Rating now unlikely to be upgraded in the next 12-24 months

Standard & Poor’s has cut the outlook on its A+ financial strength rating of Lloyd’s to stable from positive.

The rating agency affirmed the market’s A+ rating but said it had changed the outlook because of heavy competition in the key lines of business for Lloyd’s.

It added that the smaller Lloyd’s syndicates could struggle to maintain their pricing and market share, and predicted that the market could report a combined operating  ratio (COR) higher than 100% in 2015-2016.

The positive outlook, which S&P awarded Lloyd’s in August 2012, meant there was a chance the A+ rating could be upgraded. The new stable outlook means an upgrade is now unlikely over the next 12 to 24 months.

Increasingly unfavourable

S&P said the competitive environment across the reinsurance sector and in the key lines of business for Lloyd’s in particular is “increasingly unfavourable”.

The agency said: “Although the market’s recent operating results have been strong, surplus  capacity, the inflow of new capital, and changing buyer demand mean that we  anticipate continued negative pressures on profitability and revenues in Lloyd’s core business sectors: reinsurance and specialty lines.”

It added: “A number of smaller syndicates will face particular challenges in maintaining their market share, in our opinion. As a result, we consider an upgrade to be unlikely in the near future, and have therefore revised our outlook to stable.”

Work in progress

S&P said that it continued to view the competitive position of Lloyd’s as very strong, but that he increased competition in the market would force the market to focus on defending its position.

It added that the Lloyd’s Vision 2025 strategy, which will see it expand more beyond its traditional London base, is a positive but remains “very much a work in progress”.

The agency said: “We have seen limited additional diversification to date. In 2013, North American and U.K. risks accounted for 61% of Lloyd’s premiums.

Underwriting forecast

S&P forecast that Lloyd’s will report a combined operating ratio of between 88% and 90% in 2014 and 98% to 102% in 2015-2016, assuming average catastrophe loss levels.

It added that it expects Lloyd’s to generate a return on capacity of 12% and a return on revenue of between 10% and 15% in 2014-2016.