The Covid-19 pandemic forced Lloyd’s half-year COR up to a highly unprofitable 110.4%, but underneath, a disciplined approach to underwriting could be setting them up for a return to profit in 2021

By insight editor Matt Scott

When Lloyd’s published its financial results for the first half of 2020, all the headlines were about the market’s 110.4% combined operating ratio (COR) and the mammoth claims it was facing as a result of the Covid-19 pandemic.

At first glance, these were terrible results for Lloyd’s as it descended into another underwriting loss, but delve a little bit deeper and things may actually not be as bad as they seem.

Firstly, Lloyd’s underlying COR that excludes the impact of Covid-19 came in at a respectable 91.7%, which is a strong 7.1 percentage point improvement on the same period last year.

A lot of this has been driven by the market pushing through higher rates, with the Lloyd’s market as a whole increasing rates by an average of 8.7% over the first six months of 2020, more than double the price rises put through during the first halves of 2018 and 2019.

Meanwhile, Lloyd’s has also pared back its overall policy level, reducing volume by 8.6% over the first half of this year.

Investment bank Jefferies has described this as a “disciplined” and “remarkable” move; it said that the “margin benefits are already evident” in the improvement in the underlying COR.

Added to this, the number of new syndicates being approved by Lloyd’s has fallen to almost zero, meaning that the market will not be awash with fresh capital that would oversupply the market and drive down premiums at a time when higher rates are needed.

Jefferies’ analysis of Lloyd’s results in recent years also revealed high levels of volatility, which is to be expected given the market’s reliance on catastrophe risks. But it also revealed that in 2019 the market reported three consecutive annual underwriting losses for the first time this century, with Jefferies anticipating a fourth to follow when 2020 finally ends.

Lloyd’s will therefore be hoping that the underwriting discipline they are showing in the wake of Covid-19 goes some way to mitigate the impact of the pandemic and will help set them up for a return to underwriting profit in 2021.