Analysts at S&P Global Ratings have suggested that the Society of Lloyd’s will report a combined ratio of around 95% at the year-end of 2022, anticipating the same for 2023.
The rating agency noted that this prediction takes into account Lloyd’s combined ratio of 91.4% at half-year 2022, while also considering the reserving of £1.1 billion for the Russia-Ukraine conflict and £2.2 billion for Hurricane Ian.
At the same time, S&P also raised its issue-level rating on Lloyd’s subordinated Tier 2 notes to ‘A-‘ from ‘BBB+’.
S&P noted that despite significant reserving, rising interest rates, and investments in private assets through its newly launched investment platform, Lloyd’s market-wide regulatory solvency ratio and central solvency ratio remained stable over 2022.
It wrote, “Lloyd’s holds comfortable capital surpluses in both its half-year 2022 market-wide regulatory solvency ratio of 179% (year-end 2021 177%) and central solvency ratio of 395% (year-end 2021 388%).
“We expect both market-wide and central solvency ratios to remain robust even in extreme stress scenarios, such as catastrophic events, or if the current inflationary environment continues in 2023 and 2024.”
“Hence, our rating on Lloyd’s Tier 2 subordinated notes is now two notches below the long-term issuer credit rating on Lloyd’s, one notch to reflect the notes’ subordination to the company’s senior obligations; and one notch to reflect the payment risk created by the mandatory and optional coupon deferral features.”
S&P previously applied two notches to reflect the higher payment risk due to coupon deferral compared with similar hybrids rated in the ‘A’ category. This was due to S&P considering Lloyd’s solvency level in the past to be materially closer to the point of mandatory deferral when considering its sensitivity to severe events.
S&P continued, “We note that Lloyd’s significant exposure to natural catastrophe risk, the challenging macroeconomic environment due to rising inflation, and uncertainty around the Russia Ukraine conflict provide the potential for volatility in the level of its solvency cover.
“However, this is offset by the stability in the solvency ratio maintained in 2022, better operating performance expectations, and ability to recapitalize when needed.”
The rating agency cited that the latter was demonstrated in 2017 when the market injected £3 billion following Hurricanes Harvey, Irma, and Maria; and in 2020, when it injected a further £3.5 billion following COVID-19-related losses.