Fitch removes Lloyd's from negative watch

Fitch Ratings has removed Lloyd's of London (Lloyd's), Lloyd's Insurance Company (China) and Lloyd's Insurance Company from Rating Watch Negative (RWN).

This move primarily reflects Lloyd's completed capital collection from members in June 2020 to fully compensate for the company's estimated GBP3bn ($3.87bn) of COVID-19 losses net of reinsurance, as well as improvements in underlying underwriting performance, before major losses in 1H20, says Fitch.

At the same time, Fitch affirms the trio's Insurer Financial Strength (IFS) Ratings at 'AA-' (Very Strong). The outlook is stable. 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.

Losses

Lloyd's saw an increase in its reported combined ratio to 110% in 1H20 from 102% in 2019, with 20pp attributable to major losses. Major losses, which were heavily influenced by COVID-19, totalled GBP2.4bn and were driven mainly by contingency, property and casualty classes. As of end-1H20 Lloyd's expected net ultimate losses from the pandemic of GBP3bn at end-2020, up slightly from mid-year levels.

Lloyd's underlying combined ratio before major losses improved to 90% in 1H20 from 95% 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%, which is within Fitch's 'A'-category guidelines. During that period, Lloyd's underlying combined ratio before major losses averaged 92%, 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%.

Following a profitability review in 2018 and significant natural catastrophe losses of the past two years, Lloyd's reported an increase in overall risk-adjusted premiums in 1H20 of 8.7% (2019: 5.4%, 2018: 3%). Fitch expects pandemic-related losses still to be absorbed by the market and ongoing performance management actions to support favourable pricing conditions in 2021.

Business profile

Fitch ranks Lloyd's business profile as 'favourable' compared with that of global insurance and reinsurance companies, driven by a strong franchise, large operating scale and significant diversification within P&C (re)insurance. Lloyd's is part of a small group of global (re)insurance providers capable of attracting high-quality and specialised business.

Solvency

On a central fund basis Lloyd's central solvency coverage ratio was very strong at 250% at end-1H20 (end-2019: 238%), a level that is comfortably in excess of its risk appetite of 200%. The improvement was mainly driven by Lloyd's completed a capital collection from members in June 2020 in respect of COVID-19 net losses. However, in the longer term, such resilience relies on the willingness and ability of members to recapitalise, following significant losses.

Fitch views Lloyd's exposure to worldwide catastrophes as high, although the company has managed this down in recent years.

Source: Asia Insurance Review