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Fitch Revises Lloyd's of London's Outlook to Negative; Affirms at IFS 'AA-'
June 27, 2017 / 10:47 AM / 5 months ago

Fitch Revises Lloyd's of London's Outlook to Negative; Affirms at IFS 'AA-'

(The following statement was released by the rating agency) LONDON, June 27 (Fitch) Fitch Ratings has revised Lloyd's of London's (Lloyd's) and Lloyd's Insurance Company (China) Ltd's Outlook to Negative from Stable while affirming the Insurer Financial Strength (IFS) Ratings at 'AA-'. Fitch has also revised the Outlook for the Society of Lloyds to Negative from Stable while affirming the Long-Term Issuer Default Rating at 'A+'. The subordinated bonds have been affirmed at 'A-' KEY RATING DRIVERS The Outlook has been revised to Negative because of deterioration in underwriting performance, coupled with increasing exposure to catastrophe risk in the context of continuing pressure on both risk-adjusted premium rates and expense ratios at Lloyd's. The Fitch-calculated combined ratio of 98% was a significant deterioration from recent performance, driven by a return to more normalised levels of catastrophe activity in the market as well as increasing expenses and falling risk-adjusted premium rates. Lloyd's exposure to worldwide natural and man-made catastrophes is higher than peers'. This is reflected in Lloyd's combined ratio being more sensitive to catastrophic events. Fitch believes that exposure to catastrophe risk has increased in recent years despite declining margins on this line of business. However, Fitch believes that Lloyd's exposure management, through the group's modelling capabilities and the reinsurance in place, allows the market to mitigate tail risks to some extent. The 'very strong' business profile of Lloyd's of London's supports its rating. It is one of a select band of global (re)insurance providers capable of attracting high-quality and specialised business. It operates as a global insurance and reinsurance market comprising more than 100 syndicates. It writes business from over 200 countries and territories, and in 2016 reported gross written premiums of GBP29.9 billion. Fitch expects capitalisation to support the rating, assuming future losses fall within the limits expected by Lloyd's. The three-layered capital structure at Lloyd's - syndicates' premium trust funds, members' funds at Lloyd's and the central fund - remained strong in 2016, despite the impact of weaker sterling relative to the dollar and increasing catastrophe exposure. Debt is very limited in the capital structure with a financial leverage ratio of 3% at end-2016. In 2016, Lloyd's results benefitted from foreign exchange gains as a result of the depreciation of sterling and investment returns also improved, driven by a downward shift in bond yields. Overall, Lloyd's net investment income rose to GBP1.3 billion in 2016 (2015: GBP0.4 billion) and foreign exchange gains contributed GBP0.6 billion (2015: GBP0.1 billion loss) to profits which helped to offset a weaker underwriting result in the same period. Fitch views these market movements as being one-off in nature. Fitch believes that Lloyd's maintains a disciplined approach to underwriting, reinforced by the strong oversight of the Performance Management Directorate (PMD). Underwriting conditions across almost all major (re)insurance classes are deteriorating, and Fitch anticipates that Lloyd's will continue to scale back exposures in the worst affected lines to reflect the weak pricing environment. RATING SENSITIVITIES A downgrade may occur if the net combined ratio remains above 97% for a prolonged period. An extended period of underperformance or a proportionally larger net catastrophe loss versus peers or market share could also lead to a downgrade. The Outlook may be revised to Stable if Fitch anticipates an improvement in Lloyd's underwriting performance to a level commensurate with peers' or if it reduces its capital exposure to catastrophe losses. Contact: Primary Analyst Graham Coutts Director +44 20 3530 1654 Fitch Ratings Limited 30 North Colonnade London E14 5GN] Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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