Fitch Upgrades Lloyd’s Ratings to ‘AA-‘; Outlook Stable

June 11, 2014

Fitch Ratings announced that it has upgraded Lloyd’s of London’s Insurer Financial Strength (IFS) rating to ‘AA-‘ from ‘A+’, and has also upgraded the Society of Lloyd’s Long-term Issuer Default Rating (IDR) to ‘A+’ from ‘A’ and Lloyd’s Insurance Company (China) Ltd.’s IFS rating to ‘AA-‘ from ‘A+’. In addition Fitch has upgraded Lloyd’s subordinated debt issues to ‘A-‘ from ‘BBB+’.

Fitch’s outlook for the ratings is stable.

Fitch’s report detailed the following “key rating drivers:
— The upgrade reflects Fitch’s expectation that Lloyds’ future cross-cycle underwriting performance will be more favorable than that achieved by the Lloyd’s Market historically, both in absolute terms and compared with peers.”

— The upgrade is also supported by Lloyd’s strong financial profile, including a level of Fitch risk-adjusted capitalization that is in line with the new rating level, low financial leverage and a significant market position in both insurance and reinsurance classes.

Fitch said it “views the market oversight by Lloyd’s Performance Management Directorate (PMD) and other market functions as having played a key role in a reduction in cross-cycle earnings volatility, since the directorate was established in 2003.

“Processes, including business plan reviews and syndicate benchmarking, have assisted the Corporation of Lloyd’s and syndicates in improving key aspects of underwriting, including pricing, reserving, claims management, risk-adjusted capital setting and catastrophe modelling techniques.”

The report also said that the “work undertaken by the PMD has provided Fitch with increased confidence that, on an aggregate basis, prior underwriting years will continue to develop favorably across the rating horizon.

“Further, the agency considers that the substantial investment made by Lloyd’s in preparing for Solvency II has further enhanced risk and exposure management practices across the Market.”

Fitch’s report also noted, however that it “recognizes that Lloyd’s continues to face a number of headwinds that will also test the wider (re)insurance industry. These include a persistently low yielding investment environment and softening prices across certain major (re)insurance classes. The conservative and hence lower yielding investment portfolio held by the Lloyd’s Market leads the agency to view a deterioration in technical profits as the greatest risk to earnings across the rating horizon.”

On the positive side Fitch indicated that the “diversity provided by Lloyds’ (re)insurance portfolio, by line of business and geographically, is expected to provide resilience to a protracted period of premium price softening, should this occur.”

Fitch also indicated that it “currently views revenues and profits generated from property catastrophe reinsurance lines as being of a level that is unlikely to result in profit metrics deteriorating to a level not commensurate with Lloyds’ ratings.”

The report added: “Market participants at Lloyd’s collectively underwrote £26.1 billion [$43.835 billion] of gross written premiums (GWP) in 2013, a y-o-y increase of 2.4 percent, which included a risk-adjusted rate reduction (RARC) of 0.3 percent.

Profit before tax increased to £3.2 billion [$5.374 billion], compared to £2.8 billion [$4.702 billion] in 2012. The Market achieved a combined ratio of 86.8 percent (2012: 91.1 percent), with the burden from major claims reducing to 4.4pp (2012: 9.7pp).

Lloyd’s has a global franchise and operates in over 200 countries and territories. It is a leading market for reinsurance and specialist property, casualty, marine, energy and aviation insurance.

In conclusion, Fitch said that a “further upgrade is unlikely in the near to medium term, as credit metrics are not expected to strengthen significantly across the rating horizon. A downgrade may occur if the normalized combined ratio remains above 97 percent or if leverage, as measured by net premiums written to equity, rises above 1.2x.”

Source: Fitch Ratings

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