Lloyd's of London underwriting improved in 6 of its 8 business lines in 2023

Lloyd's of London reported its best underwriting performance in 16 years in 2023 thanks partly to improvements in all but two of its major business lines.

The market's approximately 80 syndicates reported a collective combined ratio, which measures underwriting profitability, of 84% for 2023, down from 91.9% in 2022. The last time the ratio was this low was 2007, when the market also produced a combined ratio of 84%.

Of the eight lines of business Lloyd's reports, the two exceptions to the improving trend were marine, aviation and transport insurance, where the combined ratio increased to 99.1% from 90.3% year on year, and motor insurance, where the combined ratio rose to 95.7% from 89.5%.

The remaining six lines — property reinsurance, casualty reinsurance, specialty reinsurance, property insurance, casualty insurance and energy insurance — all reported improved combined ratios. The biggest year-over-year improvements were seen in areas most likely to benefit from lower catastrophe losses: property reinsurance, where the ratio fell 22.8 percentage points to 72.8%; and property insurance, where the ratio fell 13.3 percentage points to 80%.

As in 2022, all lines produced a combined ratio below the 100% break-even point.

Major claims abate

The overall underwriting performance at Lloyd's was helped by an unusually low level of major claims, including natural catastrophes. Major claims added 3.5 percentage points to the combined ratio, compared with 12.7 percentage points in 2022 and a 10-year average of 10.5 percentage points.

But it also reflected a stable underlying underwriting performance. The accident-year combined ratio excluding major claims was almost flat at 82.7% in 2023 compared with 82.8% in 2022.

Overall, reserve releases improved the combined ratio by 2.2 percentage points, lower than the 3.6-percentage-point benefit in 2022. The difference included reserve strengthening for the Russia-Ukraine war, excess inflation and increased litigation risk, Lloyd's CFO Burkhard Keese said on an earnings call.

Odd ones out

The lower underwriting profit in marine, aviation and transport insurance was caused by strengthening of aviation reserves to account for losses arising from the Russia-Ukraine war, partly offset by releases from marine lines, Lloyd's said in its annual report. Reserve increases added 10.9 percentage points to the marine, aviation and transport combined ratio in 2023. In contrast, reserve releases shaved 11.4 percentage points from the ratio in 2022. On an accident-year basis, which excludes prior-year reserve movements, the combined ratio improved to 88.2% from 101.7%.

Motor's underwriting result suffered because of a lower benefit from prior-year reserve releases. Releases trimmed 2.6 percentage points from the combined ratio in 2023, compared with 14.8 percentage points in 2022.

In property reinsurance, the line with the most improved performance, Lloyd's said there was a "determined push for price adequacy" to keep pace with claims inflation caused by factors such as changing demographics and rising vulnerability and exposure values.

Property profits

Profitability improved in property insurance because the business Lloyd's syndicates write was "largely sheltered" from some of the big weather events in 2023, Lloyd's said in its annual report. However, it added that catastrophe insurers face the same claims inflationary pressures as reinsurers.

The specialty reinsurance segment, which includes marine, aviation and transport, energy and life reinsurance, also showed a large improvement in underwriting performance, with the combined ratio falling 13.2 percentage points to 83.5%. This was despite reserve strengthening, driven by unfavorable claims experience in marine reinsurance, adding 5.6 percentage points to the combined ratio. Lloyd's said in its annual report that specialty reinsurance pricing continues to be strong, following losses from the Russia-Ukraine war, entrapment of ships in the Black Sea and the conflict in Sudan.

Hard to beat

The 2023 underwriting profit of £5.9 billion combined with a £5.3 billion investment return to produce a pretax profit of £10.66 billion, the highest profit at Lloyd's for at least 17 years. Last year marked a return for positive investment returns for Lloyd's after unrealized investment losses resulted in a negative return of £3.1 billion in 2022.

The 2023 performance at Lloyd's was "exceptional" and "difficult to repeat," Keese said on the call. He added that the key was for Lloyd's to maintain the current level of underwriting profitability.

Lloyd's demonstrated underwriting discipline in 2023; gross written premium increased by 11.6% to £52.1 billion, but this was below the £56 billion it had originally estimated. Keese said the market had originally expected to grow more in directors' and officers' liability and cyber. But market conditions did not allow, which accounted for 50% of the difference between target and actual gross written premium. The remaining 50% was caused by foreign exchange movements, Keese said.

The cyber market has seen slowing rate increases generally and falling prices in some areas, while Lloyd's chief of markets Patrick Tiernan has previously labeled price-cutting in directors' and officers' liability "moronic."

Lloyd's is targeting gross written premium of £57 billion in 2024, plus or minus 5%, a combined ratio of 90% to 95% and an investment return of about 4%.