S&P: Lloyd’s strong underwriting performance overshadowed by investment losses

S&P Global Ratings said that, despite Lloyd’s market’s provisions of £1.1 billion for claims relating to the Russia-Ukraine conflict in first-half 2022, it expects Lloyd’s underwriting results to remain in line with a 95% net combined ratio for year-end 2022.

The effect of these additional reserves is offset by Lloyd’s underwriting discipline, evident in improved attritional loss experience and a favorable prior year development in first-half 2022 with a solid net combined ratio of 91.4%.

However, negative investment results of £3.1 billion are likely to hit full-year earnings, driven by the mark-to-market losses, in common with the wider insurance sector.

Lloyd’s claims provisions for the conflict are much higher than those of most similar sized peers (for example, Swiss Re, SCOR SE, and Munich Reinsurance Co).

This reflects Lloyd’s position as the prominent insurer of war, terrorism, aviation, political and marine risks. There could be further losses in the coming quarters due to the conflict and it is not yet clear if policy cancellations by (re)insurers will prove effective.

Hard market; interest rate rises will boost profitability going forward

Outside of the Russia-Ukraine conflict, S&P believes that Lloyd’s underwriting performance shows the positive effects of nearly five years of price increases and the corrective actions that management has taken.

Lloyd’s recorded an overall loss in first-half 2022 (of £1.8 billion before tax compared with a profit of £1.4 billion for first-half 2021), due to mark-to-market losses on its bond and equity portfolios.

However, while these losses will likely place pressure on Lloyd’s full-year earnings, we expect the effect will not be material on an economic basis. This is because mark-to-market losses on the bond portfolio are likely to reverse as the bond portfolio reaches maturity.

Furthermore, Lloyd’s investment income will benefit from increasing interest rates over the coming years.

S&P therefore expects Lloyd’s to maintain its capital at the ‘AAA’ benchmark (measured using our model), with a central solvency coverage ratio of close to 400% and a high market wide solvency ratio near 180%.