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Fitch turns Negative on Lloyd’s as underwriting deteriorates

29th June 2017 - Author: Luke Gallin

In response to the continued deterioration in underwriting performance and increasing catastrophe risk exposure, Fitch Ratings (Fitch) has revised the Lloyd’s of London’s and Lloyd’s Insurance Company (China) Ltd’s outlook to Negative from Stable.

Lloyd's of London insurance and reinsurance marketAt the same time international financial services rating agency, Fitch, has also affirmed the Insurer Financial Strength (IFS) Ratings at ‘AA-‘, and revised the outlook for the Society of Lloyds to Negative from Stable, while announcing the affirmation of the Long-Term Issuer Default Rating at ‘A+’. Fitch also explains that the subordinated bonds have been affirmed at ‘A-‘.

Fitch explains that the reason for the revision to Negative from Stable is in response to a continuation of the deterioration in underwriting performance, which is combining with increasing catastrophe risk exposure in light of persistent pressures on the expense ratios at Lloyd’s and risk-adjusted premium rates.

When compared with recent performance, the Fitch-calculated combined ratio of 98% represents a “significant deterioration,” which the rating agency says has been driven by rising catastrophe activity in the marketplace as a result of tough market conditions.

Fitch explains that when compared with its peers the Lloyd’s marketplace has a higher exposure to global man-made and natural catastrophes, which is reflected in the market’s combined ratio being more sensitive to catastrophe events.

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“Fitch believes that exposure to catastrophe risk has increased in recent years despite declining margins on this line of business. However, Fitch believes that Lloyd’s exposure management, through the group’s modelling capabilities and the reinsurance in place, allows the market to mitigate tail risks to some extent,” says Fitch.

Assuming future losses fall within the limits expected at Lloyd’s of London, Fitch predicts capitalisation to support the rating, and the ‘very strong’ business profile of the marketplace also supports its rating, says Fitch.

In 2016 Lloyd’s reported gross written premiums of £29.9 billion, and during the year the market benefitted from foreign exchange gains.

Underwriting performance across most major insurance and reinsurance business lines and classes are deteriorating further and expected to continue this trend in the coming months. As a result, Fitch expects Lloyd’s to continue to pull-back its exposure in the areas most impacted, in an effort to reflect the weak pricing landscape.

“The Outlook may be revised to Stable if Fitch anticipates an improvement in Lloyd’s underwriting performance to a level commensurate with peers’ or if it reduces its capital exposure to catastrophe losses,” says Fitch.

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