Follow the money: Lloyd's cumulative P&L over the last 20 years

Lloyd’s wrote £448bn of gross premiums since 2000, incurring gross claims to policyholders of £288bn, delivering a net combined ratio of 98% and generating £20bn for its investors. What happened?

It is 20 years ago that Lloyd’s presented its first pro-forma results on an annual accounting UK GAAP basis. Thus, time to review Lloyd’s results over those two decades, which represent two full economic cycles and arguably two underwriting cycles, albeit with different phasing. The cumulative position shows what actually was Lloyd’s value proposition, both to its clients and its stakeholders.

Cumulatively, Lloyd’s has written £448bn of gross premium over the period and the market has generated a long-term combined ratio of 98% whilst making a cumulative net profit of £20bn, excluding notional investment return on Funds at Lloyd’s and Lloyd’s central assets which was assumed to be £7.5bn. The market has paid its reinsurers (noting that a portion of reinsurance premium is churned between syndicates) £107bn and collected back over £87bn in recoveries, meaning the market has shared approximately half its gross profit with its reinsurers. This is probably a fair reflection of the benefit reinsurers have delivered in reducing the market’s volatility and therefore capital requirements.

Syndicate investment return has been just shy of £15bn, varying as a percentage of net earned premium between 9.3% and 1.5% over the period. This compares with administrative expenses which were nearly twice that cumulatively at £29bn, rising to a peak of 11.4% of net earned premium in 2015 before falling to 8.3% in 2019.

The market’s largest cost, net claims, have amounted to £200bn, compared with net earned premium of £330bn. This means that of the £130bn of net underwriting surplus, with only £20bn of net profit achieved pre-tax, the market has sustained £110bn in costs.

The largest single component of these costs is acquisition costs at nearly £97bn over the period. As a percentage of gross premium, brokerage has increased from 18.4% in 2000 to 25.4% in 2019, a 38% increase. And this on a gross premium base which has itself grown almost 3-fold.

Part of this increase may be a consequence of Lloyd’s rigorous management of its catastrophe exposures and expansion into emerging markets which has pushed syndicates to write more delegated MGA business. As the MGAs are themselves brokers, the requirement for a Lloyd’s broker as well in the value chain significantly increases acquisition costs to the market.

But even so, a 38% increase in the proportion of premium broked to the market, now the equivalent of over 35% of the market’s net earned premium, seems at odds with the opposed efficiency savings from all the broker consolidations seen in the market. Lloyd’s new e-commerce initiatives may help reduce some operating costs further, but the elephant in the room remains acquisition costs.