Lloyd's downplays banking crisis exposure

Lloyd’s executives have insisted the market has limited exposure to the recent banking turmoil that has threatened to engulf the financial systems.

Chief financial officer, Burkhard Keese, said the banking crisis, which saw the collapse of Silicon Valley Bank (SVB), “[does] not put our positive investment outlook at risk”.

And chief executive, John Neal, downplayed the potential losses for directors' and officers' (D&O) liability underwriters from the fallout, saying the corporation is “happy with the loss picks we have assumed for 2023”, although they will be "kept under review". 

The failure of $212bn tech-focused lender SVB triggered the most significant financial crisis since 2008, sending banks' shares plummeting and forcing central banks to act swiftly to avoid wider contagion, including the forced takeover of Credit Suisse by its rival UBS.

Addressing the investment issues, Keese said the Lloyd’s market’s credit risk exposure to the banking sector is around £8.2bn ($10.1bn) of which £3.5bn relates to global systemically important banks “which are unlikely to default”.

Lloyd’s exposure to US regional banks, which have faced significant stress following SVB’s collapse, amounts to around £630m. And the market’s exposure to additional tier 1 (AT1) bank debt, which is designed to convert into equity when a lender runs into trouble, is £33m, Keese said.

The market’s investment exposure to Credit Suisse “is not material”, he added.

“We believe that the current issues do not put our positive investment outlook at risk. However, we are in close contact with our market and regulators to understand our exposure and how, if at all, we should respond,” Keese said.

'We believe that the current issues do not put our positive investment outlook at risk. However, we are in close contact with our market and regulators to understand our exposure and how, if at all, we should respond'

^{Burkhard Keese
Lloyd's}

After Lloyd’s booked an investment loss of £3.1bn in 2022, due to mark-to-market accounting rules, it is expecting to post investment income of £2.7bn in 2023, reflecting the higher investment yields on its books.

Responding to questions about the potential for underwriting losses from the banking crisis, Neal said the turmoil emphasised the need for adequate pricing. Lloyd’s has reported that directors' and officers' (D&O) rates are softening.

“Giving price reductions on D&O does not make any sense at all, the threat of litigation is as strong as it ever was. And I'm sure there'll be some litigation implications as a result of what you've seen."

Neal added: “I think we're happy with the loss picks that have been assumed for 2023. But as with everything else, we'll keep it under review.”

Earlier, Lloyd’s reported underwriting profits climbed 52% to £2.6bn ($3.2bn) in 2022 as the market benefited from an improved attritional performance, a lower expense ratio and continued rate increases.

Despite higher major losses, including substantial claims from Hurricane Ian and the Ukraine war, the market booked a combined ratio of 91.9%. This represented a 1.6 percentage point improvement on the previous year and was the strongest result since 2015.

Major losses amounted to £4.1bn last year and contributed 12.7% to the combined ratio, compared with 11.2% in 2021. Lloyd’s has reserved £2bn for Hurricane Ian, while losses from the Ukraine war are estimated at £1.4bn.

But the market’s attritional loss ratio improved 0.5 points to 48.4%, while the expense ratio improved 1.1 percentage points to 34.4%, reflecting “efforts to deliver strong performance and reduce the cost of doing business”, the corporation said.

The results also benefited from increased prior-year reserve releases, which shaved 3.6 points off the combined ratio, compared to 2.1 points in 2021.

There were prior-year releases on most lines of business, notably on property re/insurance classes. However, these releases were partially offset by 2% prior-year deterioration on casualty reserves, reflecting the impacts of inflation, Lloyd's said.

Gross written premiums increased 19% to £46.7bn in 2022, including 4% volume growth and rate increases of 8%.

But as reported earlier this month in preliminary results, Lloyd’s booked an overall loss of £800m, following an investment loss of £3.1bn as a result of mark-to-market accounting rules. 

The mark-to-market loss is expected to reverse in the coming years as assets reach maturity and benefit from favourable interest rates. 

Neal, said the underwriting result was “outstanding”.

“[The result] follows several years of performance improvement, a comprehensive plan to digitalise our market, steady and sustained progress on our culture and purposeful action to help our industry and society manage the biggest challenges of our time,” he added.

Lloyd’s is expecting premium growth to reach around £56bn in 2023, with a combined ratio of less than 95%, Neal added.