At first glance, Lloyd's of London's 2019 results are not a good advertisement for the marketplace's campaign to boost underwriting results.

Although the market made a £2.53 billion profit, compared with a £1.00 billion loss in 2018, the result was entirely down to its £3.54 billion investment return, offsetting an underwriting loss of £538 million. Underwriting results have had the largest influence on overall performance for seven of the past 10 years, S&P Global Market Intelligence analysis shows.

Nevertheless, underwriting performance showed several gradual signs of improvement in 2019, the first full year of the profitability improvement drive aimed at fixing a deterioration in Lloyd's attritional loss ratio and accident year combined ratio excluding catastrophe losses in 2017.

The combined ratio of 102.1%, while an improvement over 2018's 104.5%, shows that the market was still making an underwriting loss, despite a far lower catastrophe claims burden of 7% of net earned premiums, compared with 11.6% in 2018. Lloyd's considers a normal catastrophe burden to be 10% of net earned premiums.

A big contributor to the 2019 combined ratio was a drop in the benefit Lloyd's gets from prior-year reserve releases. These releases only shaved 0.9 percentage point from the combined ratio, compared with 3.9 points in 2018 and Lloyd's general expectation of 3 points.

This was because syndicates strengthened casualty and aviation reserves, which Lloyd's CFO Burkhard Keese told journalists March 26 press call added around 1.5 points to the combined ratio, and also saw £300 million in claims deterioration from 2018's Typhoon Jebi in Japan. Without this, said Keese, reserve releases would have been in line with expectations.

Robert Greensted, an analyst at S&P Global Ratings, said in an interview that the drop in reserve releases had "probably driven the lower-than-expected, from our perspective, underwriting performance." Fitch Ratings said in an April 2 rating action that the market's underwriting performance, though improved, was "below our expectations."

Positive signs

A closer look reveals signs that the remedial underwriting action is starting to have an effect. The accident year combined ratio excluding major claims improved to 96% from 96.8%. The attritional loss ratio for active syndicates worsened to 57.6% from 57%, but when all syndicates are taken into account, the ratio improved to 57.3% from 57.6%.

Lloyd's also disclosed that the attritional loss ratio for active syndicates for the most recent underwriting year in isolation improved to 57.6% in 2019 from 59.3% in 2018, showing that newly underwritten business is improving.

A good omen for future underwriting improvement was a 5.4% increase in prices. Keese told journalists that there had been nine consecutive quarters of price improvement, and that the 2019 price jump had "exceeded our plan." There were price increases across all geographies, Keese said, and in 53 out of 61 classes of business.

Lloyd's outgoing performance management director, Jon Hancock, said on the same call that "we are expecting those nine quarters of positive rate to continue each quarter during 2020."

While noting that the attritional loss ratio improvement was "minor," Greensted said the price increases were "encouraging news." He added: "Considering what has been happening with rates, we would expect to probably see the attritional [loss ratio] improving more than that in 2020 and 2021."

Lloyd's CEO John Neal acknowledged on the press call that given interest rates of almost zero, "two-thirds of what we achieve is going to come from our success or otherwise in underwriting and less in investments."

The big unknown

The wild card for 2020 performance at Lloyd's will be the new coronavirus outbreak. Lloyd's has yet to provide loss estimates, saying it will do so in early May, although Neal said he had identified 14 lines of business where Lloyd's could have exposure. But he also said Lloyd's did not see the potential coronavirus claims "as any different to any other form of catastrophic loss that the market would see."

Even so, Fitch placed Lloyd's AA- financial strength rating on Rating Watch Negative on April 2 because of "the uncertainty and increased risk to Lloyd's earnings and underwriting performance" from coronavirus claims. Fitch said it could downgrade Lloyd's if it incurs "outsized coronavirus-related losses compared with the sector," although it added that at this stage "we do not expect underwriting losses to be of a magnitude to cause significant capital depletion."

Lloyd's noted that the pandemic has already started to take its toll on assets and solvency. As of March 19, it had suffered a £1.8 billion hit to asset values, while the Lloyd's central solvency ratio fell to 205% from 238% at year-end 2019, and the market-wide solvency ratio dropped to 146% from 156% over the same period.

However, Keese said £1.8 billion was "not a dramatic loss" considering the size of the total asset base. Lloyd's has about £120 billion of assets, including £52.85 billion of syndicate level assets, £27.60 billion of members' funds at Lloyd's and the £2.48 billion central fund. Furthermore, he said, a large proportion of the funds at Lloyd's are letters of credit, which are "not subject to any market volatility."

Neal added: "Liquidity is never a problem for us so we have got enough cover to pay for the claims that we would anticipate."

Looking beyond the coronavirus outbreak, the top executives at Lloyd's acknowledge that the battle for underwriting profitability is far from over. Keese said he expected it to take about three years for the full effect of the continuing remedial action to be seen in results.

The upward pricing trend is "an encouraging sign," he said, "but as the underwriting result shows, there is still a way to go in terms of improvement."