Lloyd’s remediation pays off: S&P rewards new discipline & oversight

Lloyd’s remediation paid off, with improved underwriting and oversight plus a tweak to funding meriting a ratings upgrade from S&P to AA-.

S&P tips its hat to “corrective underwriting actions in recent years, focused on enhancement of underwriting discipline through better oversight of syndicates.” 

Improved performance should hold “even if the pricing conditions were to face downward pressure.”

The wording on downside scenarios that could lead to an eventual reversal all focus on the threat of backsliding from management. Further ratings increases, in turn, are outright “unlikely.”

Expect the eventual cut if management “does not maintain strong oversight” over syndicates or capital or “compromises underwriting discipline over top-line growth.”

“This latest upgrade reinforces Lloyd’s financial strength and resilience, and is a welcome testament to the progress made in recent years to improve performance and strengthen Lloyd’s balance sheet,” Burkhard Keese, Lloyd’s CFO, said in a parallel statement.  

S&P’s new risk-based capital criteria were not the driver for the overall ratings hike nor any underlying change in capital and earnings scoring, analysts called out. Lloyd's took “some improvement” in measures of capital adequacy, but not enough to impact indicative scoring. 

Lloyd’s move to “substantially” reduce its reliance on letters of credit in its funding structure relieved some of S&P’s worries. The group had previously been penalised on its ratings scale for overreliance. 

Improved performance amidst favourable pricing is likely to lead Lloyd’s to a net combined ratio of 90%-95% and a net income of near £8-£9 billion for 2024-2025, assuming normalised major losses at 11 percentage points, S&P said. 

For 2023, further bolstered by a benign major loss record, the net combined ratio will likely end below 90% and renewed investment income will push the group to the £8-£9 billion net income level.

In the rating action just announced, S&P raised the financial strength ratings on the Society of Lloyd's and its core operating entities to ‘AA-‘ from ‘A+’. The outlook is stable.

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