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Lloyd’s results deteriorate in Q1

The profitability of the Lloyd's market looks to have fallen in the first quarter, based on a sample of four companies that report results for their syndicates.

The Insurance Insider's Data Room analysed the results of Chaucer, Talbot, Cathedral and Argo - all of which have parent companies that report full quarterly results with the figures for their Lloyd's businesses fully broken out.

Based on 2014 stamp capacities, the syndicates run by these carriers represent roughly 10 percent of Lloyd's business - leaving the distinct possibility that an extrapolation to the broader market will be misleading.

Bearing in mind that caveat, the balance of probability is that Lloyd's results deteriorated significantly from the first quarter results of last year.

The combined profitability of the four Lloyd's businesses fell by 19.6 percent to $103.1mn, although there was significant variation between them.

Argo Syndicate 1200's performance under David Harris's leadership continued to improve, with pre-tax operating income up 88 percent at $15.8mn.

Chaucer registered a 20.3 percent increase in profits to $49.2mn, with thinning underwriting margins made good by significant growth.

Cathedral, which was acquired by Lancashire in 2013, saw its pre-tax operating income collapse from $18.3mn to $4.6mn.

Talbot also underwent a significant drop-off, with earnings down 44.8 percent to $33.5mn.

However, the Validus-owned business was coming off a stellar prior-year quarter and still delivered a 21.9 percent return on net tangible assets - ahead of the full-year 2013 performance of all of the listed Lloyd's businesses.

The simple average of the group's combined ratios widened by 5.4 percentage points to 88.6 percent.

Talbot explained that the first quarter was heavier for large risk losses.

It picked up a $9.6mn bill from a fire that caused a US residential construction loss and also took a $7.4mn loss from the war policy for the Malaysia Airlines plane crash.

The sample of Lloyd's businesses - which includes RenaissanceRe for top line - grew despite the draw from a softening market.

This reflected strong growth in Chaucer, the biggest of the syndicates, which took its top line from $389.5mn in Q1 2013 to $467mn.

Nearly half of the growth reflected increased casualty opportunities at 1 January following staff hires in late 2013, Chaucer said.

RenRe also delivered double-digit growth as it continues to grow its modestly sized Lloyd's business towards critical mass, with Argo registering 5.9 percent growth.

Talbot's top line was almost flat at $290.7mn, reflecting an increase in exposure that was slightly outpaced by falling rates.

Cathedral's top line was down 14.7 percent at $108.2mn, reflecting its greater exposure to property treaty business, where pricing has been falling sharply, and its decision to non-renew an aviation quota share owing to inadequate pricing.

The pricing outlook for the Lloyd's market continues to deteriorate.

Talbot CEO Rupert Atkin told The Insurance Insider: "In terms of pricing we are worse than plan already - down 3 percent instead of 2 percent.

"And it looks like we will probably be down 5 to 10 percent by the end of the year, but we're not particularly worried because of the relatively strong base from which they are derived."

However, the Talbot CEO stressed that reinsurance rates were far weaker than direct pricing and pointed to the strong absolute pricing that is often ignored amid the focus on year-on-year rate changes.

Cession rates fell in the aggregate, with 33.2 percent of gross premiums ceded to reinsurers versus 34.7 percent in the prior-year period.

This is likely to reflect the fact that reinsurance rates have come down sooner and faster than direct rates.

"The direct market is more stable than the reinsurance market," Atkin added. "Rate reductions in reinsurance have been significant, but rates on the direct side have seen modest, single-digit falls."

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