Are Lloyd’s remedial actions paying off?

Lloyd’s ‘remedial’ actions are working — after turning its first underwriting profit last year since 2016, Lloyd’s market is expected to have a robust underwriting performance in 2022 through 2024 as rates harden across many lines, predicted credit-rating agency S&P Global.  

Much of the improvement in Lloyd’s underwriting performance has been a reflection of work undertaken by the corporation’s performance management division (PMD), said S&P Global in Lloyd’s Market 2022 Review. 

“Since 2017, PMD has focused on the market’s worst-performing syndicates and business lines, resulting in some syndicates leaving the market — either of their own volition or at Lloyd’s behest — or reducing their exposure,” the review stated.  

These actions, coupled with hardening rates in specialty and reinsurance markets, have led to a gradual improvement in Lloyd’s underlying performance from 2018, resulting in an underwriting profit via a combined ratio of 93.5% in 2021, despite high cat losses. 

The news comes after eight Lloyds syndicates closed in 2018, and some clients insured by the London market experienced four-fold premium increases. Also in 2018, the London market saw more than 70 different announcements of exit or significant reductions in various lines. 

But after last year’s performance, S&P Global said Lloyd’s has “turned the corner.” 

“We expect that with a normalized loading for catastrophes for the remainder of the year the market should return another sub 95% combined (profits and losses) ratio. We expect that Lloyd’s will continue to perform well in 2023, given that it has largely maintained rate momentum in 2022 and with the Russia-Ukraine conflict supporting rate increases in affected lines,” the review read.  

It suggested growth is back on the menu for Lloyd’s, after its market posted muted growth over 2017 [through] 2021, with the top-line increasing only 14%.  

“The majority of this was generated in 2021, given that premiums largely flatlined before that. We believe, however, that the significant volume reduction and material rate increases have left Lloyd’s with a more profitable book of business. Our expectation is that the market will continue to see significant growth in 2022 [through] 2023, largely driven by improved rates, but with some exposure growth too.” 

While its largest 20 syndicates have remained relatively stable over the past five years, their ranking by size has changed significantly. 

However, while a previous S&P Global analysis noted many of the syndicates leaving Lloyd’s market tended to be small and recently established, a more recent analysis finds larger and more established syndicates have been affected by PMD’s work.  

But, “while Lloyd’s management is clearly focused on driving out unprofitable business from the market, this has not resulted in a blanket shutdown of growth for the top-20 syndicates,” the review said. Syndicates have seen both organic and M&A growth.  

“While Lloyd’s management has restricted growth for those underperforming, it has been keen to emphasize that those syndicates (often called ‘light-touch syndicates’) that have demonstrated their ability to write with discipline and meet or exceed their own forecasts should be allowed to grow.” 

While S&P Global predicted profit for Lloyd’s, it also noted challenges may lie ahead, among them, digitalization.

“Other projects — such as a new investment platform for syndicates, attracting third-party capital to the market, and continuing to reduce the market’s expense ratio — will also keep management busy,” it said. 

 

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