S&P Global Ratings has revised its outlook on the Society of Lloyd’s to negative from stable, while reaffirming the market’s ‘A+’ insurer financial strength and long-term counterparty credit ratings on Lloyd’s.
With estimated net losses of £3.3 billion ($4.4 billion) from Hurricanes Harvey and Irma, S&P said, the Lloyd’s market also can expect major losses from Hurricane Maria and other potential catastrophe events in fourth quarter (Q4) 2017, according to S&P.
“These losses are significant relative to peers and Lloyd’s annual earnings, and emphasize the market’s exposure to catastrophe risk,” said S&P, noting that the storm losses have made it more challenging for the market to restore its capitalization to a level consistent with the current ‘A+’ rating.
“The negative outlook reflects our expectation that the market will produce a combined (loss and expense) ratio of about 95 percent in 2018-2019. We envisage a modest revival in rates and assume normalized catastrophe losses,” S&P noted.
Lloyd’s capitalization in S&P’s model had already deteriorated over 2016-2017 due to higher catastrophe exposure and premium growth – the latter in part due to foreign exchange movements, S&P added.
Expense and attritional loss ratios remained high during the first half of 2017, “while the effect of reserve releases on the result, although still positive, is diminishing,” S&P said.
Lloyd’s management will require members to inject more capital into their market operations as part of the “coming into line” exercise in late 2017, before business plans for 2018 can be approved. Stronger rates in the wake of the hurricane losses could also help the market’s results in 2018 and further rebuild capital.
S&P said the market is likely to be able to restore its capitalization in its model to the ‘AAA’ level that would be consistent with an ‘A+’ rating overall.
“However, significant uncertainties remain, and consequently we have revised the outlook on our ratings to negative,” the ratings agency said.
It noted that uncertainties include: further major losses, weaker-than-anticipated rate recovery, or members choosing to take advantage of rate revivals outside of their Lloyd’s platforms.
S&P said it could revise its outlook to stable “if the market manages to remain attractive to its members and restores its capital position to the ‘AAA’ level in our model through strong earnings in 2018-2019.”
At the same time, Lloyd’s ratings could be lowered by one notch if it is “not able to restore its capital position to the ‘AAA’ level in our model in 2018-2019 through either further major losses or weaker earnings,” it said.
Source: S&P Global Ratings