Yesterday Standard & Poor’s published a report on the profitability of the Lloyd’s market, with the overall finding that underlying performance is improving.
The outcome of the research added to a more positive tone on Lloyd’s from the ratings agency, which also in June lifted its ratings outlook for Lloyd’s to stable, and overall seems to be less hawkish on the market’s cat position.
However, it also said it expected more syndicate closures by the end of the year – and identified maturity as a greater success factor than size when it comes to syndicate performance.
“Given that some of the recent closures were syndicates established in 2014 and 2015, we think Lloyd's may have lost patience with such syndicates,” S&P said.
“We believe that the market's management has learnt from its errors when it expanded the number of syndicates during the soft market of 2012-2017.”
It also identified 10 full syndicates that have been operating for more than three years and have an average weighted combined ratio of over 120% for the past five, essentially identifying its own danger list.
There are many ways you can slice and dice the numbers in Lloyd’s, and who does and doesn’t belong on such a list is subject to debate.
However, the broader point remains that there are a group of young Lloyd’s syndicates that have produced weak performance and – all else being equal – find themselves under significant pressure to demonstrate their sustainability.
We have previously highlighted the challenges of syndicates that were established between 2010 and 2015. This cohort of businesses was launched in the thick of the soft market and struggled to gain critical mass on business which was poorly priced.
This cohort included recent closures such as Vibe 5678, Skuld 1897 and Standard 1884. In total, six of the 11 closures in the last three years were launched between 2010 and 2015 – and seven if you consider that Neon effectively re-launched itself as a start-up in 2014.
S&P is right to highlight that businesses created during the soft market have been under unique pressures since inception, and if anything the challenges have intensified this year for weak performers.
Previous analysis by this publication has shown that size is virtually irrelevant to performance at Lloyd’s, however this only really holds true for those syndicates which have reached maturity.
It is tough to develop a sustainable multi-line business without some scale and strong competitive positioning – with the latter dependent to some degree on line size.
Even though there will be some tailwinds for these businesses from the rating uplift in London market specialty lines and in reinsurance, their track record of underperformance has meant they get the toughest scrutiny in Lloyd’s regime of stratified oversight – and their ability to capitalise on this opportunity will be curtailed.
CEO John Neal has made it clear that struggling businesses will not be allowed to grow out of their problems in 2021, which means it is hard yards ahead for the 2010-2015 cohort.
Meanwhile, low interest rates will pressure earnings, offsetting improved rate and pushing capital requirements higher. Reinsurance and retro costs will also rise, with syndicates effectively obliged to buy by the Corporation.
For those in the cohort supported by trade capital, the coming-into-line season may again be accompanied with gritted teeth and held breath.
Broking sources expect an additional contraction in the roughly £2bn trade capital market, along with a flight to quality. Those that found it a challenge to secure trade capital to support their 2020 underwriting could find it even harder to renew for 2021.
Many of the syndicates in the 2010-2015 cohort are smaller, independent syndicates which are reliant on this type of capital (Dale Underwriting Partners and DTW, by way of example). However, the cohort also comprises the syndicate arms of corporate parents (e.g. Allied World, Sirius) that have also failed to deliver underwriting profits.
Multi-platform global players will be weighing the increased acquisition/operating costs, as well as the regulatory burden and the quirks of operating at Lloyd’s, against other platforms and distribution channels available to them.
Neon and AFG, StarStone 1301 and Enstar, and Syndicate 5151 and Sompo International are all cautionary tales of how mediocre-to-poor performing syndicates can be quickly discarded if their corporate parents deem them superfluous to requirements.
Last November we coined the term Great Lloyd’s Cull to describe the winnowing out of weaker Lloyd’s syndicates, as the likes of Vibe, Pioneer and Acappella all bowed out of the market.
We also predicted that there would be further shake-out of weaker syndicates this year and into 2021, and as business planning season gets underway, this is the point in the Lloyd’s calendar where tough decisions have to be made.
As such, all the drivers for a second wave of the Great Lloyd’s Cull look to be in place.
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