“We won’t tolerate loss-making syndicates”
“I’m really delighted, and I smile again to report that Lloyd’s successfully repositioned the market for sustainable profitable growth, as evidenced in our strong set of financial results.”
Keese joined Lloyd’s as CFO on April 01, 2019, after a 14-year stint with German insurer Allianz Group, where he was chief financial officer of Allianz Deutschland AG, which handled over €34 billion (£30 billion) in premiums. His appointment came at a pivotal time for the 335-year-old marketplace after two years (2017 and 2018) of poor results, where Lloyd’s was plagued by loss-making businesses and weak investment returns. So, Keese’s mandate was clear: steer the market back to profitability – and so far, things are looking good.
In 2018, Lloyd’s launched its ‘Decile 10’ initiative, aimed at bringing underperforming syndicates and classes of business (including marine hull, cargo and yacht) back to profitability. Failure to do so would result in plans being rejected and classes of business and syndicates being closed down.
“We have worked together with the managing agents and syndicates over the last three years in our Decile 10 remediation program to improve underlying performance and to restore profitability,” said Keese. “The good market conditions gave us tailwinds. [In H1 2021], we recorded a moderate growth [in profit] of around 2%, where rate changes of roughly 10% were offset by remediation portfolio and foreign exchange. We allowed for selective and profitable growth and pushed unprofitable syndicates once again out of the market.”
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The market’s underwriting result of £963 million, and investment result of £628 million, resulted in a profit before tax of over £1.4 billion, and a return on equity of 10.3% for the half-year period. Furthermore, its combined ratio – excluding COVID-19 – improved by nearly 5% to 92.2%.
Regarding COVID-19, Keese said the market has paid out 80% of notified claims, and it still holds over 50% of incurred but not reported (IBNR) reserves for losses that could manifest as a result of the pandemic but have not yet materialized or been reported.
“Our combined ratio and return on equity are very much in line with the reported figures of our global peer group,” Keese commented. “The drivers for this much improved underlying performance are the 2% improvement of the attritional loss ratio, and the 1.9% improvement of our expense ratio. The expense ratio improved even by 3.7% since 2017 as a result of the market’s collective efforts to reduce expenses.
“Expense management will remain a key area of focus for our managing agents and syndicates in the upcoming planning season. The restoration of our profitability was driven by our strong management actions over the last three years, and now we must ensure that we continue our cause of decisive management. There will be further action to improve our profitability [as] we are not yet where we want to be.
“We will do more work with the market to ensure all syndicates become profitable. […] We will continue to focus on measuring and managing price adequacy. The current favorable market conditions will not remain forever, and the market must be prepared by developing market-leading pricing tools and cycle management.”
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Keese emphasized that it is a combination of rate increases and remediation that has helped to restore underwriting profitability at Lloyd’s. Since 2018, managing agents and syndicates have remediated nearly £7 billion, or 20%, of premiums. In the first half of 2021, the market removed unprofitable business amounting to approximately 6% of premium, which then enabled 4% of volume growth, the CFO explained.
“If we look at the portfolio of syndicates, it is clear that we have moved in the right direction. The top quartile of the syndicates belongs to the best underwriting firms in the world,” he said. “However, at the same time, we won’t tolerate loss making syndicates, particularly in current market conditions. Fifteen per cent (15%) of syndicates do not have the profitability we expect to see, and these syndicates must be remediated or the future at Lloyds is unsustainable.”
The Lloyd’s balance sheet is “in very good shape,” Keese added, showing an increase of 8% in net resources to £36.5 billion in H1 2021 – a total that has been buffered by a five-year £650 million ($897 million) reinsurance cover for its Central Fund, financed by JP Morgan and a panel of eight of the world’s largest reinsurance companies.
“In addition to protecting the Central Fund, the cover will create a significant buffer against adverse solvency developments. It is expected that the new cover will increase Lloyd’s central solvency ratio significantly,” said the CFO. “The capital buffer will also facilitate growth opportunities against the backdrop of current favorable market conditions. This unique and innovative structure will enable us to support market growth ambition over the next few years, while also strengthening the resilience of our balance sheet. Our capital position is now more resilient than ever.
“Our balance sheet is very robust with superior equity, solvency and reserve positions, as well as prudent asset allocations,” Keese added. “Capital management is key and will be continued to maintain our very competitive capital position. Our disciplined underwriting approach, and the continued positive rate momentum sets us up for a strong future. However, we still have work to do and will remain focused on pricing adequacy and further retaliation of unprofitable syndicates.”