Lloyd’s move to reinsurance profit built on rising vulnerabilities

Lloyd’s has built much of its turnaround successes in reinsurance on the very segments potentially most at risk from current macroeconomic and geopolitical conditions, analysts at  AM Best suggested in their latest research.

Lloyd’s reinsurance operations turned to their first underwriting gain at £489 million in 2021, putting their combined ratio down to 93.5%, a healthy dip below the five-year running average of 104.7%.

“Favourable market conditions, as well as the robust performance oversight by the corporation, has resulted in measurable strengthening of underwriting performance,” analysts say of the top-down view.

But growth has been concentrated in casualty and profits have been concentrated in specialty, two segments most exposed to the wildcards on the market today, analysts wrote.

Specialty lines accounted for more than two thirds of 2021 reinsurance profits but only a fifth of premiums, but now show their very apparent connections to the war in Ukraine.

“The conflict between Russia and Ukraine has produced material claims uncertainty, particularly for specialty underwriters,” AM Best analysts wrote. Lloyd’s specialty strengths start with marine, followed by energy and then aviation.

Casualty has been the growth engine for Lloyd’s reinsurance underwriters, especially as many seek to stabilize earnings overly reliant on property cat. Gross written premium for casualty reinsurance grew 34% in 2021, ahead of 18% growth for reinsurance GWP overall.

“High general inflation has the potential to impact all lines of business, especially those with longer claims tails or those that are more affected by global supply chain disruption,” analysts wrote.

High on that list: casualty with sufficiently direct ties to social inflation to “result in increased uncertainty regarding reserve adequacy,” analysts wrote. AM Best softens that risk with rather generic reference to a history of strong reserve building amongst Lloyd’s players.

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