Marine classes’ return to profitability at Lloyd’s will be “up to underwriters” says Hancock

With the three marine classes of cargo, hull and yacht all being members of the eight classes subject to review by Lloyd’s last year, the question of whether they can return to profitability in 2019 was “up to the underwriters”, said performance managing director at Lloyd’s Jon Hancock yesterday at a conference to announce Lloyd’s 2018 results.

He added: “I don’t say that to be blasé about it. I think that the underwriters in those three classes have responded really strongly, and they started to respond in the middle of last year.”

Hancock noted that the three marine classes were doing different things and echoed recent comments from Lloyd’s CEO John Neal and other market participants that in yacht there had been considerable increases even for clean renewals. Cargo had also been responding over the past six months, but Hancock accepted that hull was the most challenged, “but I think that every hull underwriter at Lloyd’s has got a plan that will take it on a return to profitability. Some of those will be next year, some this year”.

Hancock said that he was “hopeful”, and he thought that the discipline was there. “And I have seen enough activity to give us some confidence. But it is going to be tough to break a long cycle of losses”.

The conference revealed that Lloyd’s loss for 2018 had been reduced to £1.0bn, from £2.0bn in 2017. Gross written premiums rose to £35.5bn, from £33.6bn, while net incurred claims fell to £16.4bn from £18.3bn. That decline was in part attributable to a significant fall in major claims (those above £20m) to 11.5%, from 18.5% in 2017, the year of hurricanes Harvey, Irma and Maria. However, Lloyd’s CFO John Parry said that this was still above the average expected major claim rate, which ran between 9% and 9.5%.

Parry also noted that net resources were up by 2% to £28.22bn. “Despite the losses, there has been no impairment of capital resources”, Parry said.

Hancock emphasized that, despite last year being a significant retrenchment, no class of business had been closed, although some of the capacity would be more expensive and discerning. “I would say that these are good things”, said Hancock.

The combined ratio was reduced to 104.5%, from 114.0% in 2017.

While the focus last year had been on the 8 classes perceived as most in need of review, and the bottom “Decile 10” within individual syndicates, which Parry and Hancock said had been responsible for an overweighted erosion of the profits of the market as a whole, this year Hancock said that Lloyd’s intended to take a more holistic focus. “We want to move from that one big moment to a more gradual iteration. The rigour will be the same, but the process will be shorter”.

Marine contributed £343m of Lloyd’s loss (2017: minus £469m), less than reinsurance ( minus £456m) and property (£700m), but proportionately greater, as Marine last year made up only 7% of the global total, compared with 31% for reinsurance and 27% for property. Marine’s combined ratio was 116.0%.

Marine within reinsurance saw Marine excess of loss reinsurers experience a relatively benign year, with Hurricane Michael and Typhoon Jebi being less impactful than may have been expected. However,  the Lürssen shipyard loss had substantial reinsurance coverage and had “a significant impact on the line”, said Lloyd’s. Also within the specialty reinsurance sector the marine line was also impacted by the 2016 and 2017 US windstorm events, which saw a reduction in the anticipated losses when compared to the estimates set at the end of 2017.

For marine, GWP for 2018 was £2.60bn, up 3.9% from £2.51bn in 2017. The accident year ratio was 115.6% (2017: 121.8%).

“While a competitive environment persisted across the marine lines, reflective of available capacity, the pricing environment was generally positive, reversing the trend of prior years”, Lloyd’s said, noting that this was “particularly apparent across the three main lines of cargo, hull and yacht in the final quarter of the year”.

Overall performance remained marginal after a series of large losses affected the cargo and hull classes, most notably the major Lürssen shipyard loss in September. Prior year movement was a strengthening of 0.4% (2017: 0.6%). There had been some favourable movement in large isolated events, such as the Tianjin port explosion from 2015. Lloyd’s observed that there was a tendency on this line for the view of claims “to be held for a number of years to allow for any uncertainty”.

Looking ahead. Lloyd’s said in its report that it had hoped that the effects of the hurricane-led losses in 2017 would act as a catalyst for price improvement in 2018, but reported that the early positive movement seen in the final quarter of 2017 lost momentum in the first half of 2018.

“Following a difficult 2019 planning season for marine business, which resulted in restriction in capacity for some of the major lines, conditions may now exist for further market stabilisation as syndicates continue to seek a return to profit”, Lloyd’s said.