Despite its challenges, the attractiveness, allure & mystique of operating at Lloyd’s of London endures….

Deals for Lloyd’s platforms just keep on coming. Last week, The Hartford agreed a $2.1bn acquisition of Navigators, including its Lloyd’s syndicate and private equity giant Apollo has taken on the troubled Bermudian, Aspen (also with a Lloyd’s syndicate attached). The press is speculating that The Hanover Group has agreed to sell its Lloyd's business Chaucer to China Re.

These transactions follow a number of others which are either pure Lloyd’s acquisitions, such as the 2017 deal which saw Axis pay ￡468m to buy Novae or other larger deals such as AIG’s acquisition of Validus (which includes Lloyd’s insurer Talbot) and the deal which saw XL buy Catlin in 2015 (which was subsequently swallowed by French giant Axa earlier this year).

I’ve written a number of times in the past about the threats Lloyd’s is facing including the rise of alternative centres (Bermuda, Asia), it’s challenging cost base, archaic ways of working and excess capital pushing rates down.

But despite this, there is evidently still the appetite to have a Lloyd’s platform as part of the offering to brokers and clients. Away from the acquisition trail, Lloyd’s themselves have been dealing with a record number of new applications for start-up syndicates to be formed inside the famed marketplace, with many from outside the traditional North American and Western capital providers.

So why is owning a Lloyd’s business attractive?

Financial ratings and capital efficiency remains

The Lloyd’s ‘Chain of Security’ which comprises of the syndicates own assets, members’ funds at Lloyd’s and the central fund, builds a wall of capital that enables all Lloyd’s players to benefit and leverage from one very strong overall financial rating, as if the market was one company.

What that means is two things, confidence to capital providers and most importantly, security and peace of mind to policyholders that genuine claims will always be paid.

Licensing prowess

If I were to start an insurance business today, in addition to requiring sufficient capital to generate robust financial ratings and satisfy regulators, I need to be regulated as insurance is a financial product that is almost always regulated in the territories in which it is bought and sold. So you need a licence in order to trade.

Any business with global ambitions would need to negotiate with local authorities, set up offices and hire staff etc. All very time consuming and all very costly. Better to piggy back off Lloyd’s who have already done all this work for you and use their licenses, brand and local office resources to trade in the countries in which you want to operate.

EC3 ecosystem is core to underwriting specialty re/insurance

Operate at Lloyd’s and your managing agency’s office is almost certain to be located in EC3, the postal code which is part of the ‘square mile’ in Central London that houses some of world’s biggest financial institutions.

Access to underwriting talent, broker expertise, accounting, legal, tax, actuarial, claims and reinsurance is all within a stone’s throw of each other. Nowhere in the world is there an ecosystem quite like it for assessing, pricing and managing the world’s most complex of risks. For other players not based in EC3, your important broker might be a 2-3 hour car journey away.

Drive for Lloyd’s profitability has stepped up

Recent years has seen Lloyd’s grow its top line from ￡22bn in premium income in 2009 to ￡33.6bn in 2017, a 53% increase over the period. However, Lloyd’s return on capital has dwindled from the high-teens (excluding the effect of 2017 natural catastrophes) to less than 5%. Growth has been sacrificed for profits, no matter what market insiders might preach - the numbers don't lie. Some might wonder if it’s now better to just leave your money in the bank.

As a result, the Corporation of Lloyd’s has rightly put the brakes on top line growth and is forcing market participants to justify why they are writing unprofitable business. If it can’t be justified, then you will be forced to shut that product line down and run it off. The term ‘shrink yourself to profitability’ comes to mind, but in an era of falling premium rates across most lines and a recent focus on growth, this is absolutely the right thing to do.

With the appointment of a new Lloyd’s CEO looming on the horizon, my bet is that if they can lead the drive to solve a number of issues highlighted above and reverse the decline, whilst maintaining Lloyd’s position as a global centre of excellence for specialty re/insurance, it will make the dwindling number of players in the market very valuable to acquirers. Similarly, those multinational insurance groups that are already holders of Lloyd’s assets may well see their capital gains rise.

What is clear by the current activity is that despite the problems and challenges the Lloyd’s market is facing – it has lost none of its attractiveness, allure and mystique. I hope it continues...