Low Interest Rates, Soft Market Pricing Hit London Market Insurers: Fitch

The negative impact of low interest rates and soft market pricing on London market insurers has been partially offset by low levels of large claims, according to Fitch Ratings in a special report.

London market insurers tend to hold a significant proportion of their reserves in short-term, liquid assets, such as corporate bonds, where the impact of low rates has been most sharply felt, said Fitch’s London Market Insurance Results Dashboard.

For example, net income for Lloyd’s of London was down 30 percent at £2.1 billion ($3 billion) in 2015, partially due to low investment returns, at just 0.7 percent in 2015, compared with 2 percent in 2014, Fitch said.

Amlin’s investment result proved more resilient, at 2.4 percent (2014: 2.7 percent), with an especially strong return from real estate investments, the report continued.

Fitch expects investment income to remain under pressure in 2016 as interest rates remain low and assets are reinvested at lower returns.

Pricing Pressure

“Fitch believes soft market pricing will continue to hurt insurers’ profitability but that most London market companies will remain profitable even if claims activity returns to normal levels,” the report said.

Pricing pressure is especially prevalent in reinsurance and other catastrophe-exposed lines of business, Fitch said, noting that some insurers have attempted to mitigate this by diversifying into other major non-catastrophe lines, such as casualty. Fitch expects this to lead to further price falls in these lines as well.

Reserve Releases

Fitch attributed the high levels of reserve releases seen across the London market to conservative reserving combined with low levels of large losses in recent years.

Reserve releases took 8 percentage points from the combined ratio for Lloyd’s in each of the last three years, the report said, adding that Lloyd’s combined ratio was 90 percent in 2015 (2014: 88 percent), the third year when the market’s combined ratio remained at or below 90 percent.

The largest loss for the year was the Tianjin port warehouse explosion, which accounted for a quarter of the total $1.1 billion of Lloyd’s major claims.

Hiscox also experienced strong reserve releases with a 13pp reduction in combined ratio from reserve releases in both 2015 and 2014, the report said.

Capitalization Remains Strong

The majority of London market insurers hold strong levels of risk-adjusted capital supported by growth in retained earnings and conservative investment portfolios, Fitch went on to say.

Most London market insurers have yet to publish Solvency II (SII) metrics but Fitch expected London market insurers will maintain strong solvency capital ratios under SII. Insurers hold strong levels of risk-adjusted capital, supported by growth in retained earnings and conservative investment portfolios, Fitch added.

Source: Fitch Ratings

Topics Carriers Pricing Trends Market London Lloyd's