We expect that the Lloyd's market will continue to record solid underwriting profits over the next two years, after turning its first underwriting profit since 2016 last year. While 2022 got off to a difficult start with the Russia-Ukraine war and a higher-than-average number of natural catastrophes for the first six months, 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. Higher-than-expected inflation may erode underwriting margins somewhat in 2022, but this will likely be limited by rate momentum and market vigilance. While increased interest rates have an immediate impact on the mark-to-market valuation of Lloyd's bond portfolio, this is cancelled out by a higher discount rate on claim reserves. In the longer term, we believe monetary policy tightening will allow syndicates to benefit from higher yields on their fixed-income portfolios.

Remedial Actions Have Laid Solid Groundwork

Much of the improvement in Lloyd's underwriting performance has been a result of the remedial work undertaken by the corporation's performance management division (PMD). 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. We believe these actions along with rate hardening in the specialty and reinsurance markets have gradually improved Lloyd's underlying performance from 2018, leading to a 2021 underwriting profit (93.5% combined ratio), despite higher-than-average catastrophe losses. As such, we believe the market is now in a much stronger position to take advantage of the most buoyant market Lloyd's has seen in over a decade.

Chart 1

A Return to Growth?

The Lloyd's market posted muted growth over 2017-2021, 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 2022-2023, largely driven by improved rates, but with some exposure growth too.

Chart 2

Chart 3

While the largest 20 syndicates have remained relatively stable over the past five years, their ranking by size has changed significantly. In 2017, Axa XL (formerly Catlin) 2003 and MS Amlin 2001 were the two largest syndicates, and the only ones writing over £2 billion of gross written premiums. By 2021, they had slipped to No. 8 and No. 9, respectively. Meanwhile, Beazley 2623, the fifth-largest syndicate in 2017, is now the only one with over £2 billion of gross written premiums. There has also been a significant bifurcation between syndicates in their growth stories.

Chart 4

In our previous analysis on the Lloyd's market, we have noted that many of the syndicates that left Lloyd's market tended to be smaller and more recently established. However, our most recent analysis of the top-20 syndicates demonstrates larger, established players have also been affected by PMD's work. Of the top-20 syndicates, five have shrunk in terms of net premiums over 2017-2021. Two of the five were once the largest syndicates in the market. Premium reductions were most noticeable over 2019-2020.

Chart 5

Performance is Key

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.

Chart 6

While some growth has been the result of mergers and acquisitions (such as Axis acquiring Novae), many syndicates have seen organic growth too, underpinned by both rate and volume increases. Unsurprisingly our analysis shows that the key determinant of whether a syndicate has grown or not has been its underwriting performance. 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. Syndicates that have recorded lower combined ratios over the past five years tend to see higher growth rates than those with worse combined ratios (see chart 7). Stronger performers also tend to have less volatility in their underwriting results.

Chart 7

Chart 8

Another noteworthy dynamic when comparing strong and poor performers is their response to the soft market conditions seen at Lloyd's during 2012-2016. A common feature of the strongest performers in 2017-2021 was their discipline over 2012-2016, with premiums either flatlining or declining, demonstrating strong cycle management and discipline around technical rates. On the other hand, those that performed poorly in recent years grew over 2012-2016, leaving them in a weaker position as the market faced tougher operating conditions.

Chart 9

Keeping Up The Momentum

While we believe that the current Lloyd's management team has achieved much since 2017, significant challenges lie ahead. The digitalization of the market is chief among them, but 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. However, improving the efficiency of the market remains an opportunity for Lloyd's to cement its place as a leading international reinsurance marketplace. We expect that the key question for Lloyd's over the next three years is whether it will be able to execute these projects while maintaining underwriting discipline.