Lloyd’s improves ‘underlying performance’ – AM Best

Lloyd’s of London has bettered its “underlying performance” over the last year due to “improving market conditions” and “very robust oversight”, according to Catherine Thomas, senior director of analytics at credit ratings agency AM Best.

Addressing delegates at Monte Carlo’s Rendez-Vous de Septembre conference on 11 September 2022, Thomas explained that “over the past five years, we have seen performance that is below our expectations” when it comes to the Lloyd’s market.

However, moving forward, she noted that AM Best predicts that Lloyd’s will “report strong operating performance across the underwriting cycle” – despite volatility around catastrophe exposures.

She said: “What we have seen at Lloyd’s is improving market conditions, but also very robust oversight by the corporation, leading to - for some time now - improvements in underlying performance.”

Thomas added that this upwards trajectory was initially recognised in the market’s H1 2021 combined operation ratio (COR) of 92.2%. At 2022’s H1 results, published on 8 September 2022, Lloyd’s reported a further improved COR of 91.4%.

John Neal, the market’s chief executive, said that this 0.8 percentage point improvement marked Lloyd’s of London’s “strongest [result] since 2015”.

However, Lloyd’s has “a big insurance specialty book that is contributing” to these ongoing positive financial results.

“Reinsurance is no longer the largest proportion of premium written at Lloyd’s,” Thomas explained. “[It] represents about 40%.”

Meanwhile, AM Best “also saw syndicates in the first half of the year building in explicit margins into their best estimates for inflation”, Thomas continued.

Cost of conflict

Lloyd’s of London’s first half COR becomes even more impressive considering it includes a “net Ukraine loss estimate of £1.1bn”, Thomas explained.

Despite this, Thomas believes losses occurring in the Lloyd’s market that are related to the Russia-Ukraine war “appear manageable” because “a prudent approach is being undertaken to recognising that loss at this stage”.

She continued: “The Ukraine loss is clearly a major loss for the Lloyd’s market, and I don’t think that’s surprising at all given the lines of business that the conflict in Ukraine is affecting – political risk, political violence, aviation, marine [and], to a lesser extent, trade credit.

“They are all lines of business written by specialty insurers, such as those operating at Lloyd’s and in the broader London market.”