Lloyd’s is in excellent condition despite tough marketplace, says AM Best

Company Profiles, Insurance and Reinsurance, Marine Insurance, News, Reports, Statistics — By on September 8, 2016 at 10:01 PM
AM Best's new reports.

AM Best’s new reports.

Lloyd’s is in excellent condition despite tough marketplace, says AM Best

By James Brewer

Battling insurance market headwinds, the £26.7bn premium income Lloyd’s market has merited a continuing favourable assessment from ratings agency AM Best. The market has been assigned a financial strength rating of A (Excellent) and an issuer credit rating of a+, with each rating carrying “a stable outlook.”

Affirming a previous evaluation of the specialist insurance market, the agency says that this reflects its “stable and strong risk-adjusted capitalisation and good financial flexibility, together with its excellent business profile and recent strong underwriting performance.”

AM Best judged the operating performance of Lloyd’s as having been good in recent years, but warned: “Prospective performance is expected to be weaker than in the recent past, due to deterioration in premium rates and assuming average catastrophe experience and a lower level of reserve releases.”

It said that an increasingly difficult operating environment posed challenges to the competitive position of Lloyd’s. For large and complex risks, the growth of local and regional insurance and reinsurance hubs throughout the world is threatening the competitive position of the wider London market.

The growth of such hubs “combined with the comparatively high cost of placing business at Lloyd’s is reducing the flow of business into the London market.” The agency said there had been a proactive response by Lloyd’s to these threats, and improved access to international business was being supported by Lime Street’s Vision 2025 strategy which was launched in May 2012 including the establishment of regional platforms, and Lloyd’s continued to implement initiatives to improve efficiency and reduce operating costs.

The agency reviews the progress of Lloyd’s in one of a series of penetrating reports it has released ahead of the Monte Carlo Rendez-Vous 2016 gathering of reinsurance leaders.

Ratings agency analyses Lloyd's market.

Ratings agency analyses Lloyd’s market.

Concerns are raised over the Brexit vote in the UK’s June 2016 referendum. Depending on the outcome of the exit negotiations, leaving the European Union could restrict access by Lloyd’s to insurance business on the continent.

Lloyd’s is exploring options to ensure that its members can continue to write EU business if loses cross-border rights, but “the fact that Lloyd’s is a market, and not an insurance company, restricts these options somewhat.  For instance, the option of setting up a licensed subsidiary in an EU country would not be as simple for Lloyd’s as it would be for an insurance company.”

AM Best notes that opportunities have been identified for syndicates to increase their share of niche business in Europe. The region remains the third largest segment of the Lloyd’s market, at 14% of premium. But the fact that this is two percentage points down over the last five years reflects the competitiveness of the European market, which is already well served by established companies.

The agency refers to abundant capacity in the casualty, marine and energy markets in 2015. Marine premiums increased by 5%, mainly because of exchange rate strengthening of dollar-denominated business as rates continued to be depressed, particularly in hull and cargo, with increased limits of cover and broader terms and conditions.  The energy sector saw a reduction in premiums of nearly 8%.

In an earlier report on the London market as a whole, AM Best said that  insurers performed well in the first half of 2016 and entered the second half of the year with strong balance sheets, but recent good performance concealed fundamental challenges to the market’s competitive position and prospective profitability.

That report, entitled London Market Insurers Adapting to an Evolving Operating Environment, emphasised that traditional business models were under threat from consolidation, alternative insurance structures and changing buying patterns. Although companies’ capital positions were generally strong, enhanced by several years of positive earnings, underwriting profitability was under pressure from lower premium rates and higher expenses.

Rates across the market continued to fall, with large property and energy risks, particularly those that are catastrophe exposed, under most pressure. Energy business had been hit by a drop in demand consequent to weak oil prices. The largest loss event for most market participants was the Port of Tianjin explosion in August 2015.

Looking at global reinsurance in a report headed Remaining Relevant, AM Best holds its outlook for the reinsurance sector at negative. The agency said that its rating outlook remained longer-term than its typical 12 to 18 months period. “The companies that are not pro-active will not lead their own destiny.  It is likely that several franchises that exist today will be sporting the logo of another brand by the time this soft market has run its full course.”

Broadly speaking, balance sheets were well capitalised and capable of withstanding various stress scenarios, but over time this strength might be eroded for some carriers. “A major catastrophe will occur at some point and the mask of redundancy reserves will eventually be removed to reveal the true ramifications of current market conditions.  If history is a guide, it may be uglier than some believe.”

Alternative capital is driving structural change, but the market continues to be heavily influenced by the global reinsurers. The reinsurance sector is supported by some $400bn of capital, of which catastrophe bonds, collateralised insurance, sidecar operations and industrial loss warranties total $71bn.

In terms of gross premiums written in 2015, Munich Re, Swiss Re and Hannover Re continue to be the three largest reinsurers, as they have since 2010. Scor and Lloyd’s took the fourth and fifth places, ahead of Berkshire Hathaway, which fell to sixth. The top 10 groups account for more than 70% of the market, a share which has hardly changed in recent times. Consolidation has taken place chiefly in the lower ranks.

After intense activity in 2015, mergers and acquisitions in 2016 may turn out to be of the smallest volume since 2004, although there is talk of a couple of big deals being struck before the year is out.

In a separate report, Europe’s Largest Cedants Take Advantage of Opportune Market Conditions, AM Best says that the 20 largest cedants are enjoying plentiful and inexpensive reinsurance capacity, particularly for catastrophe and larger risks. The cedants are securing more cover and locking in favourable rates with multi-year reinsurance arrangements. Among the cedants, Lloyd’s ranks first by a significant margin, with Euro7.7bn in 2015 in non-life premiums. Europe’s second and third biggest cedants are Chubb and Zurich.

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