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Insurer in Full: S&P’s $16bn+ bearishness on Ukraine points to a heavy Lloyd’s blow

S&P Global Ratings’ scenario analysis for specialty insured losses from the Russia-Ukraine conflict raised eyebrows late last week through its use of a $16bn base-case scenario for the terrible event...

While the rating agency was clear that the scenarios outlined in its report did not represent a loss estimate – it remains far too early to accurately assess the financial cost of the conflict to the industry – S&P said its conversations with stakeholders in recent weeks pointed to “sizeable losses on specialty lines”.

In its base-case scenario, S&P assumes insured aviation losses of ~$6bn, with the remaining $10bn split across other specialty classes such as marine hull war, political risks and political violence. Sources have indicated political risk/violence exposures to the event could total $3bn to $5bn.

Part of the reason the $16bn figure raises eyebrows is that most senior Lloyd’s executives to date have largely played down the likely costs of the conflict to their underwriting portfolios. However, there is no getting away from the fact that a market loss of this scale would have a serious impact on Lloyd’s because Ukraine is very much a specialty market loss.

Specialty insurance loss scenarios from Russia-Ukraine conflict

Lines of business such as aviation, marine, cyber, political risk and violence are all classic Lloyd’s/London market classes. 

For this reason, a $16bn+ industry event would point towards a major Lloyd’s loss.

Lloyd’s CEO John Neal stressed during an analyst call following last month’s results announcement that it was too early to quantify what the loss would represent in numbers – that will take months, maybe years to unfold, he said – although he was later quoted in an interview as stating the event will likely run into the “low-single-digit billions”. 

A £1.5bn loss to the market would be of a similar magnitude to last year’s Hurricane Ida, while a £3.4bn loss would equate to the net reserves booked for Covid-19.

Lloyd’s management has also voiced its confidence that the Russia-Ukraine conflict will not cause a loss significant enough to impact its Central Fund. In other words, each syndicate will through existing reserves and cash calls be able to fund their 2022 losses.

“Should the ultimate industry net loss reach the higher levels … then we expect the Central Fund would come into play”

These comments were all made before the S&P report was published. Of course, Neal will have a greater understanding of syndicates’ gross and net exposures than S&P. But then again the rating agency is not alone in projecting a potential loss in the double-digit billions – it’s just doing so publicly. And the fact is, with the bloody conflict still ongoing and the prospect of litigation in classes such as aviation, it is simply too difficult to know for certain.

Nonetheless, should the ultimate industry net loss reach the higher levels outlined in the S&P report – a $27bn or $35bn event – then we expect the Central Fund would come into play, just as it did after 9/11 and the soft casualty market of 1998-2000.

Indeed, even a $16bn loss would likely have an asymmetrical impact hitting some syndicates particularly hard. Narrow classes such as aviation and political violence would suffer sizeable hits, causing serious problems from an accumulation perspective for those syndicates that find themselves over-exposed or – more likely – under-reinsured.

Lloyd’s results announcement last month saw the market report an underwriting profit for the first time since 2016, earning the Corporation praise for some of the remediation efforts that have been put in place since the turnaround initiative that began in 2018 under the then performance director Jon Hancock. 

Lloyd's combined ratio…

But the emergence of the Russia-Ukraine crisis probably means 2022 profitability is already under severe threat. In all likelihood, it may have gone already unless we have an unusually benign cat year.

And that appears optimistic. While the US has seen below-average catastrophe losses for the year-to-date, there are already signs of the 2022 international catastrophe bill starting to mount. February’s cluster of European windstorms has caused an estimated ~€3.3bn of insured losses, while flooding in Australia has cost insurers around A$2.5bn.

There are other headwinds, of course. In his recent March market message, Lloyd’s chief of markets Patrick Tiernan warned of the need to properly price for inflation if the 48.9 percent attritional loss ratio achieved in 2021 was to not slip back to the 51.9 percent recorded in 2020. We expect the prospect of inflation to be a major theme in the Q1 earnings commentaries that will begin at the end of the month. 

As we begin the second quarter of 2022, it is already clear that continued high loss activity and broader macroeconomic uncertainty will prove a challenge to Lloyd’s maintaining the profitability it worked so hard to earn in 2021. Management would probably take an earnings hit right now. What nobody wants is a capital event.


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