Fitch: Low Investment Return Hurts London Market Insurers
OREANDA-NEWS. Fitch Ratings says in a special report that 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.
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. Net income for Lloyd's of London (Lloyd's) was down 30% at GBP2.1bn in 2015, partially due to the low investment return, at just 0.7% in 2015 (2014: 2%). Amlin's investment result proved more resilient, at 2.4% (2014: 2.7%), with an especially strong return from real estate investments. Fitch expects investment income to remain under pressure in 2016 as interest rates remain low and assets are reinvested at lower returns.
Pricing pressure remains, especially in reinsurance and other catastrophe-exposed lines of business. 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.
Lloyd's combined ratio, at 90% in 2015 (2014: 88%), remained at or below 90% for the third year in a row. The largest loss for the year was the Tianjin port warehouse explosion, which accounted for a quarter of the total USD1.1bn of Lloyd's major claims. Reserve releases continue to support earnings, taking 8pp off the combined ratio for Lloyd's in each of the last three years. Fitch attributes the high levels of reserve releases seen across the London market to conservative reserving combined with low levels of large losses in recent years.
Most London market insurers have yet to publish Solvency II (SII) metrics but Fitch expects London market insurers will maintain strong solvency capital ratios under SII. London market insurers hold strong levels of risk-adjusted capital, supported by growth in retained earnings and conservative investment portfolios.