S&P Global Ratings raised its financial strength ratings on the Society of Lloyd’s and its core operating entities to ‘AA-‘ from ‘A+’. The outlook is stable.
The implementation of our updated criteria for analyzing insurers’ risk-based capital was not the driver for raising the ratings; nor for the change in capital and earnings score.
The reason for changing the capital and earnings score is because we removed the qualitative adjustment we had previously applied, as we explain in the rationale below.
S&P revised capital model criteria led to some improvement in capital adequacy, primarily reflecting an increase in total adjusted capital owing to the removal of haircuts to liability adjustments, namely non-life reserves surplus and discounting, along with not deducting non-life deferred acquisition costs.
Analytics expect the management to maintain Lloyd’s underwriting discipline performance and continue to execute its expense reduction strategy. Furthermore, we expect Lloyd’s will maintain its capitalization at an excellent level.
Downside scenario
S&P could take a negative rating action over the next 24 months if Lloyd’s cannot maintain profitability levels in line with that of its closest peers or if we believe its capital levels will not comfortably navigate extreme stress levels.
This could occur if the management:
- Does not maintain strong oversight over syndicates, particularly if the pricing conditions deteriorated against the current favorable rates;
- Compromises underwriting discipline over top-line growth; and
- Does not maintain the same level of close oversight on capital protection that helped it navigate the challenges posed during COVID-19, emergence of the Russia-Ukraine war, and rising inflation rates.
Upside scenario
Favorable 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.
S&P anticipate that Lloyd’s is likely to report a combined ratio (loss and expense) below 90% for year-end 2023 considering its first-half 2023 results and low incidence of major losses during the second half of 2023.
This, coupled with higher investment income due to both reversal of unrealized losses on the bond portfolio and higher investment returns, S&P estimate will likely lead to a net income close to £8 billion-£9 billion in 2023, considering Lloyd’s actual performance in the year to November 2023.
S&P expect the net combined ratio to be 90%-95% for 2024-2025 and a net income of near £8 billion-£9 billion, assuming contribution of major losses of 11 percentage points.
Lloyd’s benefits from its unique brand; the attraction of being the world’s largest subscription market; and its broad geographic presence, from which it distributes its wide product offering.
Resulting from its structure, the cost of doing business at Lloyd’s is higher than that of most of its peers such as Munich Re, Swiss Re, Hannover Re, and Chubb.
Management has therefore been working on improving efficiency through digitalization and simplifying claims handling.
So far, analytics consider that these programs have been more successful than previous attempts to modernize.
S&P forecast the reported expense ratio will be close to 33%-35% in 2024 and reduce by two percentage points following full implementation of the cost reduction program over the next three years.
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.
by Yana Keller
