Future Lloyd's investment to focus on smaller, specialist syndicates: Oxbow

By Rebecca Delaney

April 8 - (The Insurer) - More than one-quarter of Lloyd's syndicates are likely to be available for external investment in the next few years, a report by Oxbow Partners said on Tuesday.

The report, Navigating M&A in the London market, said the London specialty market remains undervalued despite delivering strong earnings in recent years. Lloyd's recorded its fourth consecutive profitable result in 2024 with an underwriting profit of 5.3 billion pounds ($6.8 billion).

The Lloyd's market posted a combined ratio of 86.9% for the full year, a 2.9 percentage point deterioration from 2023's 84.0%.

"On a price to book ratio basis, the average of the listed Lloyd's insurers (Beazley, Hiscox and Lancashire) is 1.4x," said the report.

"This is lower than the averages of both U.S. listed carriers (1.8x) and global reinsurers (2.1x). The Lloyd's carriers are also valued at a lower price-to-earnings ratio than their global peers."

The report continued that although London has retained its leading position in the specialty insurance market, its growth rate has been outstripped by some specialty segments in the U.S. and Bermuda. For example, U.S. E&S business grew at a 21% compound annual growth rate between 2020 and 2023.

"Continuation of strong competition from U.S. E&S and Bermuda could reduce the market share of London and put pressure on growth, profitability, or both over the medium term."

The Lloyd's expense ratio remains above that of the U.S. P&C market, having been flat in 2024 at 34.4%. Oxbow highlighted that this presents an opportunity for investors with a focus on operational efficiency, as well as scope to accelerate profitable growth within a typical private equity investment timeframe.

The report added that while M&A activity at Lloyd's has historically centred around larger syndicates with bigger balance sheets and more stable earnings records, it is expected that smaller players will also attract significant investor interest given the recent proliferation of small specialist syndicates.

Oxbow conducted an analysis of syndicates to highlight those that could be available for external investment in the next few years, with propensity to sell based on entities that have been partially or wholly owned by private equity for three-plus years, and entities with GWP of less than 200 million pounds and GWP growth of 4% per annum or less over five years.

Twenty-seven syndicates met at least one of these core criteria, representing 28% of all syndicates. This includes two self-reinsurance syndicates, eight specialist syndicates, three run-off syndicates, six tech syndicates and eight growth syndicates.

Owing to the selection parameters, the in-scope syndicates are significantly smaller than the market average, marginally less profitable, and with an average combined ratio of 88% (versus 84% for the market as a whole).

Oxbow added that successful investment will require a strategic, operational and cultural alignment, including whether a business will remain autonomous or combined with existing operations.

"If the business remains autonomous then it makes differences in culture, remuneration and underwriting appetite easier to manage, but it is unlikely that you will see the full benefit of capital restructuring or dissemination of underwriting capabilities," said the report.

"If the business is full amalgamated into the purchaser, that might give you increased control, capital flexibility and the potential for synergistic cost savings, but there is a risk that changing the culture of the target business negatively impacts its performance. What is important is that these factors are considered in a structured way before purchase to ensure that the strategic benefits of the transaction are retained."