HIM losses will be capital event for some syndicates but Lloyd’s steady on cat

Despite significant expected losses in the third quarter from hurricanes Irma, Harvey and Maria and potential rate increases as a result, Lloyd’s is not planning to change the market’s overall exposure to natural catastrophes, Jon Hancock, Lloyd’s performance management director, told Baden-Baden Today.

Lloyd’s will continue to be a leading underwriter of natural catastrophes business and writer of US business, Hancock said. “But in terms of exposures and accumulations we are happy with those.”

Lloyd’s has revised net claims estimates for Harvey and Irma to a combined $3.9 billion plus a preliminary claims estimates for Maria of $0.9 billion. Overall, hurricanes in North America may cause industry-wide insured losses of $100 billion.

The claims so far seen from hurricanes are well within the range expected for such events, Hancock said. They were reflected in the models on which the underwriting is based.

“There is no danger whatsoever of any Lloyd’s policyholder not getting their claims paid,” Hancock said.

Lloyd’s has reported that the market has so far paid almost $900 million in claims for Harvey, Irma and Maria. While the central fund will not be affected by the large nat cat losses in the third quarter, the hurricanes could represent a capital—as opposed to earnings—event for some Lloyd’s syndicates, Hancock suggested.

Lloyd’s has in excess of £28 billion of financial assets, Hancock said. But every syndicate at Lloyd’s has put aside reserves and capital for capital claims. Some of these capital reserves will be used to pay for the catastrophe events, he added.

The amount of losses combined from the nat cat events will exceed this year’s earnings for the industry and become a capital event, he noted.

“Some syndicates will need to put more capital in. That’s absolutely normal and expected,” Hancock said.

He stressed, however, that the hurricanes will not turn into a solvency event for Lloyd’s.

This year is exceptional in terms of the level of hurricanes activity, he said.

These losses come after the years 2012, 2013 and 2014 which were, for the industry as well as for Lloyd’s, exceptionally low in terms of frequency and severity of natural catastrophes.

“We felt that 2016 was a far more normal year both in the industry and for Lloyd’s,” Hancock noted.

Nevertheless, Lloyd’s reported underwriting losses in all classes in the accident year 2016.

The market’s pre-tax profits remained flat in 2016 at £2.1 billion compared to the prior year. But the bulk of it, £1.64 billion, came from investment returns and foreign exchange movements. The core underwriting business contributed only £468 million to the total. This has driven the management to take action to improve underwriting quality and expenses.

“After many years of competitive market and reducing rates, Lloyd’s results were still strong but we said it needed to be stronger,” Hancock said. “We wanted more underwriting profit,” he added.

Some improvement has been seen in the 2017 interim results. Lloyd’s reported pre-tax profits of £1.22 billion for the first half of 2017, down from £1.46 billion for the same period in 2016. However, it experienced a reduction in its combined ratio to 96.9 percent, down 1.1 percentage points year on year.

“Rate reductions are much reduced, risk selection and risk management are so much more important,” Hancock said. “That’s reflected in the results of the first half year, with a lot more to do going through this year and next,” he noted.

Nevertheless, Lloyd’s is expected to post a pre-tax loss for the full year 2017 due to the nat cat events in the third quarter, according to Moody’s.

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