S&P lifts Lloyd's outlook as capital position and underwriting performance improves

S&P Global Ratings has revised the outlook of Lloyd's of London and its core subsidiaries to stable from negative, following changes made by the specialist re/insurance market to improve its overall underwriting performance.

Lloyd's reported over £3 billion of losses in the past two years. However, S&P noted that the market has since taken significant actions to to remediate its portfolio and improve its performance in 2019-2021.

According to the agency, under its new leadership team, Lloyd's has strengthened its capital adequacy, scaled back catastrophe exposures within its risk appetite, and taken actions to remediate some of the worst-performing business in the market.

S&P explained: "Management's focus on the worst-performing 10% of business at Lloyd's (known as "decile 10"), demonstrates that it has started to deal with Lloyd's worsening underlying performance. We expect this process may take some time - the extent of the remediation may not become clear until year-end 2020 - but we anticipate that Lloyd's will continue to manage its business tightly to ensure that underwriting performance improves."

Lloyd's recorded a loss of £2 billion in 2017, and another £1 billion loss in 2018, but has since steadily rebuilt its capital position. S&P noted that the improvement has been achieved through the recapitalisation of syndicates, a reduction in the use of letters of credit as part of the market's capital, and improved control over the market's catastrophe risk appetite.

"Lloyd's capital adequacy is likely to strengthen further in 2019 as the market's net premium written shrinks and Lloyd's continues to exercise stronger control over exposure to catastrophe risk," S&P said. "Under our base-case scenario, we assume that the market will see a rise in premium rates in 2019, particularly in loss-affected lines. This should help to improve Lloyd's underlying earnings in 2019-2020."

"We forecast that the market will record combined (loss and expense) ratios of 95%-99% in 2019-2021, including a catastrophe load of about nine percentage points, assuming a normal catastrophe year," it added.

Lloyd’s CFO Burkhard Keese, said: “This is great news and the decision was based on several positive factors. Most notably, the strengthening of Lloyd’s capital position was recognised by S&P as significantly higher than their AA confidence level. Lloyd’s recent focus on underwriting discipline was also highlighted, giving S&P the confidence that the Lloyd’s market will return to profitability within the next three years.”

In addition to the revised outlook, S&P has affirmed the issuer credit and financial strength ratings of Lloyd's to 'A+'. "We now expect its capital to be significantly higher than our 'AA' confidence level over the next three years," it said.

The rating agency expects the management to continue to focus on Lloyd's underwriting performance and to address its overall cost structure, which has hindered the market over the years. It also expect that the market will continue to hold capital at levels at least in excess of our 'AA' level.

S&P warned that it could lower the ratings by one notch if Lloyd's cannot maintain capital above our 'AA' requirement through 2019-2021, or if its competitive strength significantly weakens. This could be triggered by a further deterioration in underlying performance, compared with similarly rated reinsurers and insurers.

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