Lloyd's premium may decline in 2017/18

Premium growth at Lloyd's of London is likely to slow and may even decline in 2017/18 as competition intensifies and economic growth remains tepid, according to a Moody's Aug. 31 report.

The emergence of new reinsurance hubs in Singapore and Dubai will also put Lloyd's under added pressure to develop innovative products and services, the rating agency noted.

"The pressure on rates reflects a combination of mounting competition stimulated by a steady supply of new capital, and suppressed demand due to tepid economic and trade growth," said Helena Kingsley-Tomkins, an associate vice president and analyst at Moody's Investors Service.

Helped by its global reach and large collective underwriting capacity, Lloyd's has almost doubled its premium base over the past decade, with a 6.9 percent compound annual growth rate (CAGR) in premium income over the period as a whole. However, over the last five years the CAGR has slipped to a more modest 4 percent and Moody's expects lower top line growth going forward and potentially even a decline in 2017/18 as premium rates continue to fall.

Lloyd's profitability has exceeded that of its peers every year since 2012 but the gap is narrowing and its underwriting profitability fell sharply in 2016. Although headline profit was flat, due to stronger investment income and foreign exchange gains, return on equity fell for the third year running, dropping 1 percentage point to 8.1 percent. Furthermore, if reserve releases were excluded, Lloyd's would have made an underwriting loss in 2016, with a combined operating ratio (COR) of 103 percent.

Moody's expects lower premium rates and a slowdown in reserve releases to weigh on Lloyd's underwriting performance again in 2017 and 2018. The market is however, taking steps to increase efficiency to counter this and some respite may also come in the medium term from rising US yields.

Lloyd's has a strong capital structure, but it also has a higher risk appetite than some of its peers. As such, Lloyd's insurers' earnings and capital have become more sensitive to outsized losses as rates and underwriting margins have deteriorated. Nonetheless, Moody's believes that Lloyd's has the ability to withstand a substantial insured loss, as demonstrated by a stress test carried out in late 2016, and could recapitalize if needed.

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