Lloyd’s can sustain its improved recent underlying underwriting performance, with expected further gains this year, despite an upward trend in both frequency and severity of climate risks, according to Moody’s Investors Service.

However, in a report looking at the Lloyd’s of London insurance market, it’s profitability and the outlook for its underwriting performance, the ratings agency cautioned that inflation and potential claims related to the Ukraine conflict will be earnings headwinds:

“The market’s return to profitability in 2021 shows it is fixing its Achilles heel. Even with last year’s turnaround, Lloyd’s five year average return on capital is just 0.3%, held back by a succession of major claims.”

“Underlying performance improvements have strengthened the market’s ability to absorb large losses. Lloyd’s has also reduced its natural catastrophe exposure, protecting its earnings as climate change makes extreme weather more frequent. Lloyd’s position as the world’s biggest (re)insurance subscription market, its global licence network, and strong asset quality will also continue to support its credit strength.”

Moody’s noted that Lloyd’s has also taken steps in recent years to reduce its exposure to catastrophe risk, a frequent source of large claims. This is reflected in a decline in the share of Lloyd’s market-wide solvency capital requirements related to catastrophe risk to 4% in 2021 from 31% in 2016.

It added that Lloyd’s partial retreat from catastrophe risk comes amid an upward trend in the frequency and severity of extreme weather events, driven by climate change:

“In 2022, total insured natural catastrophe losses topped $10 billion in the first quarter for the sixth consecutive year. Aon estimates extreme weather related losses of at least $14 billion, exceeding the industry’s combined catastrophe budget for the period. The February winter storms across Europe underline the growing impact of so called ‘secondary perils’ – less severe but more frequent catastrophe events.”

Moody’s also noted that catastrophe losses and other large claims have previously taken their toll on Lloyd’s earnings, limiting its five year average return on capital to just 0.3%, even when last year rebound in profitability is included.

However, it stressed that the market’s ability in 2021 to absorb large claims and still report a profit reflects its stronger underlying underwriting performance. In 2021, Lloyd’s combined ratio excluding major claims was 82.3%, down from 87.3% the previous year.

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