Better underwriting prompts Fitch to remove Lloyd’s from rating watch negative
The move applies to Lloyd's of London, Lloyd's Insurance Company (China) and Lloyd's Insurance Company. The outlook on them all is stable.
The rating agency said the move primarily reflects Lloyd's completed capital collection from members in June 2020 to fully compensate for the company's estimated £3 billion of COVID-19 losses net of reinsurance, as well as improvements in underlying underwriting performance, before major losses in 1H20.
The affirmation of the 'AA-' IFS ratings primarily reflects the company's very strong business profile and capitalisation and leverage. These strengths are partially offset by Fitch's assessment that Lloyd's financial performance and earnings are more consistent with the agency's 'a' rating category.
Lloyd's saw an increase in its reported combined ratio to 110 percent in 1H20 from 102 percent in 2019, with 20pp attributable to major losses. Major losses, which were heavily influenced by COVID-19, totalled £2.4 billion and were driven mainly by contingency, property/casualty classes.
As of end-1H20, Lloyd's expected net ultimate losses from the pandemic of £3 billion at end-2020, up slightly from mid-year levels.
Lloyd's underlying combined ratio before major losses improved to 90 percent in 1H20 from 95 percent in 2019, reflecting positive results from the company's performance management division initiated in 2018. This improvement in underlying underwriting performance will help Lloyd's absorb possible upward revisions in its 2020 COVID-19 losses, given still material market-wide uncertainties related to possible business interruption, liability and other classes of claims.
Given the year-to-year variability in major losses at Lloyd's, Fitch believes evaluating underwriting results over longer periods can provide a useful perspective. For the period of 2015-2019, Lloyd's combined ratio averaged 102 percent, which is within Fitch's 'A'-category guidelines.
During that period, Lloyd's underlying combined ratio before major losses averaged 92 percent, with major losses contributing an average of 10pp. Assuming no material additional major losses in 2H20 beyond Lloyd's current estimates, the five-year average combined ratio from 2016-2020 would be expected to increase modestly to about 104 percent.