Revised outlook reflects reduced profit volatility

Lloyd's building

Fitch has raised the outlook of its A+ financial strength rating on Lloyd’s to positive from stable.

Fitch said the revised outlook was prompted by a reduction in the profit volatility of Lloyd’s, both in absolute terms and when compared with higher-rated peers.

It also reflects the rating agency’s view that the underwriting performance of Lloyd’s across the pricing cycle will be better than it was historically.

Fitch said: “The ratings continue to reflect Lloyd’s strong financial profile, including a level of Fitch risk-adjusted capitalisation that is more than supportive of the current rating level, low financial leverage and a significant market position in both insurance and reinsurance classes.”

The rating agency credited the reduced profit volatility to increased oversight of market participants by the Lloyd’s Performance Management Directorate, run by Tom Bolt.

It added that the substantial investment Lloyd’s has made in preparing for Solvency II has enhanced risk and exposure management across the market.

However, the agency noted that Lloyd’s continues to face a number of challenges that are taxing the whole industry, including persistently low yielding investment environment and softening pricing across certain major insurance classes.

Fitch could upgrade the Lloyd’s rating if t maintains its existing financial profile and if profit volatility continues to fall. This would include Lloyd’s reporting a five-year average combined ratio of below 95%.

A marked decline in the level of reported profitability, erosion of capital and poor performance relative to peers could lead to a downgrade.

Topics