Lloyd’s 2013 Annual Report Part 2 – Sector Performance

Last month our first blog on the 2013 Lloyd’s of London annual report was uploaded, giving an overview of the annual performance.  In this blog we explore the specific lines of business within the Lloyd’s insurance market and highlight the strengths and weaknesses that have driven the overall performance.

Overall Lloyd’s experienced a remarkable 2013, with pre-tax profits of £3.2 billion, compared to £2.8 billion in 2012. The combined ratio also improved from 91.1% in 2012 to 86.8% in 2013.  The two strong drivers of this impressive result were the absence of significant catastrophe events and a large release of prior year reserves of £1.6 billion.  We will now discuss the performance of the seven lines of business written within Lloyd’s: reinsurance, property, casualty, marine, energy, motor, and aviation.

"Lloyd’s cyber liability market continues to grow in response to the greater demand for cyber cover, as the number of high profile cyber breach cases rise exponentially."


Reinsurance is the line of business with the highest gross written premium at £9.468 billion.  Reinsurance classes include accident and health, casualty, motor, professional liability, with the predominant class being property.  The overall combined ratio improved to 80.5%, from 91.0% in 2012.  Positive performance can be attributed to favourable weather conditions such as an absence of hurricanes crossing the US coastline, which have led to below average natural catastrophe losses.  Competition did, however, intensify during 2013 as more capital was drawn into the reinsurance market due to attractive returns relative to other sectors.


Lloyd’s property business saw an improvement in gross written premium and the combined ratio.  The sector consists of a wide range of risks that are written worldwide.  The low incidence of catastrophe losses benefited all major property lines, as with the reinsurance lines.


The casualty sector at Lloyd’s also comprises of a wide range of classes.  The most significant of these are medical malpractice, professional liability and general liability.  Gross written premium for the casualty business increased by 6.8% in 2013 to £4.850 billion.  Marginal profitability has been seen in this industry for several years now, with few signs of corrections due to surplus capital continuing to supress rate increases.  Lloyd’s cyber liability market continues to grow in response to the greater demand for cyber cover, as the number of high profile cyber breach cases rise exponentially.  This is an area with a huge amount of scope for expansion, but the large amount of uncertainty driven by limited historical data means that insurers are cautious with regard to the cyber insurance market.


Lloyd’s is an industry leader in the marine insurance sector.  The main classes of business include hull, cargo, marine liability, political risks and war. 2013 was a positive year for this market, with a rise in gross written premium and an improvement in the combined ratio relative to last year.  The premium growth was largely driven by the political risk class and rate rises in marine liability.  Reserve releases occurred in all marine classes. Reinsurance has heavily mitigated movement associated with Costa Concordia and this has been accompanied by relatively good experience elsewhere.


Lloyd’s energy business is made up of a variety of property and liability classes such as exploration, production, refinery and distribution.  Despite gross written premium decreasing by 3.4% on last year (from £1.727 billion to £1.668 billion) the combined ratio remained favourable at 83%.  The strong overall performance of the Lloyd’s energy market was driven by offshore energy, which benefited from another year without a significant windstorm in the Gulf of Mexico.  Nonetheless, this recent lack of wind activity should be treated with caution as this region will continue to be prone to extreme weather events.


The motor market at Lloyd’s predominantly covers UK private car and fleet business.  Gross written premium increased to £1.184bn but the combined ratio worsened from 104% to 108.6%.  Motor premium reductions were consistently enjoyed by customers throughout 2013, in response to the implementation of new legislation that was designed to cut claims costs.


Lloyd’s is also an industry leader in the global aviation market.  Business is written across all the main business segments such as airline, aerospace, general aviation and space.  The combined ratio for this sector worsened from 67.7% in 2012 to 81.4% in 2013.  This deterioration of the combined ratio was driven by two high profile large losses.  The first was a satellite launch failure and the second was the crash of Asiana Airlines Flight 214 in San Francisco which resulted in three fatalities and many injured passengers.


Overall 2013 was a very success year for Lloyd’s of London.  The motor industry for the UK as a whole has seen poor results, so it is not surprising to see an unfavourable combined ratio for Lloyd’s motor sector.  Despite the two large losses within the aviation market, the sector as a whole experienced loss activity below normal long-term levels.  The other markets benefited from a relatively benign year in terms of catastrophe events, with the cost of major claims at more than half of the cost of 2012 major claims.  As mentioned in the previous blog, ignoring the large release of prior year reserves, the results were still impressive despite investment returns being historically low due to the continued low interest rates.  The encouraging signs of the UK and US economies picking up could be the impetus behind further commendable performances by Lloyd’s of London in the future.