2006 was the year property cat rates spiked after the shocks of hurricanes Katrina, Rita and Wilma the previous year (a combined loss of ~$160bn in today’s money) – and Lloyd’s syndicates took full advantage.
The outcome was a return even better than 2003 (18.8 percent return on capacity) and 2009 (17.2 percent). Overall, the market’s combined ratio was a modest 83.1 percent – and that, no doubt, included some judicious reserving.
Star performers that year included Hiscox’s Syndicate 33 with an impressive 36.6 percent return on capacity while traditional outperformer MAP Syndicate 2791 delivered a 44.9 percent return. Nor was it just property/reinsurance syndicates that triumphed. QBE’s Syndicate 386 – a UK/international liability-focused syndicate – unveiled a 56 percent return that year.
Next month, Lloyd’s will post the market’s aggregated result for 2022. Credibly, it will be an underwriting profit despite strong headwinds including the $50bn+ Hurricane Ian and the confused loss picture of the Russia-Ukraine conflict. Measured in terms of return on capacity (or, for that matter, capital) it will not be a patch on either 2003 or 2009, let alone the record-breaking 2006.
But if Guy Carpenter is correct, the 2023 underwriting year may be much closer to that record-breaking underwriting year.
Last month, The Insurer was the first to report on Guy Carpenter’s 1.1 Global Property Catastrophe Rate-on-Line Index, which is widely regarded as the most definitive measure of cat pricing, measuring overall risk adjusted premium movements at 1.1 against limits purchased.
The index spiked 27.5 percent at 1.1 – bringing it back on par with 2006 for the first time in 17 years (see below). Most expect the enduring factors behind the spike – elevated losses, modelling uncertainty, war in Europe, capital caution and inflation – will ensure further momentum throughout 2023.
So, can Lloyd’s investors look into the future through the rear-view mirror?
Certainly, there are many parallels between 2023 and 2006 for Lloyd’s. The market’s property weighting in 2023 is modestly higher than it was 17 years ago, notwithstanding a concerted drive by Lloyd’s central management to reduce exposure to cat volatility.
In 2006, property direct insurance accounted for 22 percent of total gross written premium, compared to 24 percent in 2021 (Lloyd’s will provide 2022’s mix next month but it is unlikely to have changed significantly in one year).
And while Lloyd’s did not provide a breakdown of property reinsurance premiums in 2006, the 34 percent weight of reinsurance on total written premiums by Lloyd’s syndicates in 2006 is lower than the 37 percent weight in 2021.
Interest rates are also broadly similar. By mid-2006, the Federal Reserve rate stood at 5.25 percent (after two years of cumulative 25 basis point increases). It is currently lower – but not by much at 4.5 percent.
Lloyd’s, of course, is much more than a property market but specialty/commercial rates for many classes are high. Cyber – a class that didn’t exist in 2006 but in which Lloyd’s is a market leader – is a stand-out rating story of 2022. Beazley, for example, reported a 71 percent risk-adjusted rate change on renewal business for the class in the first half of 2022, pushing the H1 aggregate rate increase of the carrier to 18 percent.
It is true D&O is seeing downward momentum and the Q4 aviation renewals were flat at best but generally speaking most specialty classes that Lloyd’s writes are enjoying improved conditions relative to prior years.
But before investors get too excited, the parallels only stretch so far. 2006 (like 2003 and 2009) was an extraordinarily benign cat year with around $40bn of overall catastrophe losses.
By way of contrast, Lloyd’s now operates in a period of hyper loss activity. Over the last five years, three have endured insured cat losses in excess of $100bn. 2022 was one of the worst years yet with Aon estimating global insured natural catastrophes losses at $132bn.
And 2023 has already begun badly with two reinsurance loss events, in the form of the New Zealand floods (described as a 1-in-300-year event) and the devastating Turkey/Syria quake. Neither will be significant in quantum (~$1bn each) but both are reminders that cat activity remains high.
And it is losses that will ultimately determine the 2023 return. It’s a point that was emphasised by Alistair Wood, the CEO of Lloyd’s largest members’ agency Hampden, when asked what investors should expect.
“The rating environment today is the best for a generation, and although it would be optimistic to expect 2023 to be a year when loss activity was as low as 2006, we are encouraged about the prospects for potential returns in 2023 that syndicates can generate for our clients,” he explained.
In other words, 2023 should be good – but fickle fate will determine just how good.
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