As Lloyd’s profitability rises again, no surprise London Bridge ILS pipeline burgeons

The Lloyd’s insurance and reinsurance market has just reported a stellar set of results, featuring growth, a lower combined ratio, higher underwriting profit, all underscoring the health of the market and the opportunity for capital to derive returns there, so it’s no surprise speakers at our conference this week and our sources tell us the London Bridge 2 PCC pipeline is burgeoning.

This morning Lloyd’s revealed an overall profit before tax of £4.9bn for the first-half, up on H1 2023’s £3.9bn, and an underwriting profit of £3.1bn, up on H1 2023’s £2.5bn) and a £0.6bn increase on the previous year.

Growth remains on the agenda at Lloyd’s, as underwriters capitalise on insurance and reinsurance market opportunities in the still firm pricing environment.

Gross written premium were up by 6.5% to £30.6bn in H1 2024, with 5% volume growth the main driver, along with price increases of 1.5%.

At the same time, Lloyd’s reported its lowest combined ratio for an interim result since 2007, reflecting the relatively benign catastrophe loss environment and absence of major man-made losses.

The half-year combined ratio was 83.7%, better than the previous year’s 85.2%, while the underlying combined ratio improved to 80.6% from last year’s 81.6%. The attritional loss ratio fell to 49.2% as well, down 1.7% in the half-year.

Even the investment return improved for Lloyd’s, to £2.1bn, up from £1.8bn.

Lloyd’s cites a “drive to improve performance and reduce the cost of doing business at Lloyd’s” which has also helped to lower the expense ratio in the market as well, to 34.5%, down from 35.4%.

Central solvency rose to 520%, demonstrating balance-sheet strength, while market-wide solvency was roughly flat at 206% for H1 2024, which Lloyd’s said highlights its “capital discipline and resilience.”

Lloyd’s CEO, John Neal commented, “The first half of 2024 has presented a superb set of results for the Lloyd’s market which represents a combination of disciplined underwriting, smart organic growth and real strength in the Lloyd’s balance sheet. This is good news for both investors in the Lloyd’s insurance marketplace and our customers as we continue to support them in an increasingly risky world.”

What does this all mean for those watching the Lloyd’s market and its underwriting companies and members as potential avenues to deploy investment capital? It means a stellar half-year and an increasingly strong and robust marketplace.

At our Artemis London 2024 conference earlier this week, we kicked off the conference with a fantastic panel session discussing the opportunities to deploy capital efficiently into the Lloyd’s market.

It was perhaps the best sales pitch for Lloyd’s we’ve ever heard, as speakers expertly and clearly explained the investor opportunity, the robustness of the market and the growing range of methods and structures for deploying capital to derive returns from insurance and reinsurance at Lloyd’s.

There has always been some difficulty in communicating the investment opportunity, given the different types of capital providers in the market and the desire not to favour one over another.

But Lloyd’s and its constituents, like so many other major players in re/insurance, appear to be honing the story and finding more compelling ways to explain the opportunity, while also communicating to incumbent underwriters and investors just how and why the entry of efficient capital through efficient structures is additive, not taking away anything from their own return potential.

A key structure for Lloyd’s is of course its London Bridge 2 PCC insurance-linked securities (ILS) structure, through which it is possible to channel investor funds to underwriters in the market through a variety of transaction types.

The London Bridge ILS structure has been well-used already, but speakers at the conference and our sources suggest that could pick-up further over the remainder of this year, with growing investor interest and a number of strong pipeline opportunities that could see at least hundreds of millions in new capital enter, potentially more, with once source suggesting the pipeline of opportunities across capital flowing into Lloyd’s and risk flowing out through London Bridge facilitated ILS risk transfer, could be around the billion mark in capital terms over the coming six months, if all opportunities came to fruition.

What is increasingly interesting about London Bridge 2 PCC, is the multiple use-cases it has, from quota share access to underwriting returns, to provision of Funds at Lloyd’s, to excess of loss reinsurance arrangements and catastrophe bonds.

We’re told we should expect to see further London Bridge hosted catastrophe bond activity in time, as this is an area of growing interest for market participants.

The growth of Lloyd’s, as demonstrated in the GWP figures released today, shows the underwriting entities there are expanding too and with reinsurance demand rising across the global market still, it stands to reason some Lloyd’s underwriters may require additional catastrophe reinsurance, with London Bridge 2 a viable option to source that.

During our conference earlier this week, John Cavanagh, Chairman of Beat Capital Partners explained that there are now more ways to get capital into Lloyd’s and why that’s been good for his business and for the third-party investors backing the company.

John Francis, Head of Research at Hampden Insurance Partners, highlighted the different ways investors can use the London Bridge 2 structure to access returns in the Lloyd’s market, such as bringing together multiple investors to support a single syndicate in the market.

Kate Tongue, Executive Director at Argenta Private Capital Ltd., said that London Bridge has itself helped to widen awareness of the Lloyd’s investment opportunity, helping to create a story around the ways returns can be accessed and offering greater optionality to members agents to support underwriters with capital coming through new routes.

Asked about how large investors could deploy capital into the Lloyd’s market, Bill Cooper, Managing Director, Howden Capital Markets & Advisory said that aside from getting the right advisor to help you do that, the structures are all in place to allow for an efficient flow of large sums to support underwriting at Lloyd’s. While the market is complex, the London Bridge story has helped to simplify that, he explained.

Des Potter, Special Advisor to the CFO at Lloyd’s and the moderator of the session at our conference, explained that while Lloyd’s had historically been at a bit of a disadvantage around data transparency for investors, steps have been taken to improve this as well, and it is bearing fruit, with Potter citing an expectation of more ILS activity bringing capital into Lloyd’s and risk out of it.

All speakers agreed that the pipeline of opportunities to bring investor capital into Lloyd’s is particularly strong, with London Bridge and ILS arrangements through it likely to play a growing role for the market.

In addition, as well as accessing capital via London Bridge, Lloyd’s participants are increasingly interested in transferring risk through the structure as well.

All of which adds up to a strong current pipeline of opportunities, as well as discussions about how to leverage London Bridge 2 to construct unique investment opportunities for third-party capital, one of which is expected to be the way start-up Solasta Innovation intends to use an ILS structure to create what will effectively be a diversified investment fund for Lloyd’s opportunities.

CEO of Lloyd’s John Neal said today that the corporation continues to “deliver on our commitment to our customers, and build on the achievements and unique attributes that create the distinct investment proposition and opportunity in a growing Lloyd’s market.”

While not every opportunity in the London Bridge 2 pipeline will come to fruition, as is the case with every ILS structure around the world, the growing conversation around the opportunities it presents and interest from investors suggests a steady flow of new deals and also use-cases over the next year.