Analysing Lloyd’s syndicates as an investment market

Through its RISX index methodology, ICMR can provide a mark-to-model valuation for Lloyd’s investments…

The Lloyd’s market appears buoyant with many syndicates aiming to grow their footprint by double digits in 2023.

At ICMR we believe the next few years should see Lloyd’s returns exceed its cost of capital again.

As a result, we expect more M&A activity as investors look to take advantage of the increasing value of insurance franchises with improving underwriting performance.

The traditional pricing metric in our industry is the price-to-book multiple (P/B).

The following chart shows the long-term trend of P/B versus performance, using the RISX constituency of listed global P&C (re)insurers.

Using the relationship between relative return on capital performance and relative P/B multiples within the confidence interval shown above, it is possible to extrapolate a valuation map for every Lloyd’s syndicate.

The next chart illustrates every syndicate at Lloyd’s ranked by amount of value created, or destroyed, for their investors.

A number of assumptions have been made (listed beneath the chart) but it does serve to underline that Lloyd’s is home to a wide variety of underwriting performance and therefore value propositions for investors.

Clearly this is only an outside-in view and investors’ actual return expectations will be influenced by a significant number of factors which cannot readily be modelled.

But it does demonstrate how careful investors new to the market must be.

Relative performance is particularly stable, meaning underperforming syndicates tend to stay underperforming even in good times.

At this time of elevated M&A activity in the sector, new investors need to be confident they are not buying into a business in need of major restructuring, rather than simply development capital.