Lloyd's of London Takes `Massive Hit' From Low Returns

  • Investment return drops to lowest level since at least 2001
  • Pressure on insurance rates expected to continue into 2016

Lloyd’s of London reported a 30 percent drop of full-year profit as the world’s largest insurance market was hurt by continued pressure on pricing and the lowest investment returns since at least 2001.

Earnings declined to 2.1 billion pounds ($3 billion) for 2015 as income from investments, primarily in fixed income, sank 60 percent to 400 million pounds with the majority earned in the first half of the year, according to the company’s annual report Wednesday. Weaker insurance pricing in 2015 is expected to continue this year, hurting profitability.

“We’ve taken a double hit from reduced margins in underwriting and lower investment yield,” Chief Executive Officer Inga Beale said in an interview with Bloomberg Television Wednesday. “On the investment side we saw a dramatic reduction in 2015 that was a massive hit” to earnings.

Beale said the low interest-rate environment and a “healthy” return on capital of 9.1 percent continued to attract new money into the industry, placing further pressure on insurance rates that have already seen double-digit declines. Pricing is falling at a time when natural disasters are on the rise, circumstances that would previously have sent rates higher, she said.

Shock Event

“We’re not actually sure if the old-fashioned way of doing business is going to happen again,” Beale said in a separate interview. “Now people are saying there is so much capital swilling around that one shock event wouldn’t have an immediate effect. It doesn’t seem to tally.”

Beale’s comments echo those of Aon Plc’s Greg Case, who said that it would take “multiple Hurricane Katrinas,” which cost the industry $41.1 billion, to absorb the excess capital that’s available to underwrite risk.

Lloyd’s so-called combined ratio rose to 90 percent from 88.4 percent amid higher claims in the energy sector and the explosion at Tianjin Port in China. An increase in the ratio indicates a deterioration in profitability.

“We would be concerned if we saw ill-disciplined underwriting, but these figure still look good,” said Beale, referring to the 9.1 percent return on capital. Given the low interest rates “for many investors that are looking at that figure, they would ask what’s your problem?” she said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE