Falling investment returns fail to cover for Lloyd’s losses

28 March 2019

Lloyd's of London insurers recorded a loss of £1bn ($1.3bn) in 2018 which it attributed to an overload of natural catastrophes. However, falling investment returns failed to cover for the claims due and raises question on the London market’s investment strategy.

Claims from hurricanes Florence and Michael in the US, typhoon Jebi in Japan and California wildfires cost the Lloyd's market £2.9bn, significantly higher than the long-term major claims average of £1.9bn. Overall, the market paid out £19.2bn of gross claims in 2018.

These were highlighted as the major driver for the market’s losses. However had the investment function performed as well in 2018 as it had in 2017 with returns of £1.8bn, the loss could have been avoided.

Instead investment returns dropped to £504m in 2018.

John Parry, chief financial officer at Lloyd’s, attributed the drop to volatility in Q4 2018, following tensions between the US and China, and various other uncertainties in the market.

This resulted in mark-to-market losses on a proportion of equity and risk assets held by the market, and corporate bond spread widening.

However, Parry said much of the mark-to-market loss had already been reversed in Q1 2019, after the markets bounced back.

“In terms of key drivers, an allocation, albeit conservative, to equity and risk assets generated losses for the year, but this was offset by positive returns in cash, government and investment grade corporate bonds,” Lloyd’s 2018 financial report reads.

Syndicate premium trust fund assets form the largest element of investment assets at Lloyd’s and are used to meet insurance claims as they become payable. Cash and high quality, shorter duration, fixed interest investments constitute a majority core share while return-seeking equity and growth assets account for a moderate allocation at less than 10%.

“Syndicate investments returned £333m, or 0.8% in 2018 (2017: £907m, 2.2%),” the financial report read. “Investment return was materially lower this year driven by disappointing corporate bond returns as well as negative performance in equity and growth assets.”

Asked if underperformance in its investments was a concern, and if it saw any flaws in its asset liability management strategy, Lloyd’s of London declined to comment.