With Lloyd’s falling to a near £2 billion first half loss for 2022 driven by rising interest rates, rating agency Standard & Poor’s (S&P) has flagged the impact of the ongoing war in Ukraine for the wider market.

Lloyd’s posted a £1.8 billion profit for period in 2022 (H1 2021: £1.4 billion profit),

Lloyd’s result was was mainly driven by a £3.1 billion first half investment loss from unrealised mark to market losses.

The market also confirmed that it has reserved £1.1 billion net of reinsurance for policyholders impacted by the conflict in Ukraine.

On the underwriting from it delivered a profit of some £1.2 billion (HY 2021: £0.96 billion) and a combined ratio of 91.4% (HY 2021: 92.2%).

Lloyd’s said that, notwithstanding a challenging year of natural catastrophes, the invasion of Ukraine, inflation, and other geopolitical factors, this marks a 0.8% improvement on 2021 and the strongest combined ratio since 2015.

John Neal, CEO, Lloyd’s, said: “Rising interest rates, while prompting an unrealised investment loss on paper at the half year, will be good news for insurers in the long term as returns on assets strengthen in 2023 and beyond. Meanwhile, with the conflict in Ukraine continuing to inflict devastating consequences, we’ve taken proactive steps to protect our customers from the fallout while ensuring we can support them – and continue driving sustainable performance – through the uncertain times ahead.”

As S&P issued its outlook for the global reinsurance sector, Ali Karakuyu, director and lead analyst at S&P said the costs of the war in Ukraine to the global reinsurance sector remained fluid and had the potential to be a major event.

He added the war is expected to be an earnings event for the sector, with Aviation, trade credit, political risk, cyber, political violence and marine war hull classes all seeing exposures to risks arising from the conflict.

Karakuyu added that the ratings company has looked at three loss scenarios for the war, with insured values of $16 billion, $27 billion, or  $35 billion, of which the reinsurance sector is expected to assume 50% of the claims.

“This year we have seen the reinsurance sector report around $1.4 billion in claims from the war in Ukraine, however, this does not include any figures from Lloyd’s,.”

“The situation is fluid, we will not see claims loaded into this year, it is likely that the claims will be spread across the next two to three years. Indeed some CFOs have said they expect they will be talking about the claims and the vents in Ukraine in ten to 15 years times in a similar way to they have discussed the events of 9/11.”

The outlook added: “The growing concern on the Russia-Ukraine conflict has altered the perception of risk in specialty lines. Particularly, aviation is a key focus area with potential large losses, which could result in sizable rate increases later this year and into 2023.”

S&P  warned the continued concerns around the rising frequency and severity of natural catastrophes had seen reinsurers adopting different strategies in an effort to limit exposures.

“In the past five years, the global reinsurance sector generated a weak underwriting performance with an average combined ratio of 102.3%, hurt by elevated natural catastrophe losses, which added about 10 combined ratio points,” said S&P. “Over this period, the frequency and severity of primary and secondary perils have increased, with the latter causing two-thirds of the increase. In addition, the magnitude of losses has been exacerbated by several factors including urbanization, higher asset values, underestimated exposures, supply chain disruption, increased material costs and labour shortage due to COVID-19, inflationary pressures, and the effects of climate change.

“For the top 21 reinsurers we rate, we estimate that, on average, their capital is more exposed to natural catastrophe risk. Their net exposure as measured by a 1-in-250-year return period grew 4%, with average capital (shareholders’ equity including preference shares) at risk increasing to 28% in January 2022 from 27% in January 2021. In addition, this cohort of reinsurers has markedly increased natural catastrophe budgets in 2022 compared with those in recent years, allowing for exposure growth.”

It added: “However, when we take a closer look, there are two strategies at play. Half of the top 21 reinsurers are growing their natural catastrophe net exposure by close to 20% on average in 2022, while the other half is taking a more cautious and defensive stance by reducing their net exposure by an average of 20%. The divergence in strategies reflects reassessment of risk appetites, uneven pricing adequacy across the globe despite years of improved pricing, and loss fatigue.”

The outlook continued: “While reinsurers are getting required price increases, rate adequacy particularly in property catastrophe is questionable, reflecting the divergence of strategies among reinsurers regarding this line of business. The pricing, which should be an indicator of prospective loss trends, seems to be an uphill struggle for the past several years. The growing impact of climate change, increasing losses from unmodeled secondary perils, higher inflationary pressure, and a litigious environment have resulted in accelerated loss trends, outpacing the property catastrophe reinsurance rate increases. Hence, reinsurers have tightened their property exposure management, creating a dislocation in this market.

“Half of the top-21 reinsurers have reduced their property catastrophe exposure, with some exiting this line altogether. While reinsurance capacity is still available, the rising uncertainties have resulted in an increased demand for reinsurance from cedants. We believe this trend will persist and support rate increases into 2023.

The outlook added: “The growing concern on the Russia-Ukraine conflict has altered the perception of risk in specialty lines. Particularly, aviation is a key focus area with potential large losses, which could result in sizable rate increases later this year and into 2023.”