’ve done, this was a Q2 decision, is to rationalise and narrow our focus into the areas that will make the most difference in 2020 and 2021.”

That means Lloyd’s will continue with the next generation of PPL, continue putting the coverholder solution in place, continue its claims work, and make sure that the underlying framework is being put in place for data and technology, he said. Q2 has a “heightened focus” Neal said, adding that the situation would be reviewed in Q3 and Q4.

Long term sustainability in underwriting

The 2019 results confirm that the work to improve underwriting profitability in 2019 is beginning to bear fruit, according to Keese. He said that “the decile 10 work has been successful and is now embedded in our ‘business as usual’”. However, there was still an underwriting loss of around £500 million, he added. Keese said it was “of the utmost importance that we continue to see improvement in underwriting profitability to maintain our strong balance sheet and operate in a positive environment”.

He also said that 2019 premium income had been driven by two main factors “a significant rate increase of 5.4 percent and a volume reduction of 8 percent” as part of a better priced portfolio and improved underwriting measures.

“The impact of both points show why first class underwriting performance supports the sustainability of Lloyd’s market and why we are continuing to focus on it as a priority throughout 2020 and thereafter.”

Hit on assets; more work needed

Underwriting might have improved, confirmed by the combined ratio reduction of 2.4 percent in 2019, but CFO Keese highlights that Lloyd’s is “still not where we need to be because we are making an underwriting loss”.

“The key question for the 2020 results is of course the scale of the losses caused by COVID-19. Travel, credit, D&O and other liability cover could be affected and the questions around business interruption insurance will take some time to sort out. It is far too early for a loss estimate.”

Lloyd’s has also achieved a strong investment return of 4.8 percent in 2019, Keese said, which he described as an “outstanding result”.

“But in light of the current economic crisis caused by COVID-19, it is not just investment that is important but where we invest our money and the quality of that investment.”

Lloyd’s has “only a moderate exposure” of 15 percent to growth assets, he said, explaining that “most of our assets are in government and investment grade corporate bonds”.

“In terms of the impact of COVID-19 on our assets we have taken a hit of around £1.8 billion over the last few weeks. £1.6 billion from the funds at Lloyd’s and the balance sheets of the syndicates and £200 million from the central fund. This is certainly a big number but compared to our £70 billion asset base, this is not a very dramatic decline - below 5 percent on average - in asset value. There is not too much to worry about.”

Neal highlighted that 13 percent of the assets Keese was talking about “are in cash”, reflecting the low rate environment. “Liquidity is never a problem for us,” he added.

‘Staggering’ state packages; Aon/Willis merger

Lloyd’s does not exist in a vacuum and, pointing to the $2 trillion stimulus package in the US, Neal called the numbers “staggering”.

“The government packages that are being put forward, such as the $2 trillion stimulus package, we’ve never seen numbers of that magnitude, let alone the £330 billion in the UK and the second package that will be announced on the self employed [on March 26].

“I think the world looks to the US in terms of its actions. We’ve seen some stability in markets in the last 24/48 hours driven by the US actions. It is making a difference and starting to create a bit of stability, which helps all of us.”

Neal was also asked about the Aon/Willis Towers Watson merger.

“The way we’ve looked at it is that Aon is a valued partner and trading partner of Lloyd’s and the London market,” he said. “They’ve been very active in the way in which they’ve engaged with us around this as well as with a number of the market participants. We’ve said we’ll respond when the Competition and Markets Authority (CMA) asks us for the appropriate data and information and we will do that openly with the CMA and with Aon.

“It is for them [Aon] to represent the value proposition to London and that has been the message we’ve given to them. It’s very early days in those conversations, it’s a transaction, as we all know, that’s going to take a long time to execute, so I'm sure there will be more discussion along the way.”

Pandemic reinsurance resurfaces

Lloyd’s has also re-floated the idea of pandemic reinsurance. Neal said the re/insurance industry is really good at sitting down and looking at solutions that can work for new exposures and new risks, like COVID-19.

He said Lloyd’s had written to the UK government’s Treasury and set out all of the examples taking place today where insurers are responding in different parts of the world, as well as insurers' historical responses.

“I was reminded, through Munich Re and Marsh, that post Ebola in 2014 they designed a brilliant product called pathogen RX, which was a pandemic insurance solution. No one bought the cover.

“We’ve got to make sure that in a world where costs seem to be at the forefront of everybody’s minds that people do understand the benefits of some of the covers and why maybe they should buy them.”

Lloyd’s has volunteered its resources and capability and offered to engage with the UK government and Treasury to work through the solutions that will work now and in the future.

For example, leveraging the administrative capability that Lloyd’s has to assess claims that would be made against the government under the packages to assist businesses and individuals. “The response we’ve got from the government is that they’re appreciative of the connection we’ve made and would want to engage with us. We’ve volunteered to coordinate, so watch this space, I’m sure there will be some good ideas that will come from that.”

The 2019 results show the market to be in a relatively strong position, and Neal said the COVID-19 crisis was “teaching us many lessons", but he added, "one thing is really clear - our world and ways of working will change forever.

“Our immediate focus is on the wellbeing of our people and their families, and in the leadership we can show. COVID-19 will undoubtedly have a significant bearing on the out-turn of 2020 and on so much else. But I hope we’ve demonstrated the action we have taken and are continuing to take are improving the Lloyd’s market’s ability to meet the challenges of the future.”