After realising preliminary results for 2023 last week, analysis by ICMR and the LMA reveals that the specialist Lloyd’s insurance and reinsurance marketplace has, in aggregate, exceeded its weighted average cost of capital (WACC) for the first time in the last decade.
ICMR notes that although it’s a challenge to establish the Lloyd’s WACC as you need to estimate the cost of equity and debt, the RISX equity index of publicly traded parent companies at Lloyd’s allows for a calculation of the ‘as-if’ market capitalisation of Lloyd’s and its beta, which are two key inputs in the calculation of the WACC figure.
By looking at Lloyd’s pro-forma returns to investors from 2007 to 2022 and also ICMR’s estimation of Lloyd’s pro-forma return on capital and WACC up to 2023, ICMR finds that prior to 2014, Lloyd’s pro-forma returns generally exceeded WACC.
“The market was softening for several years thereafter before delivering a return in excess of WACC in 2023. It should be noted that this return to exceeding WACC has still taken three years of market rate hardening since the pandemic, which illustrates just how soft the market had become,” says ICMR.
The snapshot of results from ICMR, in collaboration with the LMA, will be followed by a larger, joint report after the release of the full set of Lloyd’s results.
Markus Gesmann, Co-founder of ICMR, commented, “At ICMR, we welcome the opportunity to partner with the LMA on this Lloyd’s market report. This collaboration will bring increased transparency and data-driven analysis to the financial performance of the market beyond aggregated results.”
As we wrote last week, the Lloyd’s underwriting profit increased by a significant £3.3 billion to £5.9 billion in 2023, as the combined ratio strengthened to 84% from 91.9%.
However, and as noted by ICMR, the biggest shift was in the syndicates’ investment returns, with Lloyd’s reporting a positive return of £5.3 billion following the £3.1 billion loss in 2022.
