Lloyd's market unlikely to turn profit in 2020 with COVID-19 & struggling syndicates — but still improving: S&P

Analysts at S&P Global Ratings believe that the Lloyd's market looks unlikely to turn an underwriting profit in 2020, with syndicates struggling to break even following several years of above-average natural catastrophe losses, but there are signs that the market is beginning to turn.

Although Lloyd's market managed to report an overall profit in 2019, its first since 2016, its underwriting remained unprofitable, with a headline combined ratio of 102 percent.

Nevertheless, S&P believes that there are signs that the market is improving. It noted that the market's underlying underwriting performance is continuing to improve after 10 consecutive quarters of re/insurance rate improvement.

"Underlying combined ratios have slowly, but steadily, improved since 2017. As rates continue to harden and Lloyd's cracks down on underperforming syndicates, the overall improvement is likely to continue in 2020-2021," S&P said. "While the supertanker has not reached its cruising speed yet, it seems to be on the right course for now."

"At the syndicate level, results over the past five years indicate that the high level of natural catastrophes since 2015 has hit two types of syndicate hardest: Those specialising in catastrophe-exposed short-tail lines; and special-purpose syndicates, which often reinsure the property catastrophe risk of their sponsor syndicates. Our analysis shows that the maturity of a syndicate is often the best determinant of operating success--size is less important," it added.

The report, however, noted that the COVID-19 pandemic has already caused Lloyd's market considerable losses, both underwriting and investment, with the North Atlantic hurricane season still to come.

Lloyd's has recently completely overhauled its C suite and the management team has launched its 'Future at Lloyd's' project, which S&P considers to be ambitious, with a high degree of execution risk.

"An organisation as complex as Lloyd's takes some time to change course, but in our view, if the 'Future at Lloyd's' project is well executed, it will enable Lloyd's to address its historical underperformance and further strengthen its competitive position," said S&P.