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Opinion: Bold words from John Neal on a sub-95% combined ratio

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Earlier this week, Lloyd’s CEO John Neal went on the record to state that the Corporation believed the Lloyd’s market was still on track for a sub-95% combined ratio for 2021, despite the cat losses the industry has borne.

This will be seen as a bold move from the CEO, who is under big pressure to preside over an underwriting profit this year after four years of consecutive losses.

Indeed, a sub-95% combined ratio for 2022 would better than seen in 2016, before performance went off a cliff.

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There are many in the market who will not dare to put too much faith in Neal’s projection. And indeed, there are some sceptics who believe that Lloyd’s will fall to another underwriting loss this year.

Neal made the comments at an Aon-hosted webinar and noted both the unusual nature of Winter Storm Uri and that Hurricane Ida had the potential to be a $40bn event.

However, he also said that while Ida might cause the market to exceed cat allowances over Q3, this is likely to be “only by a point”.

There are some points to note here which lend weight to Neal’s statement. The CEO is a media-savvy executive and it is highly unlikely he will have made projections in a public forum such as this without a fair degree of confidence.

But further than that, Lloyd’s is understood to be heavily underweight on European cat risk, and is unlikely to pick up a substantial portion of what is a record-breaking loss year for the continent.

We also know that Ida losses will fall more heavily on the reinsurance market in comparison to Louisiana-landfalling predecessor Hurricane Laura.

And while Lloyd’s is still very geared towards US cat, it is relatively underweight on reinsurance.

Sending signals

It is clear that Neal wishes to get the message out there that Lloyd’s is drawing a line under the past.

A sub-95% combined ratio would very definitively signal the end of a string of underwriting losses which have been a drag on both the rating and the Lloyd’s franchise.

And whether you believe the statement or not, perhaps a bigger question is to ask: who is Neal signalling to?

Perhaps most obviously it is a signal to the wider market that this is a new chapter for Lloyd’s.

The performance drive, and the dropped business and syndicate closures that came with it, brought a certain amount of reputational damage and created a more negative perception of Lloyd’s in other territories.

Anecdotally, London wholesale brokers have said in recent years that US clients in particular have often seen domestic paper as the “safer” option, and as we reported on here, the company market has directly benefitted from both dropped premium and premium flight from Lloyd’s.

It could also be a message to the wider investor community that Lloyd’s is a good place for their money. The Corporation has worked hard via its Future at Lloyd’s programme to make it easier for investors to put their capital at Lloyd’s, and its London Bridge vehicle is open and ready for business.

It may also be a signal to the rating agencies. Lloyd’s currently has strong ratings across the board, but an upgrade would be a major vote of confidence in Lloyd's, and a vindication of the strategy the Corporation has taken.

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Lloyd’s has previously said that if you look at the rating agencies’ capital models, Lloyd’s is comfortably reaching AAA capital requirements under S&P, and the higher financial strength levels for AM Best.

It’s fair to say, then, that performance to date has been the major impediment to achieving an upgrade. An early sign that the progress seen at H1 will extend to the full year – despite heavy cat losses for the industry – could prod the rating agencies to start re-examining the case for an upgrade.

As we said at the H1 results, it feels like the Corporation is now moving from a defensive stance to getting on the front foot in terms of its market positioning.

The confidence in financial performance comes in tandem with strong commitments on culture and ESG (see Lloyd’s new membership of the net-zero alliance, announced yesterday), which come together to portray a more self-assured Lloyd’s.

Of course, there is still scope for Lloyd’s to miss on the combined ratio – the year isn’t out yet, and as they say, it’s always earthquake season. But Neal wants the message out there that Lloyd's has turned a corner after a long four years.

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