Trading conditions are difficult in the London market as insurers contend with changing buying habits, an influx of alternative capital and global economic uncertainty, according to a special report published by A.M. Best.
The availability of alternative capital in the form of sidecars and catastrophe bonds continues to grow, attracted by uncorrelated risk at a relatively good rate of return, said the report, titled “London Market Insurers Enjoy Strong Balance Sheets but Changing Dynamics Challenge Sector.”
Additionally, competition is intensifying, most notably in the reinsurance sector, where operating margins are being squeezed and leading market players are loosening terms and conditions in an effort to protect market share, the report said.
A.M. Best observed that London market insurers entered 2015 with strong balance sheets on the back of three years of good underwriting results. The overall Lloyd’s market recorded a solid pre-tax profit of £3.16 billion ($4.82 billion) in 2014, marginally down from £3.21 billion ($4.89 billion) in the previous year. The combined ratio deteriorated two points to 87 percent, while the net investment return (including gains) rose year over year to 2.0 percent from 1.6 percent.
The report states that final results for 2015 will depend mainly on the frequency and severity of large losses, as well as the level of prior-year reserve releases. Strong underwriting discipline, as well as prudent management of capital and aggregate exposures, will determine which companies are able to absorb any catastrophe losses and maintain capital strength.
“Premium rates are under pressure and a return to a more normal level of catastrophe losses could push this year’s technical results into the red,” said Catherine Thomas, director, analytics. “With interest rates set to remain at historically low levels, investment income will provide limited earnings support.”
The report also notes the changing relationship between risk carriers and brokers, who have increasingly sought to establish smaller panels of reinsurers. In particular, the use of broker facilities – pre-arranged schemes composed of multiple risks – continues to grow, particularly for smaller-scale business. Such facilities provide insurers with access to a broader spread of business, but they also represent a competitive threat to the traditional subscription market as fewer risks are placed in the open market.
The competitive position of London is also under threat from the growth of local and regional (re)insurance hubs throughout the world, and wholesale insurers have to compete hard on price and service to maintain the flow of international business into London.
Despite the competition from other hubs, the Lloyd’s market remains attractive to investors. Yvette Essen, director, research & communications – EMEA, noted: “M&A is seen as the most straightforward way to access the Lloyd’s market, as its capital-efficient structure and international licenses continue to attract trade buyers and private equity. However, the number of London-centric companies has shrunk as a result of M&A, and the listed London market entities that remain tend to trade at a high price to net tangible assets, reducing their attractiveness as takeover targets.”
(£1 = $1.52)
Source: A.M. Best Company