Lloyd’s of London posted its worst results in four years as low interest rates shredded the specialist insurance market’s investment returns.
Lloyd’s said that pre-tax profits last year were £2.1bn, a 30 per cent drop on the previous year and well below the £3.2bn achieved in 2013.
Return on capital also fell from 14 per cent a year earlier to 9 per cent. The numbers reflect the combined results of the 97 syndicates that operate in the market.
John Nelson, chairman, blamed low interest rates for the 60 per cent decline in investment income. Due to the fact it may need to pay out on claims at any moment, Lloyd’s has to hold a lot of its reserves in short term, liquid assets where the impact of low rates has been most sharply felt.
The drop in profits came despite a 6 per cent rise in premium income to £27bn.
“Growth came from new syndicates or from existing syndicates bringing new business in,” said Mr Nelson. “One of our best-performing markets is the US, where there is greater penetration in a whole range of lines. Our Chinese business is also growing fast — in 2016 we think that business on our China platform will double.”
That new business offset the weak pricing that has plagued the insurance industry for years — prices fell 5 per cent last year, according to Mr Nelson. Capital has been pouring into the insurance sector, attracted by returns that are better than, and not correlated with, what is available elsewhere.
Those returns have been helped by a relatively small number of large catastrophes in recent years that has kept underwriting profits steady. The combined ratio (claims and costs as a proportion of premium income) was 90 per cent last year, slightly worse than 2014 but much better than the 107 per cent reported in catastrophe-hit 2011.
Last year there was a wave of merger and acquisition activity in the market, including the acquisitions of Catlin by XL and Amlin by Mitsui Sumitomo.
“Maybe in one or two cases the M&A activity is positive due to the strengthening of medium-sized reinsurers,” said Mr Nelson, although he added that the consolidation elsewhere in the industry did pose challenges.
“We have to make sure that we keep our platform really attractive. These major companies have choices over where they write their business.”
Mr Nelson repeated his support for the UK’s membership of the EU.
“The Brexit situation concerns us. The EU is very important,” he said. “It gives us passporting rights in 27 member states and free trade agreements with 55 countries. For us to come out of that would be disruptive.”
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