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Lloyd’s H1 results: Progress, but still more to do

A £2.3bn ($2.9bn) profit put Lloyd’s firmly in the black for the first six months of this year, but the underlying financials suggest that the market’s performance is still being held back by the poor underwriting decisions of the past.  

The headline result of the H1 disclosures showed a market still reliant on a good investment performance to support overall profit – with investment income 16x greater than underwriting profit for H1.  

The calendar year combined ratio for the first half of the year deteriorated by 3.3 points year on year to 98.8 percent, after higher major claims (following an exceptionally benign first half last year) and lower reserve releases.

The accident year ex-cat ratio was also 60 basis points worse year on year, at 59.4 percent.

However, year of account figures – which show underwriting changes more quickly – demonstrate improvement following the remedial actions pushed through by Jon Hancock and the performance management directorate (PMD) last year.

The underlying loss ratio for the 2019 year of account at the half-year stage was 2.9 points better than that of 2018 a year earlier, showing that overall, the market is writing more profitable business.  

The Insurance Insider identified four key takeaways from the Lloyd’s financials that underline the changing performance of the market:

  1. The remedial actions taken by Jon Hancock and team are working, but the benefits are being offset by the performance of prior years

  2. The market is starting to book more meaningful improvement on expenses

  3. Reserve releases are falling and are less likely to support underwriting income in future

  4. Performance varies wildly by class of business, with some select classes showing meaningful claims deterioration


Going forward, market observers will be keen to see demonstrable improvement in the underwriting result following the hardline stance taken by the Corporation, in which nine syndicates ceased operations and some £4bn of poorly performing business was jettisoned.   

And as 2020 business planning gets into full swing, a crucial question is how much the PMD will allow the market to grow in the coming year.  

Underwriters will be keen to secure more stamp capacity to take advantage of the rate improvements that have swept through the London market. For H1, Lloyd’s estimated a risk-adjusted average rate increase of 3.9 percent.

However, the PMD has a fine line to tread between allowing syndicates to seize this opportunity and preventing a flood of capacity from re-entering the market, and a return to indiscipline.

Adding to the complexity of this balancing act is messaging from CEO John Neal that Lloyd’s can expect a new era of growth as a result of his wide-ranging transformation plan for the market.  

Hancock and his team will need to secure year-on-year improvement in the financials to both steady the market and prove that a firm-hand approach gets results. However, a key question is whether this is achieved through further remediation and culling of bad business, or through growth and the booking of more highly rated business onto the books.  

Hancock has previously made clear that each business plan is evaluated on its own merits, and a compelling case for growth will be needed to secure pre-emptions. He has also said he will differentiate between syndicates based on performance.

If this holds true, this approach, alongside the establishment of a “fast-track” cohort of best performers which gain automatic plan approval, will likely mean that any market growth will be weighted towards the top quartile of Lloyd’s businesses.  

The performance gap process is working, but there is still work to be done

The first half of 2019 marks the first reporting hurdle since Lloyd’s cracked down on performance during last year’s business planning process.

The true measure of the success of this work is found in the accident year ex-cat loss ratio, which strips out the impact of major claims and reserve releases, and focuses on the underlying profitability of a portfolio.  

On a calendar-year basis, this metric grew by 60 basis points year on year, to 59.4 percent. However, breaking down by underwriting years demonstrates the benefit of the work carried out by the PMD towards the end of 2018.  

The 2019 year of account shows a 2.9 percentage point reduction in the underlying loss ratio when compared to the 2018 year of account at the same time – meaning that overall, the market is writing more profitable business than it was this time last year.  

However, this improvement is offset by deterioration in the underlying loss ratio on the older underwriting years, written before the remedial work was initiated.  


Risk-adjusted rate change figures for Lloyd’s also show that further work is needed to bring the market back to more profitable territory.  

Lloyd’s reported a 3.9 percent rate increase for the first six months of the year, as the crackdown on performance and the resulting contraction in capacity helped boost the upwards rate momentum slowly starting to take effect in London.  

Indexing the Lloyd’s market average rate to 2011 shows that after two years of rate increase at the half-year mark, the market is still around 3 points of rate off 2011 levels.  


It also shows that at the bottom of the cycle in 2017 – before the HIM hurricanes hit – the Lloyd’s market was booking rates almost 10 points off 2011 levels, and writing business priced well below rate adequacy. This is now being reflected in the attritional loss ratio for older underwriting years.  

  Admin costs drop, but acquisition costs remain high

The H1 results for the market showed further improvement on the overall expense ratio, which fell by 1.2 points year on year to 38.1 percent.  

By The Insurance Insider’s own analysis, reductions in admin costs account for the entire 1.2-point improvement in the overall expense ratio. The admin expense ratio for H1 sat at 8.2 percent.  

Lloyd’s calculates its admin expense ratio as 11.2 percent, but clarified that this includes some adjustments made by Lloyd’s where an element of acquisition costs is moved to administrative costs.  

In either calculation, acquisition costs account for the majority of the market’s expense base and remain stubbornly high. Lloyd's attributes the level of acquisition costs in the market to business mix.


Speaking to this publication in Monte Carlo, performance management director Hancock said his team would take a stronger stance on expenses for 2020 business planning.

He said the Corporation would move from “encouraging” to “demanding” to see progress on expense ratio reduction, and that any business plans that do not include expense ratio improvement will be sent back.

The volume of reserve releases is falling

The H1 Lloyd’s disclosures supported commentary in the wider market that the level of reserve releases is falling, and cannot necessarily be relied upon to support underwriting profits going forward.  

Reserve releases for H1 in Lloyd’s were just 0.4 percent of net earned premium, compared to 3.8 percent a year ago. This H1 2019 figure was impacted by 1.8 points – or £228mn – of reserve strengthening attributable to Typhoon Jebi, but even accounting for this impact, the level of releases would have been lower year on year.

Lloyd’s stresses that as a market it is well reserved, with 71 percent of syndicates reserving higher than best estimate. Its central projection of reserves concludes that the overall market reserves are above the 75th percentile.  

However, even if the market is well reserved, the amount of surplus it is able to release to support underwriting profits is dwindling.

Yearly H1 figures show the market’s reserve releases have fallen from a high of 8.0 percent of NEP in H1 2015, and show a steady downwards trajectory.  


The three listed London players also showed a drastically lower level of reserve releases than previously in their H1 results.  

That reserve releases are falling is perhaps unsurprising given that during the depths of the soft market, syndicates were unable to build their reserves to the extent they had been able to previously. A slew of cat events in 2017 and 2018 has also worked to diminish the market’s surplus reserve pool.

At the time of results, Beazley CFO Sally Lake admitted that H1 reserve releases were “lower than you would expect from Beazley”.


Reserve releases continued but at a lower rate at four of Beazley’s six divisions. However, these were offset by strengthening in the reinsurance and marine divisions.

The firm also warned: “The scale of the losses that we, in common with the broader market, have incurred over the past two years means that below-average reserve releases will continue this year, impacting our full-year combined ratio which we expect to be in the high 90s.”

More widely, concerns have started to mount in the underwriting community on loss emergence in US casualty, as the environment becomes increasingly litigious.  

This is eating away at the market’s reserve pool, with some carriers already choosing to strengthen reserves to support the changing claims environment.  

Marine, casualty and reinsurance losses mount  

Breaking down the results by line of business show how performance varies widely at Lloyd’s from class to class.  

When comparing H1 net incurred loss ratio development across all classes, marine, aviation, casualty and reinsurance all show a marked deterioration year on year while all other lines show improvement.  

Marine and aviation in particular has had a hefty share of large losses during H1, including losses related to Boeing 737 Max groundings, which generated a £60mn market loss for Lloyd’s, the Grand Bahama shipyard (£38mn) and the sinking of the Star Centurion (£21mn).  

In reinsurance, the first half has been characterised by loss creep from Jebi as well as the Californian wildfires, but few natural disasters.  


The deterioration in casualty, however, is a clear demonstration of the loss emergence trends in the US which have been repeatedly flagged by market executives.  

Travelers CEO Alan Schnitzer warned that the worsening casualty loss environment is showing no sign of improving in the third quarter, while WR Berkley chairman William Berkley has publicly said the uptick in jury awards stemming from social inflation is likely to “drive significant trend and hardening” in the casualty and professional indemnity markets.  

Similar warnings have come from ProAssurance on the healthcare professional liability market, while directors' and officers' insurers are facing spiralling loss costs from increasing litigation.  

Adding to fears are recent rulings expanding statutes of limitations for filing sexual abuse-related cases, as well as the growing opioid crisis in the US.  

In April, Travelers said it had set aside $21mn for the first quarter to deal with adverse development stemming largely from the new sexual abuse case law in New York. The insurer said at the time that it faced total unfavourable prior-year development relating to the law of $50mn to $100mn.

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