Lloyd’s margin gains look lasting, Fitch says to support Lloyd’s AA-

Lloyd's is likely to maintain its recent margin gains, albeit with the standard cat-driven volatility, following both improved syndicate oversight and an outlook for continued pricing strength, the Fitch ratings agency said in defence of an AA- Insurer Financial Strength rating with Stable outlook for the Market. 

“We expect Lloyd’s to maintain the improvements in its underlying underwriting performance,” analysts said of the combined ratio tightening to 84% in 2023 from nearly 92% in 2022. 

The caveat: “overall results are likely to remain volatile, given [..] exposure to catastrophe-exposed lines.”

Pricing conditions have been a strong contributor and are likely to remain in the picture. GWP growth of 11.6% in 2023 was built on 7.2% rate growth ahead of 4.3% volume growth. 

“Fitch expects pricing conditions to remain favourable in 2024, although any further pricing improvements should be moderate,” analysts said. 

“We expect market conditions to support Lloyd’s strong underwriting profitability and capital generation in 2024,” analysts said. Slowing price growth should nonetheless “moderate” top line gains. 

Additionally, improved syndicate oversight at Lloyd's “has played a key role in improving the overall technical performance of the Lloyd’s market.”

Business plan reviews and syndicate benchmarking have improved aspects of underwriting, including pricing, reserving, claims management, risk-adjusted capital setting and catastrophe-modelling techniques, analysts believe. 

On the core rating metric of reserve adequacy, Fitch sees strength, likes a recent independent review and expressed faith in “robust market oversight of reserving practices,” which they say is increasingly important, given inflation and US social inflation.

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