Analyzing Lloyd’s results with Rob Johnson

Greetings from Canada!

Every year we head back to the motherland for a couple weeks to unwind, reconnect with friends and my wife’s family, tow the kids around on a boat and… talk about the financial results of the Lloyd’s marketplace!

Rob Johnson (youtubemp3) returns (here’s the original!) to the Not Unreasonable Podcast for a deep dive into the financial results of the Lloyd’s market. Rob almost always has a contrarian view of insurance company results. Usually when an insurer is lamenting their results they’re much better than they seem. And when they’re pumping up their performance, that’s a warning sign!

Rob has taught me that insurance companies are remarkably resilient institutions and amid all the hand-wringing of the Lloyd’s market’s results he remains more sanguine than you’d think!:

First comment would be that the underlying loss ratio is a phenomenally good. Across all those 17 years that the gross loss ratio is about 65.. that’s gross. I should warn you I always talk gross, and deal with reinsurance as a cost. So the gross loss ratio is 65 and it’s been down under 50 for quite a few years. Last year it 85. I think 2005 it was 112. It’s actually a good figure.Then there’s expenses, net expenses are declining, that’s masked a little bit by the way insurers and Lloyd’s account for quota share reinsuraces. I reverse that out.. if you reverse that out, the acquisition costs have gone from 19-20% to 26-27%. that’s a very big increase and the cost of administering the business has been 6% or 7%.

It’s clear that the original brokerages and commissions have gone up. The originators of the business have a lot of market power and it’s in their interest to push up the rate of brokerage. The other comment I’ll make there is that up until recently Lloyd’s did not specifically report on brokerage it is just netted off. It was in the bottom line but it was not there as a line item and I personally think that’s been a mistake over the long term. If you don’t measure it and report it you won’t control it.

Thanks for listening!

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