The Lloyd’s paradox: Stronger than ever, yet undervalued

Ben Canagaretna, managing director of Acrisure Re Corporate Advisory & Solutions, examines the path ahead for Lloyd’s businesses.

The Lloyd’s market just delivered its best year-end results in nearly two decades, boasting an 84 percent net combined ratio on £52bn of GWP. Overall profit climbed to £10.7bn, including £5.3bn of investment returns.

Yet despite this stellar performance, it is grappling with a paradox: London-based companies with a Lloyd’s franchise listed on the London Stock Exchange (LSE) are trading at significantly lower multiples than many of their international P&C peers.

This disparity forces Lloyd’s businesses to confront the factors skewing valuations and make a critical choice: adopt more flexible, capital-light models or double down on core strengths and position for a market correction.

The impact of undervaluation

A significant factor in this paradox is the LSE itself.

UK defined benefit pension funds, which can sway the fortunes of whole asset classes, have shifted their focus towards fixed-income investments to reduce volatility and risk. This has dampened their demand for equities, leaving LSE stocks – including those tied to Lloyd’s – undervalued, despite strong performance.

There are broader concerns at play, too. Headlines have been dominated by whisperings of UK-based companies considering going public in the US, rather than confronting the challenges of the domestic market. For Lloyd’s companies already listed in London, undervaluation creates both challenges and opportunities.

The problem of acquisition

Lloyd’s companies that are trading at lower multiples than international P&C peers, such as Beazley and Hiscox, have become attractive takeover targets. Yet these potential acquisitions are complicated by strategic shifts among private equity players.

Facing uncertain exit routes, private equity firms are increasingly cautious about investing in balance sheet-driven businesses, favouring fee-based models that offer relatively predictable earnings and lower exposure to balance sheet volatility. However, the limited availability of such opportunities in the P&C sector is driving up valuations, making it difficult for new entrants to gain access.

Balance sheet businesses are perceived as risky due to volatility caused by climate change, inflation and geopolitical instability, along with the challenge of securing an exit with a narrower pool of buyers. This reduces valuations which only heightens the paradox. However, with recent changes in investment income and the fact that balance sheet businesses have large investible assets, one would have thought that such firms would come into vogue once more.

Navigating the path forward

As the Lloyd’s market stands at this fork in the road, each route requires careful reflection.

Some companies are considering a shift toward carrier-light structures, separating balance sheet-driven operations from fee-based ones (à la the Fidelis bifurcated model). This aligns with private equity preferences by offering stable earnings and reduced exposure to balance sheet risks, but requires precise planning and execution. It offers lower but more predictable earnings, with third-party capital providing the underwriting capacity, enabling these Lloyd’s companies to stabilise their financial base while capitalising on the growing demand for fee-based services. However, let’s not forget that someone must still take on the risk at an acceptable risk-adjusted return.

The alternative path is a revival of balance sheet businesses, driven in part by government reforms to encourage investment in UK equities, which could reignite investor confidence and reverse the current trend. Businesses choosing this path must relearn how to articulate their value proposition, address perceived complexity and communicate the opportunities within Lloyd’s to a broader audience.

Assessing these options and aligning them with strategic goals and broader market conditions is crucial. At Acrisure Re Corporate Advisory & Solutions, we are well equipped to guide companies through this decision-making process. Whether transitioning to a carrier-light model, raising third-party capital or making strategic adjustments in response to market shifts, we provide the expertise and support Lloyd’s businesses need to navigate their path ahead.