Lloyd's reports £10.7 billion profit in 2023

Lloyd’s presented its results for the year ended 31 December 2023 on the morning on 29 March 2024. The main headlines are a profit for the year of £10.7 billion and a combined ratio of 84%.

Strong market conditions allowed syndicates to increase premium volumes by almost 12%, with organic growth responsible for 4% premium increase and the balance from rate increases.

The combined ratio, which is an important metric of insurance entity performance, showing claims and expenses as a proportion of premium, improved by almost 8 percentage points to 84%. This is the best combined ratio that the market has recorded since 2007.

Lloyd’s breaks down the combined ratio into four key components

• Attritional loss ratio, the cost of everyday claims such as fires, thefts, cyber attacks, ship collisions, aviation losses and so on. Although there can be some randomness here, generally this loss ratio will improve as the market conditions, and the underlying levels of profitability, improve.
• The catastrophe loss ratio. This is the cost of more significant events, including natural disasters, but also significant man made disasters such as airline crashes or drilling rig losses. While these also respond to changes in the underwriting market, there is more volatility and unpredictability in the cost of these losses on a year to year basis.
• The expense ratio, which includes both the part of premium paid to insurance brokers in sourcing and servicing policies and claims and the administrative costs of running the syndicates and central charges paid to Lloyd’s.
• Prior year experience, showing whether reserves for old years have improved in the year (and therefore reducing the overall combined ratio) or have deteriorated and increase the overall combined ratio.

There was a marginal improvement in the attritional loss ratio, down from 48.4% to 48.3%. Lloyd’s says that it believes the market should look to keep this measure below 50%, which creates margin for the volatility inherent in the catastrophe exposures. Although the improvement in 2023 was small, this metric has improved every year since 2017, when it stood at 58.9% of premiums.

The biggest movement in the year was in the catastrophe loss ratio, which fell from 12.7% of premiums in 2022 to 3.5% in 2023. 2023 was another year of frequent and severe catastrophic worldwide loss, including an earthquake in Turkey, Hurricane Idalia and many convective and tornado storms in the USA. Reports from both Aon, the insurance broker, and Swiss Re, the reinsurer, suggest that catastrophe losses in 2023 were again above the long term trend. The reduction here does reflect some of the changes in the reinsurance market and syndicates’ approach to catastrophe risk. Since 2017, catastrophe losses have cost the market an average of 10.6% of net premiums (excluding covid-19 related claims, 12.5% including covid claims).

The expense ratio was flat at 34.4%, although the components changed slightly with a reduction in the acquisition costs offset by an increase in administrative expenses. Part of this increase does reflect increasing profit related payments such as syndicate profit commissions as overall profitability has improved.

There was again a surplus on old years, although this was at a lower level than in 2023, down from 3.6% of net premium to 2.2%. There were positive contributions from all lines of business with the exception of specialty reinsurance and casualty reinsurance. Part of the release stems from loss portfolio transfers, where a syndicate buys reinsurance to protect against deterioration on an entire book of legacy business. There is some comfort here, despite the reduced scale of the release. It comes at a time both of general inflation across most economies and insurance specific social inflation, where insurance claims, especially for liability losses receive bigger awards. Lloyd’s remains very comfortable with reserving levels across the market.

Lloyd’s is giving some limited guidance on expectations for the 2024 year, giving an outlook for premium income of £57 billion (up around 5%), for combined ratio between 90% and 95% and for a 4% return on investments.

The full report can be found here and the analysts’ slide pack here.