Lloyd’s state ‘better than expected’ but faces looming challenges from Ukraine war

Lloyd’s is in a “good position” to navigate the insurance sector’s challenges of 2022, including rising inflation and the Russia/Ukraine conflict, according to  S&P Global, but may face  significant challenges as potential losses from Russian expropriation of leased aircraft looms.

Lloyd’s direct exposure to the conflict in terms of premiums and assets could be “minimal” prior to the sanctions, but it may face “ exposure in its credit, aviation, marine, cyber, and war/political risk books”, analysts at the ratings agency have warned.

“Potential losses for Lloyd's and the wider (re)insurance market from the non-recovery of planes leased to Russian airlines remain uncertain and evolving, considering the cancellation of all insurance business with Russia-based entities as part of U.K. and EU sanctions,” S&P said.

Despite these challenges, the agency seems to have a bullish outlook for the 336-year-old insurance and reinsurance marketplace that has shown a significant improvement in its performance in the financial year 2021.

Lloyd’s reported a net combined ratio of 93.5% (2020: 110.3%), its first underwriting profit since 2016. This was despite significant natural catastrophe losses that added 11.2 percentage points to the combined ratio, demonstrating Lloyd's better-rated book of business compared to prior years.

“ Lloyd's year-end 2021 results are better than our expectations and reflect the remedial actions that management has taken over the past four years,” S&P said in a market bulletin.

“This is thanks to Lloyd's enhanced governance for ensuring disciplined underwriting; robust capital position above the 'AAA' level measured using our capital model; market-wide solvency coverage ratio of 177%; and central fund solvency ratio of 388% as of year-end 2021.”

S&P expects Lloyd’s to maintain its 'AAA' risk-based capital over 2022.

Lloyd’s underlying loss ratio, which excludes catastrophe losses and prior-year development, continued to improve to 48.9% in 2021 (2020: 51.9%; 2019: 57.3%). S&P expects it to continue reducing its expense ratio, which decreased to 35.5% in 2021 from 37.2% in 2020, mostly through its ongoing focus on reducing acquisition costs and its digitalisation of the market through the Future at Lloyd's programme.

“We believe that Lloyd's management will continue to maintain strict discipline on syndicate underwriting, with a focus on technical rates and ensuring that market participants are addressing the potential erosion of margins due to higher-than-expected inflation,” it noted.

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