COVID losses mask progress Lloyd’s has made in improving underwriting, say analysts

Analysts and rating agencies have reacted with bemusement at Lloyd's 2020 results, published today, which saw the market report a pre-tax loss of £0.9 billion for the full year.

The loss was driven largely by £3.4 billion of COVID-related losses after reinsurance recoveries, and analysts admitted there are grounds for optimism that future earnings will look better.

The majority of London market insurers reported either a loss or only a very small profit in 2020, with COVID-related losses offsetting most underwriting and investment profits.

London market insurers incurred substantial pandemic-related losses in 2020, leading to combined ratios well over 100 percent in 2020, noted Fitch Ratings, with losses driven principally by event cancellations and business interruption (BI) policies.

The specific impact on individual insurers was dependent on their portfolio composition, Fitch added, with Beazley and Brit more affected by event cancellation losses, for example, while Hiscox was hit harder by BI claims.

The attritional combined ratio improved to 89.1 percent, from 96 percent in 2019, said Peel Hunt, the independent brokerage, advisory and research firm, which it said “seems sustainable given ongoing rate increases across the market at the start of 2021.”

It noted that underlying margins across the market showed significant improvement, which it said bodes well for future profitability. Premiums declined by 1 percent to £35.5 billion, despite rate increases of 10.8 percent across the market, Peel Hunt said, suggesting “significant exposure reductions in 2020.”

Peel Hunt highlighted the significant improvement of the attritional loss ratio, from 57.3 percent in 2019 to 51.9 percent in 2020. “This was driven by a combination of the earn-through of rate increases and the underwriting actions that Lloyd’s has taken to boost profitability across the market,” Peel Hunt said.

Investment returns recovered in the second half of the year, Fitch noted, after the dramatic volatility of the first half of the year, even if it was not enough to compensate for underwriting losses. Returns on equity for the year were typically either negative or only marginally positive, it said.

Fitch predicted pandemic-related losses will decline in 2021, given the conclusion of the FCA BI test case and a smaller exposure to BI and event-cancellation claims through policy language adjustments. However, it admitted the impact on third-party claims remains unknown.

“We expect these claims to start developing in 2021 and 2022 and these could negatively affect the profitability of the market, but these claims are slow to materialise and even slower to settle,” Fitch said.

Fitch said its sector outlook for the London market for 2021 is improving, amid expectations for improving pricing conditions. However, it pointed to continued uncertainty over the ultimate costs of pandemic-related claims, the recessionary macroeconomic impact on the sector and ultralow investment yields as headwinds for the industry.

Peel Hunt also saw grounds for optimism in the results. “There is now evidence that the actions Lloyd’s took three years ago to improve its underwriting performance are starting to boost underwriting quality,” it said.

“This is further underpinned by the rate momentum across the market. Casualty reserving remains one area of concern in 2021, but this is not new and being monitored. As such, we believe the market is back on the path to deliver positive risk-adjusted returns going forward.”

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