Lloyd’s remediation did the trick: profits will hold, Moody’s says

Lloyd’s turned the corner in 2021 with its arm-twisting of members on costs, rates and loss picks, enough to secure continued underwriting profits in the coming periods, Moody’s said in celebration of  Lloyd’s first underwriting profit in five years.

“We believe  Lloyd's can sustain its improved underlying underwriting performance, and expect further gains this year,” Moody's analysts wrote in a report.

The price increases, cost controls and portfolio pruning that rendered a 3-percentage point decline in underlying loss rates looking “sustainable,” analysts believe.

Even with the spike in return on capital to 6.6% in 2021, the 5Y average was only pulled up to 0.3%, Moody's added in a sobering note. The 2021 gain follows £7.8 billion in underwriting losses 2017-2020.

That running performance was built on a succession of major claims as the portfolio was biased towards moderate-to-high risk commercial specialty re/insurance.

Remedial work took it the other way, reducing cat exposure but also taking on the minutiae needed to knock ten percentage points off of the attritional loss ratio 2017-2021.  Lloyd's insurers likewise took 5 points from expense ratios. Rate gains hit the double digits for 2020 and 2021.

“In our view,  Lloyd's improved result in 2021 shows that it has addressed a key weakness in its otherwise strong credit profile,” Moody's said of the gains.

Profits up or down, Moody's still likes the loss backstops visible in solvency ratios, especially after the major boost taken in 2021.

Sustainable performance comes on a moving playing field, Moody's acknowledged.

“Inflation and potential claims related to the Ukraine conflict will be earnings headwinds,” analysts nonetheless warned.

The war in Ukraine “is likely to be a material event for the market in 2022, generating claims that could take years to settle fully,” authors wrote.

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