Volatility reigns amid Lloyd’s of London market investment

Gallagher Re reveals extent of precariousness to market's investment over 2021 in a new study.

Andrew Putwainposted on Tuesday, July 12, 2022

Pixabay. A Lloyd's of London market report showed a mixed bag for investments.

The Lloyd’s market was revealed to have mixed fortunes over the past year, including in its investment returns, according to a new study, the “Lloyd’s of London Market Report”, which was the first annual Gallagher Re’s Lloyd’s report that tracks the capital and profitability of the market.

Key parts of the report showed that it had been a difficult year for investments in the market – but that it wasn't all bad news, though, with increases in some areas. As such a huge force in the industry, the Lloyd's market could be used as a weathervane for many other aspects of insurance and those companies' investments.

The report was intended as an update on Lloyd’s of London covering its business model, capital, initiatives undertaken and analysis of underwriting performance for the 2021 year, said the reinsurer. The report was based on Lloyd’s publications, including its Annual Report and Accounts results presentation, individual syndicate annual report data, and Gallagher Re internal information.

Investment concerns

The overall picture of Lloyd’s performance showed some stability with its investments – returns on investment were at 1.2%, with a combined ratio of 93.5% and a return on capital of 6.6%.

“The ongoing invasion of Ukraine by Russia is driving a range of uncertainties in the market, relating to loss potential, inflationary pressures and impact on investments."

The world’s largest insurance marketplace saw a pre-tax profit of £2.3bn.

However, there were still many areas of concern for the major player. “The ongoing invasion of Ukraine by Russia is driving a range of uncertainties in the market, relating to loss potential, inflationary pressures and impact on investments,” it said. “Lloyd’s have previously stated that exposure to aviation, credit, cyber, and political risk classes are within manageable tolerances, and would not create solvency challenges. Market participants will continue to keep a close eye on developments.”

Investment returns in 2021, were at £900m, which was down markedly from 2018’s £2,166m and down also from 2020’s £1,266m. The investment returns have been volatile for several years with large swings. Overall cash and investments were £84,772m in 2021, up markedly from 2020’s £80,129m.

“Following the tough years of 2017 to 2020 several established trade players scaled back or completely exited their funds at Lloyd’s participation. However, 2021 and 2022 has seen an increase in alternative capital entering the funds at Lloyd’s market."

“Since 2011, [Lloyd’s has seen] a period of recent volatility and increased risk, and most notably the marked turnaround in underwriting performance in spite of reduced investment income in 2020, which was down 27% from 2020” the report added.

“Following the tough years of 2017 to 2020 several established trade players scaled back or completely exited their funds at Lloyd’s participation,” the report added. “However, 2021 and 2022 has seen an increase in alternative capital entering the funds at Lloyd’s market. This has been facilitated somewhat by the London Bridge Risk PCC structure, although not all alternative capital has chosen to utilise the new platform with some setting up their own corporate members, and some participating directly into syndicates own capital platforms.”

Inflation and more

The report highlighted inflation as a key area of focus, which many insurers have mentioned over the past few months as one of their main concerns. “Syndicates will need to ensure that inflation is carefully considered and factored into planning activities which will be monitored by Lloyd’s.”

After the immediate financial impacts of the current economic picture, ESG was also a heavy concern. “ESG remains a key priority for Lloyd’s with its commitment to be net-zero by 2050. Syndicates will be required to submit a strategy and framework as part of 2023 business plans,” it said.

"A relentless effort to improve syndicates’ performance has led to satisfactory results, which bolster the market’s sustainability and its credibility. Lloyd’s decreasing attritional loss ratio points to the positive performance impact of portfolio remediation and rate increases."

Gallagher Re’s report said that their analysis of the distribution of individual syndicate underwriting performance found that not only did the majority achieve a sub-100% combined ratio in 2021 but also that the general spread of performance across the market – viewed over 10 years – has narrowed and shifted toward a profitable result versus previous years. The Lloyd’s market’s continuing profitability has long been an issue of anxiety.

It also warned that Lloyd’s markets writing a majority share of the war and aviation war market, material adverse loss deterioration in this space could have direct consequences for insurers and reinsurers.

“Lloyd’s made great progress in 2021, particularly in view of the natural catastrophe burden that hit the market,” said Tom Wakefield, UK CEO of Gallagher Re. “A relentless effort to improve syndicates’ performance has led to satisfactory results, which bolster the market’s sustainability and its credibility. Lloyd’s steadily decreasing attritional loss ratio points to the positive performance impact of portfolio remediation and rate increases. Challenges remain, though. Maintaining or even stabilising the positive trajectory in 2022 will be frustrated especially by intensifying inflationary pressures and their impacts.”

 

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