Lloyd’s is back to black, but time is running out for unprofitable syndicates

Despite recent catastrophe activity,  Lloyd’s half-year results show the market bouncing back to profit. Improved performance, driven by higher rates and efforts to eliminate underperforming business lines, and a strong balance sheet, brought  Lloyd’s back into line with its global peers, Burkhard Keese, chief financial officer, said at a press conference.

Remediation efforts would continue, however, and unprofitable syndicates were warned that their time at Lloyd’s would be limited.

The results showed strong underwriting, boosting Lloyd’s pre-tax profit to £1.4 billion ($1.9 billion) for the first half of 2021, compared with a £400 million ($550.8 million) loss during the same period of 2020. Gross written premium for the period was marginally up, increasing 2 percent to £20.5 billion from £20 billion.

Lloyd’s combined ratio for the first six months showed an 18 percentage point improvement year on year, at 92.2 percent against 110.4 percent. Even after the effects of COVID-19 were stripped out, the combined ratio was down 4.8 percent.

The results came despite continuing cat losses. “We are all operating in a period of heightening catastrophe activities, ranging from systemic risk exposures that we clearly saw with the pandemic to nat cats that impact us every year.

“In 2021, we have already encountered winter storm Uri, which was a surprise, European storms, wildfires, floods and most recently Hurricane Ida,” noted Keese.

“I’m delighted that Lloyd’s has successfully repositioned the market for sustainable, profitable growth.”

Patrick Tiernan, chief of markets, said: “Today, we’re reporting strong half-year results for 2021, which reflects the very firm focus we’ve had and will maintain on performance.”

Three key factors contributed to its performance: improved pricing, cautious reserves, and continuing “remediation efforts” to address underperforming syndicates.

On pricing, the risk-adjusted rate achieved in the first half of the year was 9.9 percent, with the market seeing its 15th consecutive quarter of positive rate increases.

“Every class and geography has seen upwards momentum on rate,” said Tiernan. However, further improvements were needed.

“This does not mean that pricing is adequate in all classes and all subclasses. It’s not.” Talk of rate increases flattening was “a bit premature”, he added.

“We expect rate momentum to continue, if not necessarily in a linear fashion.”

On borrowed time

Results had been obtained by cautious reserving, said Keese. “Our reserves are broadly unchanged over the last 12 months, and this is despite repeated and further lockdowns across the world.”

Lloyd’s had paid out £2.2 billion to customers for notified COVID-19 claims at the end of the first half of 2021. It still held half its incurred but not reported reserves (IBNR) for losses it believes will manifest from the pandemic.

“Fifty percent of IBNR at this late stage after the first lockdown is a pretty remarkable number,” said Keese. Despite this, the wider impacts of the pandemic continued to create uncertainty.

“Nobody knows now how robust our economic environment is at the moment,” he said.

The cautious approach was reflected across the Lloyd’s business. Its solvency ratio at 218 percent was well above that of the wider market average of 170 percent, he added.

Perhaps most importantly, improved performance reflected Lloyd’s focus on its remediation efforts to drive out unprofitable syndicates.

“If we look at the portfolio of syndicates, it is clear that we have moved in the right direction. The top quartile of syndicates are among the best underwriting firms in the world.

“However, at the same time, we won’t tolerate loss-making syndicates, particularly in current market conditions,” said Keese.

He added that 15 percent of syndicates did not have the profitability Lloyd’s expected and needed to be remediated—“or their future at Lloyd’s is unstainable”.

Tiernan agreed. “Despite having some of the best underwriting shops in the world, more work needs to be done, and time is running out,” he said.

“We set out what we were going to do back in June,” he said. “We’ve done exactly that over the summer. We’ve engaged with boards and with executives.

“We’ve demonstrated to them what we want to see and when we want to see it. On the whole, we have been very encouraged with the actions that have been taken. But, for those who don’t want to listen or don’t agree with us, their time in Lloyd’s is likely to be limited.

“Our work on performance is far from done, and it remains our number one priority. The work the market has done to achieve these strong numbers today is what allows us to make the pivot with confidence to profitable growth through the remainder of 2021 and into 2022,” he concluded.