S&P Global Ratings has raised its financial strength ratings on the Society of Lloyd’s and its core operating entities to ‘AA-’ from ‘A+’. The outlook is stable.
Lloyd’s said on its website that the rating upgrade reflects the improvement in Lloyd’s balance sheet strength, which S&P has assessed to be ‘excellent’, as well as Lloyd’s very strong capital and solvency positions with profitability in both underwriting and investments, and strong premium growth evidenced in Lloyd’s 2023 half year results published in September this year. It also noted that the ratings agency report focused on the corrective underwriting actions by Lloyd’s in recent years.
In its rating report, S&P expects the management to maintain Lloyd’s underwriting discipline performance and continue to execute its expense reduction strategy. Furthermore, it expects Lloyd’s will maintain its capitalisation at an excellent level.
Favourable pricing conditions in most lines and regions, coupled with strong oversight over syndicate performance, will help Lloyd’s sustain its positive trajectory in underwriting results, said S&P.
“We anticipate that Lloyd’s is likely to report a combined ratio below 90% for year-end 2023 considering its first-half 2023 results and low incidence of major losses during the second half of 2023,” said S&P. This, coupled with higher investment income due to both reversal of unrealised losses on the bond portfolio and higher investment returns, the agency estimates will likely lead to a net income close to GBP8bn-GBP9bn in 2023, considering Lloyd’s actual performance in the year to November 2023.
“We expect the net combined ratio to be 90%-95% for 2024-2025 and a net income of near GBP8bn ($10.18bn) to GBP9bn, assuming contribution of major losses of 11 percentage points,” said S&P.
Lloyd’s capital exceeds the capital requirement for an extreme stress, said S&P.
“On regulatory terms, Lloyd’s market-wide regulatory solvency ratio (190%-200% for 2023) and its central solvency ratio (400%-450% for 2023) are expected to remain robust in 2024.
“In recent years, Lloyd’s has acted promptly to address large claims events by accelerating capital collection from members. Should another significant claims event occur, like the 2017 hurricanes or COVID-19 pandemic, we expect management will again seek to quickly address any capital shortfalls,” said S&P.
S&P expects that robust earnings will also translate into building capital levels to the extent needed. “Lloyd’s has also substantially reduced its reliance on letters of credit during the past few years and we do not expect Lloyd’s to materially increase its reliance of them from the current level. Hence, we no longer revise downward the capital model output through the use of the capital and earnings adjustment,” it said.
In S&P’s view, Lloyd’s is more exposed to environmental risks than the insurance industry average because it writes significant amounts of property reinsurance and insurance. Therefore, it said that Lloyd’s has the option to reprice its catastrophe contracts annually or cede the risks to help it absorb a gradual increase in claims.