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Fitch puts Lloyd’s on Rating Watch Negative amid COVID-19 risks

2nd April 2020 - Author: Luke Gallin

Uncertainty and heightened risk to Lloyd’s of London’s earnings and underwriting performance as a result of COVID-19 claims, has pushed Fitch Ratings to place the marketplace and its operating entities on Rating Watch Negative (RWN).

Lloyd'sFitch states that it has placed Lloyd’s of London’s, Lloyd’s Insurance Company S.A. and Lloyd’s Insurance Company (China) Ltd’s ‘AA-‘ Insurer Financial Strength (IFS) Ratings on RWN. At the same time, the ratings agency has also placed on RWN the Society of Lloyd’s Long-Term Issuer Default Rating of ‘A+’ and subordinated bonds of ‘A-‘.

“The RWN 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,” explains Fitch.

The move isn’t too surprising given the depth and breadth of the Lloyd’s marketplace, with market participants potentially being exposed to losses from the COVID-19 pandemic across numerous business lines. Furthermore, Fitch has held a negative outlook on Lloyd’s ratings since June 2017, mostly because its underwriting performance, which has been unprofitable, is weak for the rating.

The Lloyd’s market announced its results for 2019 recently, which showed an improved, but still negative underwriting performance. In addition, Lloyd’s revealed that so far in 2020, the impacts of the ongoing coronavirus pandemic on financial markets has driven down its solvency ratio from the end of 2019.

“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,” explains Fitch.

The ratings agency notes that it does still view Lloyd’s capitalisation as strong, supported by the expectation that the market will be able to restore its capitalisation through the ‘coming in line’ initiative in June 2020.

Currently, Fitch doesn’t envision that underwriting losses will be large enough to result in a significant depletion of capital. And, the fact that the majority of Lloyd’s syndicates are owned by large, global insurers or reinsurers, it’s likely syndicates will receive capital when needed.

Fitch warns that Lloyd’s ratings are likely to be downgraded if the marketplace fails to achieve improving underlying underwriting performance excluding catastrophe losses. At the same time, an upgrade would occur from a significant improvement in the market’s general competitive position, which is viewed as unlikely by Fitch in the medium-term.

Only time will tell exactly what impact the COVID-19 outbreak has on Lloyd’s, individual syndicates and the wider insurance and reinsurance universe. Lloyd’s explained during a recent call that after the closing of its underwriting room, so far, emergency trading is going well as a historically face-to-face market adjusts to a remote working business model.

As a result of the adjustments, Lloyd’s management have decided to rationalise and narrow the focus of the Future at Lloyd’s strategy.

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