Lloyd’s of London strong and well-positioned, despite heavy losses in 2017/18, says Moody’s

Lloyd’s of London is strongly capitalised and its brand name helps it attract new business, said ratings agency Moody’s.

The agency made the observations in a new note, which did not include a rating action, but proffered much justification for an “A” rating stance on the 300 year old insurance market.

Lloyd’s has credit strengths including its established underwriting expertise, track record of product innovation, and strong brand, said Moody’s.

Lloyd's also remains strongly capitalised, an important advantage given its high natural catastrophe exposure, despite two consecutive years of bottom line losses. Lloyd’s had two of its worst years in 2018 and 2017, with losses of £2.9 billion and £4.7 billion respectively.

Challenges for Lloyd’s include falling yields, rising claims inflation, stubbornly high costs, as well as fierce competition across the sector, said Moody’s.

The agency said that Lloyd's new modernisation plan, if successfully implemented, will significantly reduce costs and boost future profits. But it has a high degree of execution risk.

Earnings are improving, but will remain marginal, said Moody’s. Firmer prices and stronger underwriting discipline should help improve underwriting margins, which are currently negative across virtually all lines of business. Moody’s added that prices for property catastrophe reinsurance remain below 2012 levels, held back by an abundance of capital.

Moody’s said Lloyd’s earnings can be volatile, because of its bias towards moderate-to-high risk commercial specialty re/insurance lines, and its exposure to catastrophe risk. Following substantial catastrophe losses in 2017, Lloyd's had to raise around £3 billion to restore its Solvency II ratio to prior year levels.

At year-end 2018, Lloyd's market-wide Solvency II ratio, which assesses the capital strength of the overall market on a consolidated basis, was 148 percent. Moody’s noted that this is below the corresponding ratio for major European reinsurers such as Munich Re (245 percent) and SCOR (215 percent).

Although Lloyd's ratio is calibrated to cover a 1 in 200 year loss event over a one-year horizon with a 99.5 percent confidence level, the market also requires each syndicate to incorporate an additional 35 percent uplift to its solvency capital requirements (SCR). Moody’s estimates that removing the 35 percent uplift would move the market-wide Solvency II ratio closer to 200 percent. Moody's views this, taken alongside Lloyd's requirement that each syndicate have a Solvency II ratio of at least 125 percent, as a level of capitalisation consistent with an A rating.

Standard & Poor’s has an A+ rating on Lloyd’s.

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