Fitch puts Lloyd’s of London on negative watch

Fitch Ratings has placed the ratings of Lloyd’s of London (Lloyd’s) and its subsidiaries on rating watch negative. This reflects the uncertainty and increased risk to Lloyd’s earnings and underwriting performance due to claims emanating as a result of the COVID-19 pandemic.

Lloyd’s ratings have been on negative outlook since June 2017, mainly due to its underwriting performance being weak for the rating. Underwriting performance, although improved in 2019, was below the rating agency’s expectations.

In addition any outsized COVID-19-related losses could add further pressure to Lloyd’s earnings. Lloyd’s is potentially exposed to COVID-19-related losses through event cancellation, business interruption, directors & officers’ liability and trade credit lines of business.

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% (2018: 104.5%); the improvement to the pre-tax result was primarily driven by stronger investment performance.

The better headline 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 originally expected. In particular, Lloyd’s attritional loss ratio on more recent underwriting years showed a 1.7% improvement to 57.6% (2018: 59.3%), 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% in 2019 from 92.9% in 2018. This was a result of lower reserve releases, below average at 0.9% in 2019 (2018: 3.9%), due to a loss creep on 2018 losses as well as reserve strengthening on US casualty lines.

Lloyd’s ratings reflect Fitch’s current assessment of the impact of the COVID-19 pandemic, including its economic impact, under a set of ratings assumptions related to interest-rate levels; declines in the market values of stocks, bonds, derivatives and other capital market instruments typically owned or traded by insurance companies. 

Under these assumptions the rating agency continues to view Lloyd’s capitalisation as strong. It anticipates Lloyd’s will be able to restore its capitalisation through the ‘coming into line’ exercise in June 2020. At this point, Fitch does not expect underwriting losses to be of a magnitude to cause significant capital depletion.

A majority of syndicates at Lloyd’s are also owned by large multinational insurance companies, who should be able to provide capital as required.