Lloyd's of London still has work to do to improve its underwriting profit despite early signs that its efforts are bearing fruit, according to Performance Management Director Jon Hancock.
Speaking to journalists about the 330-year-old insurance market's first-half earnings, which showed a dip in underwriting profit compared with the first half of 2018, Hancock acknowledged that the work Lloyd's syndicates had put in to rid their books of unprofitable business was "starting to come through." But he added that "more improvement on the underwriting account is needed" and said Lloyd's would continue to monitor the worst-performing segments, portfolios and syndicates as part of its annual business planning process.
He noted that syndicates had removed or were removing £4 billion of unprofitable business from the market, which is creating capacity to write £7.5 billion of new business this year. He said: "We are certainly not declaring victory, but we are starting to see some improvements following that activity."
The planning process for the 2020 underwriting year is underway. Lloyd's embarked on its profit push as part of the 2019 planning process back in 2018, ordering syndicates to fix or weed out the worst-performing 10% of their portfolios and requiring syndicates with three years of consecutive underwriting losses to come up with a credible remediation plan or exit the market.
Hancock said Lloyd's medium-term target of a combined ratio below 100%, which it hopes to hit in 2019, "is a good step in the right direction", but added that a longer-term ambition was a combined ratio in the "low-to-mid 90s" depending on market conditions. "To get to that you need a majority of your classes [of business] performing well."
Early signs
A combined ratio below 100% denotes an underwriting profit, something only two of the eight Lloyd's business segments — property and energy — achieved in the first half. The market as a whole reported a combined ratio of 98.8%, a deterioration from the 95.5% reported in the first half of 2018, mainly because of the need to boost reserves in response to worse-than-expected claims from 2018's Typhoon Jebi and reserve strengthening for some long-tail lines at certain syndicates.
Despite this, there was evidence that the remedial action is starting to take effect. The attritional loss ratio, which excludes catastrophes and large claims, improved by 2.9 percentage points to 65.6% for business written in the first half of 2019, compared with 68.5% for business written in the same period of 2018.
Yet the overall attritional loss ratio, which includes the effects of business written in older underwriting years, worsened to 59.4% from 58.8%, driven by a 1.6-point deterioration in the business written in 2017 and 2018.
Lloyd's CFO Burkhard Keese told journalists that those two were "not great underwriting years" and that they had a greater effect on the attritional loss ratio than the new business written in the first half under the profit push. But he said the efforts to improve underwriting would translate into a "significant improvement" in the full-year 2019 underwriting year, and that there would be more improvement in subsequent years as the proportion of new, more profitable business increased.
He also said that the market's newer, tougher underwriting discipline "must become our DNA." He added: "We will not go back to loose underwriting procedure."
Exceptional investment result
While Lloyd's reported deteriorating underwriting performance in the first half, its overall profit jumped to £2.33 billion from £588 million, driven almost entirely by investment income. Keese described the result as "absolutely exceptional" and said recovering equity markets, falling interest rates and tightening credit spreads had played in the market's favor, for now at least.
But he warned that although falling interest rates had boosted the value of the existing bond portfolio at Lloyd's, the situation was "not so good" for reinvestment. He noted that reinvestment yields had fallen by more than 1% in the half year and said that although Lloyd's was happy with its investment return for now, over the longer term "it is never a good message when rates come down."
He also advised against simply doubling the £2.32 billion first-half investment income to work out what Lloyd's would make for the full year, saying the market was "very unlikely" to repeat its investment performance in the second half.
