Lloyd's of London placed on negative watch due to COVID-19 fears

The uncertainty and increased risk to earnings and underwriting performance due to claims emanating as a result of the COVID-19 pandemic have prompted Fitch to place specialist re/insurance marketplace Lloyd's of London on rating watch negative.

Lloyd's is potentially exposed to COVID-19-related losses through event cancellation, business interruption, directors & officers' liability and trade credit lines of business.

Fitch said that although Lloyd's improved its underwriting performance in 2019, the results were still below its expectations. The agency has maintained a negative outlook on Lloyd's rating since June 2017, mainly due to its underwriting performance being weak for the rating.

The rating agency's current assessment criteria includes - the impact of the COVID-19 pandemic, including its economic impact, and declines in the market values of stocks, bonds, derivatives and other capital market instruments typically owned or traded by insurance companies.

Under these assumptions Fitch views Lloyd's capitalisation as strong, relying on its ability to restore its capitalisation through the 'coming into line' exercise in June 2020. Fitch does not expect underwriting losses to be of a magnitude to cause significant capital depletion, since a majority of syndicates at Lloyd's are owned by large multinational insurance companies, who should be able to provide capital as required.

Lloyd's reported a pre-tax profit of £2.5 billion in 2019 (2018: pre-tax loss of £1 billion) and a combined ratio of 102.1 percent (2018: 104.5 percent); the improvement to the pre-tax result was primarily driven by stronger investment performance.

"The better combined ratio followed the market's 'Decile 10' performance reviews and nine consecutive quarters of rate rises, but the pace of improvement was slower than we originally expected," Fitch noted. "In particular, Lloyd's attritional loss ratio on more recent underwriting years showed a 1.7 percent improvement to 57.6 percent (2018: 59.3 percent), but the deterioration in older underwriting years was a drag on the result."

"In addition, Lloyd's combined ratio, excluding major losses, deteriorated to 95.1 percent in 2019 from 92.9 percent in 2018. This was a result of lower reserve releases, below average at 0.9 percent in 2019 (2018: 3.9 percent), due to a loss creep on 2018 losses as well as reserve strengthening on US casualty lines," said Fitch.