S&P Global Ratings has revised its financial strength rating for Lloyd’s of London to “AA–”, outlook stable, from “A+”, outlook stable.

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, according to Lloyd’s in a statement.

“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,” said S&P, predicting a combined ratio for the market of below 90% for year-end 2023 given the market’s first-half 2023 results and the low incidence of major losses during the second half. (Combined ratios below 100 indicate underwriting an profit.)

“This, coupled with higher investment income due to both reversal of unrealized losses on the bond portfolio and higher investment returns, we 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. We 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,” S&P continued.

Lloyd’s noted that the ratings agency highlighted the corrective underwriting actions taken by Lloyd’s in recent years (with a focus on underwriting discipline through better oversight of syndicates) as a key reason for its improved performance.

“This latest upgrade reinforces Lloyd’s financial strength and resilience, and is a welcome testament to the progress made in recent years to improve performance and strengthen Lloyd’s balance sheet,” commented Burkhard Keese, Lloyd’s CFO, in a statement.

“Financial strength ratings are vital indicators to our customers, our market, and our investors. This upgrade provides a renewed optimism that we will continue on our positive financial trajectory and deliver a strong financial outlook for 2023,” he added.

“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,” said S&P.

However, as a result of 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.”

S&P said that management has been working on improving efficiency through digitalization and simplifying claims handling in order to reduce expense ratios. “So far, we consider that these programs have been more successful than previous attempts to modernize. Hence, we 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.”

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 the ratings agency believes 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 conflict, and rising inflation rates.

Source: S&P Global Ratings and Lloyd’s