The Lloyd's 2021 $15bn stakes
ICMR.Matrix; a new tool to assess which syndicates are best placed to win the race for more new business
As all bookies know, form is temporary but class is permanent. So which syndicates would you bet on for maximum return from the suggested expansion of $15bn of new premium growth for 2021? Lloyd’s stipulated aim is to protect its brand, rating and central assets by making sure each syndicate is capitalised to the same level of risk. But how does this actually manifest? Are some syndicates more successful than others in achieving capital efficiency for a similar business mix, and thereby a greater return on capital? And is historical performance factored in?
To take a deeper look, ICMR has developed ICMR.Matrix, a new “outside-in” capital transparency tool for the Lloyd’s market which brings together our unique mix of comparative Lloyd’s data, including our own modelled ECA figures by syndicate.
We know from much previous work that relative performance at Lloyd’s is mainly stable, regardless of profitable or loss-making years. What we can now also show is how relative performance compares to relative capitalisation of syndicates; are the best performers over time required to post less or more capital than others? Our analysis of all syndicates over a 3-year time horizon gives the following scatter diagram:
Here we compare relative performance on the y-axis with relative capital efficiency on the x-axis. Those syndicates in the top right quadrant are both capital efficient and have demonstrated superior performance over time. We call these the “Value Creators” as they will typically have the best returns on capital which will make their businesses more valuable.
Those syndicates in the top left quadrant we call “Preferred Security” as they have shown superior performance but have focused less on achieving the same capital efficiency as the Value Creators. Interestingly, this quadrant is not dominated by any one peer group, as one might expect with, say, Reinsurers. Perhaps they could make an argument about their relative capital levels, particularly when compared with syndicates in the bottom right quadrant. These have achieved superior capital efficiency, yet seemingly without the need to demonstrate superior performance. We call these syndicates “Growth Opportunities” as they have the platform to take advantage of their capital efficiency, but perhaps need to increase the volumes of what they’re best at to improve their performance.
Finally, we have the bottom left quadrant of inferior relative performance coupled with lower capital efficiency. This is the quadrant where most start-up syndicates can be found, as they slowly emerge either up the chart or to the right depending on their strategy.
So, if Lloyd’s is to expand with $15bn of new business for 2021, as stated by their CEO John Neal, which syndicate would you place your bet on?