2016 at a glance
Investment return rose to 1.8%, which was notably stronger than the return recorded for the first six months of 2015 (2015: 0.6%), thanks in part to a downward yield shift in our bond portfolio.
The strengthening of the US dollar relative to sterling contributed to foreign exchange gains of £0.30bn with the market holding a surplus of US dollar assets over liabilities.
This period’s result, therefore, benefited from yield curve movements and the strengthening of the US dollar against sterling post the EU referendum, neither of which represent sustainable profitability. The underwriting result clearly reflects the challenging market conditions we have previously reported.
With continuing low interest rates, that show no immediate sign of changing, an unparalleled amount of capital coming into the market and the impact of the Fort McMurray fires in Alberta, Canada on major claims, our underwriting profit fell by £0.85bn on the previous period. Premium rates continue to be under pressure.
Lloyd’s combined ratio increased to 98.0% for the first six months of 2016 due to an increase in expense and attritional loss ratios, an increase in catastrophe losses, and a reduction in reserve releases. The rising attritional loss and expense ratios pushed Lloyd’s combined ratio higher than the competitor group weighted average (95.1%) for the first time since 2011.
Lloyd’s capital position does remain strong, increasing 6% on December 2015 to £26.6bn, as do our financial ratings. Our rating with Fitch is AA- (Very Strong), A.M. Best reaffirmed our A (excellent) status as did Standard & Poor’s at A+ (strong) which is a significant vote of confidence in our ability to successfully navigate our way through these difficult times.
Overall, while these results show the impact of the highly competitive environment we are in, they demonstrate that Lloyd’s is in robust financial shape.
Gross written premiums have increased by 5% to £16.31bn. Excluding the effect of foreign exchange movements, gross written premiums have increased by 0.6%. While rates have continued to decline, volumes have increased, reflecting the strong footprint Lloyd’s has globally in the specialist insurance and reinsurance market.
New entrants and licenses continue to expand the global reach of the market to geographically diverse areas, offering new lines of business. The United States remains a strong market for Lloyd’s with 41% of gross written premium as well as those traditional markets where we have enjoyed success for many decades. However our ability to continue to grow in the key emerging markets is vital.
In 2016 we celebrated the first anniversary of the Dubai platform as well as opening a new office in Bogota, Colombia. We have also applied for an Indian reinsurance branch based in Mumbai and an onshore reinsurance license in Malaysia. As these economies continue to grow and thrive, Lloyd’s is well placed to address the significant insurance gaps that are still prevalent.
In London, the first half of 2016 was dominated by the United Kingdom’s referendum on its membership of the European Union and subsequent decision to leave.
It is important to be clear that the referendum result has no immediate impact on the UK’s ability to continue trading with the EU. The UK continues to be a full and active member of the EU with access to the single market until the point that negotiations on its departure are concluded and an exit formally occurs. This means that we continue to trade under the current passporting regime.
As you would expect, we are advancing our plans for how Lloyd’s will continue trading with EU countries when the UK’s membership of the EU ends. Continental Europe will continue to be an important market for Lloyd’s, as it accounts for 11% of gross written premium and we fully expect to maintain our position in the new post-Brexit landscape.
The referendum outcome has meant that we have re-prioritised work within the Corporation to ensure we are using our resources appropriately. Therefore we have decided to pause our work on the Lloyd’s Index, but will continue discussions with the Insurance Linked Securities Taskforce over the coming months.
This year has seen significant progress in the modernisation of the market with the delivery of some key London Market Target Operating Model (TOM) milestones. The electronic placing platform PPL went live in July and the first phase of the Central Services Refresh Programme (CSRP) was implemented in the first half of 2016.
During the first half we have said goodbye to Tom Bolt, our performance management director, and to Sean McGovern, our legal counsel and chief risk officer. Tom and Sean made outstanding contributions to Lloyd’s over 7 and 22 years respectively. We wish them well in their new roles.
We are delighted to welcome Jon Hancock to Lloyd’s as performance management director. He will be joining us at the beginning of December.
On the non-executive front, Bruce van Saun retired from the Franchise Board. We will miss his excellent counsel and advice. In his place we have appointed Richard Keers, CFO of Schroders, who will become Chair of the Audit committee later this year.
Chief Executive Officer