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Fitch removes Lloyd’s from Rating Watch Negative as underwriting improves

18th September 2020 - Author: Luke Gallin

Fitch Ratings has removed Lloyd’s of London’s, Lloyd’s Insurance Company (China) Ltd.’s, and Lloyd’s Insurance Company S.A.’s Insurer Financial Strength (IFS) Ratings from Rating Watch Negative (RWN).

lloyd'sAt the same time, Fitch has affirmed Lloyd’s and its two operating subsidiaries’ IFS Ratings at ‘AA-‘ (very strong), while the outlook is stable.

At the beginning of April, Fitch placed the IFS Ratings of the Lloyd’s market and its subsidiaries on RWN, citing uncertainty and heightened risk to earnings and underwriting performance in light of COVID-19 challenges.

Today, Fitch has announced their removal from RWN and says that this primarily reflects the market’s completed capital collection from members in June to fully compensate for its estimated £3 billion of losses related to the pandemic, net of reinsurance, alongside an improved underlying underwriting performance, before major losses in H1 2020.

On September 10th, 2020 Lloyd’s announced a net loss of £400 million for the first-half of the year, and also an underwriting loss as COVID-19 claims contributed 18.7 percentage points to the market’s 110.4% combined ratio. However, excluding the pandemic, the combined ratio ended the period at 91.7%, which represents an underlying underwriting improvement from the 98.8% combined ratio reported in H1 2019.

When excluding major losses entirely, which were heavily influenced by COVID-19, Lloyd’s produced a combined ratio of 90% in H1 2020, against 95% in the same period in 2019.

“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,” says Fitch.

Ultimately, Fitch expects that the Lloyd’s market will be able to absorb pandemic losses, while ongoing performance management actions will likely support favourable pricing conditions in 2021 as the reinsurance market continues to harden.

Discussing the IFS Ratings affirmation, Fitch notes the Lloyd’s market’s very strong business profile, capitalisation and leverage. However, the ratings agency adds that these strengths are somewhat offset by Fitch’s assessment that Lloyd’s financial performance and earnings are more consistent with its ‘a’ rating category.

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