Exposed by disastrous quarter
31 Oct 2017
Fitch ratings agency says catastrophe losses from hurricanes, Mexican earthquakes and Californian wildfires may leave Lloyd’s exposed to a ratings downgrade.
The ratings agency has affirmed Lloyd’s of London and Lloyd’s Insurance Company’s AA- financial strength rating and negative outlook amid an estimated £3.3 billion ($5.68 billion) loss from hurricanes Irma and Harvey and anticipated losses from other recent catastrophes.
While catastrophe losses will probably fall within tolerances for the AA- rating, “they will likely place some pressure on Lloyd’s capital”, Fitch says.
The ratings agency expects Lloyd’s will restore its capitalisation through the “coming into line” exercise in December.
Until then, it remains exposed to further major losses, and any such event could increase uncertainty around its ability to successfully recapitalise.
“Even before the [third-quarter] catastrophe losses, the negative outlook reflected the underlying trend of pressure on both risk-adjusted premium rates and expense ratios, together with Fitch’s belief that Lloyd’s exposure to catastrophe risk remains high relative to peers,” the ratings agency says.
This is reflected in Lloyd’s combined operating ratio being more sensitive to catastrophic events. Fitch believes exposure to catastrophe risk has increased in recent years, despite declining margins on this line of business.
However, recent catastrophes should lead to an improved pricing environment, particularly on loss-affected lines, which should lift profitability next year.
Fitch will likely downgrade Lloyd’s if it fails to restore capital by December 1 or if the net combined operating ratio remains above 97% for a prolonged period.
The rating is also highly sensitive to additional catastrophic losses before year’s end, or upward development in third-quarter loss estimates.
The outlook may be revised to stable if Fitch anticipates an improvement in underwriting performance or cut in capital exposure to catastrophe losses.
Fitch has affirmed the Society of Lloyd’s long-term issuer default rating at A+ and subordinated bonds at A-.