Lloyd’s hits record highs as UW profit more than doubles, strong rates ahead

Lloyd’s underwriting profit more than doubled and combined ratio improved 7.9 percentage points in what its CFO Burkhard Keese hailed as an “outstanding” year where the market capitalised on the continued hard market and favourable major loss experiences throughout the year. S&P anticipates that Lloyd’s will sustain its reserve margin, despite general inflationary pressures on casualty reserves.

Preliminary figures released ahead of the March 28 results unveiling revealed a remarkable 127% surge in underwriting profit for 2023, reaching £5.9 billion, a substantial (£3.3 billion) increase from the £2.6 billion reported in 2022.

Gross written premium also experienced a notable uptick, rising by 11.6% to £52.1 billion, up from £46.7 billion in FY 2022, attributed to a 4% organic growth and a 7% price adjustment.

The positive trends were seen in the combined ratio, which saw a significant improvement of 7.9 percentage points to 85%, with both the loss and expense ratios holding steady at 48% and 34% respectively.

The market said its investment return swung to a £5.3 billion profit compared with a £3.1 billion loss in FY 2022, reflecting the higher interest rate environment and the unwind of released and unrealised losses in 2022.

“2023 was an outstanding year for the Lloyd’s market,” Lloyd’s CFO Keese (pictured right) said in a statement. “We continued to see sustainable, profitable growth and performance, leading to our best underwriting result in recent history and a rock solid balance sheet that gives us and our stakeholders confidence in an uncertain environment.

“We will maintain our focus on underwriting and capital discipline and we look forward to announcing our full results and strategic progress later this month.”

Commenting on the results, S&P said: “We expect Lloyd's to maintain its reserve margin bearing in mind the general inflationary pressures on casualty reserves. We expect Lloyd's to maintain risk-based capital, as per our model, in line with our extreme stress benchmark (99.99% confidence level) throughout 2024.”

In the market’s quarterly message delivered to underwriters today, chief of markets Patrick Tiernan (pictured left) said Lloyd’s would continue to focus on disciplined underwriting in 2024 after several years when returns averaged 3.4% which he said was “hardly nosebleed territory”.

He said the preliminary results demonstrated “the primacy of underwriting”, but warned: “It is one year and not a reason for indulgence or complacency. On the contrary, it is time for discipline and considered expansion”.

Tiernan said the market needed to maintain its combined ratio of 85% if it was to meet its target of an average combined ratio of 95% over five years.  

He said when foreign exchange rates were stripped out, GWP was 3.8% under budgets submitted to Lloyd’s, which Tiernan attributed to “disciplined underwriting” in the struggling Directors and Officers’ (D&O) segment and lower than expected premiums in cyber insurance caused by “subdued growth”.

“Overall, 2023 represents a strong disciplined result that compares favourably against peers,” he said, adding that going forward Lloyd’s would focus on underwriting and disciplined growth and would not be overly influenced by the “vagaries of annual weather patterns”.

“Critically, we are not seeing market adjusting levels of capital flowing into the system at historical post loss levels.”

In casualty, he said the proliferation of intangible assets and proliferation of post-Covid court settlements in the United States particularly continued to put pressure on businesses of all sizes to get sufficient cover.

“We see reason to expect a healthy combination of resilience and opportunity in the casualty class.”

Tiernan said he expected rates to remain strong in the near term.

“The top of the market has been called many times, but in my view, this is a false summit,” he said. “Risk factors remain elevated across the portfolio and uncertainty has not been becalmed.

“The higher underwriting returns expected from disciplined capital to reflect increased uncertainty gives me confidence that current pricing dynamics  at a market level will not change materially in the near term.”

Tiernan said Lloyd’s would therefore continue to support market expansion driven by market outperformers.  

Kirsten Mitchell-Wallace, head of risk aggregation at Lloyd's, noted that non-peak natural catastrophes had now become as costly as major natural catastrophes, referred to at Lloyd’s as the LCM5 – US hurricane, US and Canada earthquake, Japan typhoon, Japan earthquake and European windstorm.  

She said the non-peak perils – US severe convective storms, US wildfires, US flood and  New Zealand earthquake “are now material perils for Lloyd’s. These were now as costly as Japan typhoon, the smallest of the LCM5, she said.

“This materiality means we need to up our oversight,” she said, adding that syndicates would be asked to identify their appetite for natural catastrophes and after an event, they would be asked if it had exceeded their risk appetite and, if so, why.”

Keese said Lloyd’s would work in 2024 to simplify its calculation of the cost of fees charged to syndicates and to make the calculation more transparent.

He said the reporting burden on syndicates would be reduced. An optimised cost and funding structure for the Lloyd’s Corporation will be developed, aimed at making it simpler and cheaper to operate at Lloyd’s.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.