Lloyd’s turnaround gains ground as ‘evolution’ unveiled with 2018 results

Market digitalisation and the launch of the “Brexit-proof” Lloyd’s Brussels subsidiary were highlighted as ongoing initiatives that could help the specialist re/insurance market continue to turn around its performance, after CEO John Neal described the 2018 annual results as “not of the standard that we would expect”.

For year end 2018, Lloyd’s reported a loss of £1 billion before tax, which represented an improvement from the £2 billion loss in 2017. Gross written premiums increased 6 percent to £35.5 billion from 33.6 billion in 2017, while net earned premiums rose by 3 percent.

Net incurred claims dropped by 10 percent “reflecting a reduction in the major claims activity”, according to chief finance officer John Parry. He highlighted a 2 percent increase in operating expenses, adding that it was “less than net earned premium, and is a combination of acquisition costs and admin expenses”.

Parry said: “Pulling together net earned premiums, net incurred claims and expenses, you see a drop in the underwriting loss of two thirds to £1.1 billion.

“Moving the other way though, we saw a reduction in our investment return from £1.8 billion to £0.7 billion reflecting the volatility in the market particularly in the fourth quarter of 2018, particularly in December, resulting in market to market losses.

“But the good news is for the first quarter of 2019, we have seen markets recover and a lot of those market to market losses have been reversed.”

He said they had seen a reversal in the continued slow decline in written premium pricing in 2018 with an increase on renewal business of just over 3 percent.

“[This was] more focused towards loss affected lines of business, but we have seen quite a broad affect across the whole of business written by Lloyd’s,” he said.

Lloyd’s saw four new syndicates join, demonstrating its continuing attractiveness, Parry said, as he valued the additions at 2 percent of Lloyd’s premiums. He said that existing syndicates saw an increase of 5 percent in premiums, with just over half of that coming through business written under delegated authority. He said this demonstrated “the success of the Lloyd’s brand in using managing general agents to access business, particularly in the US, [and] we’ve seen an increase in the quality of premiums coming through from prior years”.

Current business has increased by 2 percent, which the CFO said was within approved syndicate business plans, and had "largely" come through new innovative products such as cyber, warranty and indemnity, and the sharing economy. “Some of this growth has been more targeted at the property lines of business,” he added.

He said the reduction in administrative expenses costs of 0.6 percent was “an early sign” that the finance transformation and other cost saving initiatives being put in place by the managing agents and syndicates to tackle the cost base of this market were working.

This effort has been supported by continuing investment in modernising the market through the London market target operating model, he said, “which we set up to realise the benefits of the investment in technology”.

Comparing Lloyd’s 2018 performance to a relative aggregate group of comparators, Parry said the gap between Lloyd’s combined ratio and its comparators had narrowed in 2018. “We were 6.6 points worse in 2017, down to 3.7 points worse in 2018.”

However, in 2014, 2015 and 2016, Lloyd’s had been better than its comparators with differentials of -3.6 points, -5.4 points and -0.7 points respectively.

On investment, Lloyd’s saw a drop in return caused by market volatility. It dropped to £504 million down from £1.8 billion in 2017. “We haven’t seen any change in the asset mix of Lloyd’s which remains pretty conservative. Two-thirds of the investment in high quality corporate bonds, 68% are fixed interest,” Parry said.

Looking ahead to 2019, Jon Hancock, Lloyd’s performance management director, said the world is changing and “Lloyd’s must change with it”, adding “we have to redefine the purpose of Lloyd’s”.

He said that over the past 6 months, they had spoken to hundreds of stakeholders about how they should evolve the market to achieve this.

Hancock said they planned to launched the prospectus for this action on the 1 May 2019, then hold ongoing consultations with stakeholders in May and June, followed by the development of a blueprint and prototypes from May to September. Work to begin building the solutions that come out of this is planned for October 2019.

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