John Neal's legacy: Market delivers on performance improvement

By Henry Gale

May 23 - (The Insurer) - We begin our review of John Neal's legacy with a look at performance under the outgoing CEO.

Neal leaves a more profitable Lloyd’s market than the one he found, shaped by the Corporation’s actions and the market cycle.

When John Neal joined Lloyd’s as CEO in October 2018, the market’s performance was under intense scrutiny. It had reported a 2 billion pound ($2.7 billion) loss for 2017 as its combined ratio hit 114%.

Elevated catastrophe activity during the year was partly to blame, but some classes of business had been unprofitable for years while rates faced downward pressure. Lloyd’s cost base had also swollen, with expense ratios several percentage points higher than the wider industry.

The remedial work started before Neal took over. The Insurer was first to report in June 2018 that then-performance director Jon Hancock was cracking down on underperformers. Managing agents had to report plans for improving their underwriting to Lloyd’s, with the threat of syndicate closure hanging over them.

The planning cycle for 2019 was the most challenging to date, the corporation’s 2018 annual report said, with poor-performing classes and syndicates in focus. Appetites were curbed, and exposures contracted in most lines of business in 2019.

The market’s exposure dropped by 7.8% overall, or 8.0% excluding the impact of newly launched syndicates. But this was not the end of the remediation. With Neal now established at the helm, volumes reduced even more in 2020, which he said reflected “the market’s continued focus on the quality of the business it underwrites.”

Meanwhile, the market cycle had turned and average rates across the market were increasing every year. In 2020 and 2021, the average risk-adjusted rate change at Lloyd’s was more than 10%, another contributor to underwriting profitability.

[CHART 1 - Remedial action saw the Lloyd's market reduce its exposure in 2019 and 2020 alongside rate increases]

By the time it released its 2020 results, Lloyd’s said the benefits of remedial action had “begun to more substantially materialise.” While the COVID-19 pandemic pushed its combined ratio back above 110%, attritional losses dropped by 5.4 percentage points: a major improvement.

This was no one-off; when major claims and reserving changes are stripped out, Lloyd’s underwriting profitability has improved every year since 2017. The market’s attritional loss ratios have come down every year and expense ratios also reduced up until 2022, since when they have held steady at 34.4%.

In 2023, Lloyd’s attributed the market’s underwriting result, which saw the lowest combined ratio since 2007, in part to the “continued realisation of benefits” from the remediation, started before Neal took over but continued under his leadership.

[CHART 2 - Lloyd's underwriting profitability has improved since its combined ratio peaked at 114% in 2017]

But the market cycle was an ever-present factor in Lloyd’s improved performance too. Neal took over just as rates were beginning to increase and that hard market environment was a feature of most of his tenure. Price hikes and reduced capacity outside Lloyd's enabled syndicates to raise rates and improve their underlying loss ratios.

His successor Patrick Tiernan’s experience overseeing performance as chief of markets could prove valuable as Lloyd’s looks to prevent the market from returning to unprofitability as a new soft market dawns.

[CHART 3 - John Neal's tenure as CEO saw underwriting results benefit from hard market conditions]

In John Neal’s last week as CEO of Lloyd’s, The Insurer is reflecting on how the Lloyd’s market has changed between his appointment and departure, and his role in shaping it. Stay tuned for our takes on Lloyd’s growth, modernisation and culture later this week.