Declining profit margins, overcapacity and a series of catastrophes - the Lloyd's forecasts for the 1997 to 1999 years of account don't look promising. Alison Boyle looks at the predictions...
When Chatset reviewed its forecast for the 1997 to 1999 years of account, the first question it asked was whether Lloyd's was right to try to rid itself of the remaining Names.
Eight syndicates were put into run-off at the end of 1999 with the majority of the capacity being provided by corporate limited liability. Nearly £400 million was withdrawn at a time when the market faces a loss cycle set to last beyond the 2000 year of account.
The withdrawal of support by corporates, according to Chatset, has dealt a real blow to the theory that capacity provided by Names is unreliable and unstable.
The first corporate to withdraw capacity was Capital Re for Syndicate 490 managed by RGB Underwriting Agencies. This followed forecast losses of 30% for 1997 and 25% for 1998. The second, Duncanson & Holt, withdrew support for its five syndicates for the year 2000.
Chatset editor Charles Sturge comments: "Not only does such a late withdrawal of capacity by a corporate backer destabilise the market but when syndicates such as 490 and 957 produce an aggregate loss over three years of over 50%, or greater than funds at Lloyd's, the threat to a call on the Central Fund is obvious.
"In the current situation, the corporate backers are strong entities and are likely to meet any losses in full, but whereas security at Lloyd's has always proved to be 100% whilst capital was provided by unlimited Names, is the future of Lloyd's secure from default?"
He adds that one of the problems with the Names is that there is no fresh blood - most of those providing unlimited capacity to Lloyd's are over the age of 60.
Against this backdrop, Chatset's forecasts for 1997, 1998 and 1999 are not encouraging. But it adds that the net premium income is showing an improvement in all markets except marine.
The marine market has traditionally been the most stable of the Lloyd's markets and Sturge says for it to have sunk into losses after the good profits of the last four years is very depressing. He adds that the marine market "reached the doldrums in 1998 and remained so in 1999", raising the question of whether it will pull out of its current decline next year.
For 1997, the forecast is a small profit of 1.75% which is a drop of nearly ten points on the 1996 result. For 1998 a loss of over five per cent is showing, with 1999 expected to fair slightly better with a loss of four per cent after the third quarter.
Chatset says overcapacity and a competitive market environment are mostly to blame. An inadequate rating structure which has not produced sufficient income to pay for the inevitable claims has also affected the sector.
In 1998, the market was especially affected by a high incidence of catastrophes. Sturge says: "Hurricane Georges, although a relatively small windstorm at a gross insurance loss of $3 billion, was by far the worst windstorm to affect Lloyd's since Hurricane Andrew in 1992. The reason appears to be the devastation caused in Puerto Rico where Lloyd's has a strong presence."
Chatset adds that the market has little for which to thank Jonathan Jones, the underwriter of Syndicate 329, as he aggressively attacked the premiums charged by the Protection and Indemnity (P&I) clubs for marine liability as well as major hull fleets. The mounting losses of five per cent to 15% forecast on his syndicate for 1997 through to 1999, Chatset feels, demonstrate the danger of underwriting at low rates and writing for premium income. It will be a corporate capital provider that bears this loss.
Profits in this sector, according to Chatset, are unlikely to return for another three years.
The non-marine sector has also seen a steady deterioration on the 1997 and 1998 accounts. 1997 was affected by lower investment returns and 1998 was hit by losses from Hurricane Georges as well as the Canadian ice storm and the American mid-West tornadoes in May.
1999 did not suffer equivalent catastrophes but competition has remained fierce in most classes of business so Chatset feels there has been little overall improvement in this result from the market.
However, Chatset does see signs of improvement for next year with underwriters able to demand better rates and terms on reinsurance business. Rate increases though are unlikely to show through until 2001.
In motor, Chatset states it cannot see any motor syndicate making a profit in any of the three current underwriting years, although 1999 might be a break-even situation for one or two syndicates. An improvement in profitability though is expected for the year 2000 because of rate increases.
The concern, though, is whether this improvement will be short-lived because of the highly competitive UK market and lack of capacity.
The aviation sector, which has suffered serious losses in the past three years, is another area giving cause for concern. Hull losses this year are estimated at $950m, the highest this decade. The Swissair loss of September 1998 has also inflated liability claims for 1997 and 1998.
With an estimated premium income from airlines of $800 million, losses sustained in the past three years cannot be paid out of premiums.
In 1999, rates were kept at the current inadequate levels in both the London and International markets because of excess capacity. The space market though has seen rate increases. Chatset feels, with the addition of capacity contracting with the withdrawal of GIO and the two Spinney syndicates folding, means the area is looking healthier for next year. Good news after its serious losses in 1998 following a series of launch failure and in-orbit accidents.
In terms of the Lloyd's market overall returning to profit Sturge comments: "It is always longer than you think for a cycle to turn around. We have seen some improvement but it usually takes two years to feed through to the market."
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