Lloyd's of London should be able to keep up the improvement in underlying underwriting performance it reported in the first half of 2020, according to ratings analysts. But the 334-year-old insurance market's persistently high expense ratio is unlikely to be tackled any time soon.

On Sept. 10, Lloyd's reported a loss of £438 million for the first half of 2020, compared with a £2.33 billion profit in the same period of 2019. The loss was mainly driven by a net coronavirus-related claims charge of £2.36 billion.

But when coronavirus claims are stripped out, the market put in its best underwriting performance of the past five half-years. The attritional loss ratio, which measures the effect of business-as-usual claims and excludes the effect of large losses and prior-year reserve movements, improved by 7.1 percentage points to 52.6% from 59.7%. The combined ratio excluding coronavirus claims also improved by 7.1 percentage points, to 91.7% from 98.8%.

Big shift

There were small signs of improvement in earlier periods. Jon Hancock, then performance management director at Lloyd's, said when the market published its first-half 2019 results that he was "starting to see some improvements" from the work to restore underwriting profitability. These efforts included ordering all syndicates to fix or exit the worst performing 10% of their portfolios and telling syndicates that were consistently reporting underwriting losses to shape up or ship out.

Lloyd's also reported a 0.3 percentage-point year-over-year improvement in the attritional loss ratio for the full 2019 year. But the shift at the 2020 half-year stage showed a more decisive move in the right direction.

Ekaterina Ishchenko, a director covering EMEA insurance at Fitch Ratings, said in an interview that the first-half 2020 attritional loss ratio was "a substantial improvement" and "shows the actions the [Lloyd's performance management directorate] has been taking since the beginning of 2018." She added that the result also reflected "a much better-priced portfolio at this point in time."

Lloyd's reported that it had seen risk-adjusted price increases on renewal business of 8.7% in the first half, marking 11 consecutive quarters of price increases.

Robert Greensted, associate director of insurance ratings at S&P Global Ratings, said in an interview that previous movement on underlying performance had been "piecemeal," but that "the improvement on the attritional loss ratio looks fairly significant" and that underlying performance improvement had "accelerated."

Greensted also said that "unless we see a new trend coming into the market, it should be fairly sustainable. I don't think we're expecting to see rates significantly go the other way. It seems that the trend at the moment is for further hardening."

Ishchenko said she expected the performance "will be sustained for as long as they focus on the underwriting performance." However, she said Lloyd's now faced a "challenging" balancing act between allowing syndicates to grow and maintaining underwriting discipline.

Although it can be tempting for insurers and reinsurers to loosen underwriting controls when pricing is good, Greensted said the Lloyd's management team "is focused on performance and they are unlikely to take their foot off the gas just because rates have started to move more in their favor."

Sticking to it

The underlying performance improvement came suddenly rather than gradually in part because of the accounting conventions Lloyd's uses, according to CEO John Neal. Lloyd's uses three-year accounting and reports on an underwriting year basis, and so its first-half 2020 results are a mix of what happened in 2018, 2019 and 2020. "You are seeing benefits of the actions in '18, '19 and '20 come through simultaneously and they do tend to come through late," Neal told journalists Sept. 10.

Neal said that following the "vastly improved underwriting result," performance was now "near to the levels where we would hope to be on an underlying basis." He also said he expected "further improvement through 2021."

Lloyd's also expects the gains it has now made to be sustained. CFO Burkhard Keese told journalists that he thought the attritional loss ratio could move "in both directions" going forward, but that the market's recent work had provided it with a "toolkit" to tackle any problems.

"If we stick to our strategy of disciplined growth and disciplined underwriting we can steer it to profitable territory," he said.

Neal stressed that progress to date did not mean Lloyd's could ease up on its push to improve performance. He said: "The market has got to hold its nerve because continuing the work that we have started and completing that well is what will put us back on track to long-term sustainable profitability."

Lloyd's is in the midst of its business and capital planning approval process for the 2021 underwriting year, and the continued stringency could mean disappointment for some syndicates. Neal said that based on submissions so far, a third of the market had business plans that Lloyd's cannot yet see a clear path to making "logical, realistic and achievable." He added, however, that this was better than a year ago and so he was "not discouraged" by this development.

The profit drive has seen a number of syndicates close in 2018, 2019 and early 2020, and there may be more to come. S&P Global Ratings said in an Aug. 20 report that it was expecting more closures in 2020. But Greensted said that while there was potential for more syndicates to close, "with the rates hardening in the market, there might be less than we previously thought."

Ishchenko said "the major bulk of work is done already" but that she could not rule out further syndicate closures. She added, however: "I would expect that number to be smaller than last year."

One element of Lloyd's performance that unlikely to enjoy big improvements soon is the expense ratio, which improved by just 0.4 percentage point year over year to 37.7% in the first half of 2020.

Greensted said that given expense anomalies caused by the coronavirus pandemic, "it is pretty difficult to get a read on any trends in 2020." He added that it would require further execution on the Future at Lloyd's modernization plan "to really make a significant play on the expense ratio" in the longer term.

Ishchenko added: "I think we would expect to see a marginal improvement, but we would not expect to have a significant improvement in the near term."