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by : Alpha Insurance Analysts Limited

Standard & Poor’s has revised the outlook on Lloyd’s 'A+' financial strength rating (FSR) from ‘positive’ to ‘stable’ on the back of deteriorating reinsurance conditions.  However, at the same time, Standard & Poor's affirmed its 'A+' insurer financial strength rating on Lloyd's and its 'A+' long-term counterparty credit rating on The Society of Lloyd's.

 

Standard & Poor’s announced that the competitive environment across the reinsurance sector, as a whole and in Lloyd's key lines of business, looks increasingly unfavorable.  Although the market's recent operating results have been strong, surplus capacity, the inflow of new capital, and changing buyer demand were given as reasons for anticipated continued negative pressures on profitability and revenues in Lloyd's core business sectors: reinsurance and specialty lines.  Furthermore, a number of smaller syndicates were cited to be likely to face particular challenges in maintaining their market share.  Standard & Poor’s considers an upgrade to be unlikely in the in the next 12 to 24 months and has therefore revised its outlook to ‘stable’.

 

Standard & Poor’s continues to regard Lloyd's competitive position as very strong based on its franchise, strong diversification by line and the loyalty of its policyholders.  An upgrade would require a marked improvement in the reinsurance sector's pricing environment.  Equally, a downgrade is unlikely in the next two years because of Lloyd's competitive and capital strengths. However, a return to the more volatile performance of pre-2002 could prompt a negative rating action, as could a catastrophe loss that was significantly outside Lloyd's expectation or tolerance levels.

 

In its base-case scenario, Standard & Poor’s expects Lloyd's to continue to exhibit strong earnings to sustain its extremely strong capital adequacy. It has forecast a combined (loss and expense) ratio of 88% – 90% in 2014 and 98% – 102% in 2015 – 2016, assuming average catastrophe loss levels. Historically, such losses have contributed about 12% to the combined ratio. According to Standard & Poor’s, over 2014 to 2016, Lloyd's should generate an overall return on capacity of 12% and a return on revenue of 10% – 15%.  These projected returns are based on strong net income of £2.8 billion in 2014 and £1.5 billion – £2.0 billion in 2015 – 2016.