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June 10 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Lloyd's of London's (Lloyd's) Insurer Financial Strength (IFS) rating to 'AA-' from 'A+'. Fitch has also upgraded the Society of Lloyd's Long-term Issuer Default Rating (IDR) to 'A+' from 'A' and Lloyd's Insurance Company (China) Ltd's IFS rating to 'AA-' from 'A+'. The agency has additionally upgraded Lloyd's subordinated debt issues to 'A-' from 'BBB+', as detailed at the end of this comment. The Rating Outlook is Stable.
KEY RATING DRIVERS
The upgrade reflects Fitch's expectation that Lloyds' future cross-cycle underwriting performance will be more favourable than that achieved by the Lloyd's Market historically, both in absolute terms and compared with peers. The upgrade is also supported by Lloyd's strong financial profile, including a level of Fitch risk-adjusted capitalisation that is in line with the new rating level, low financial leverage and a significant market position in both insurance and reinsurance classes.
Fitch views the market oversight by Lloyd's Performance Management Directorate (PMD) and other market functions as having played a key role in a reduction in cross-cycle earnings volatility, since the directorate was established in 2003. Processes, including business plan reviews and syndicate benchmarking, have assisted the Corporation of Lloyd's and syndicates in improving key aspects of underwriting, including pricing, reserving, claims management, risk-adjusted capital setting and catastrophe modelling techniques. The work undertaken by the PMD has provided Fitch with increased confidence that, on an aggregate basis, prior underwriting years will continue to develop favourably across the rating horizon.
Further, the agency considers that the substantial investment made by Lloyd's in preparing for Solvency II has further enhanced risk and exposure management practices across the Market.
Fitch recognises that Lloyd's continues to face a number of headwinds that will also test the wider (re)insurance industry. These include a persistently low yielding investment environment and softening prices across certain major (re)insurance classes. The conservative and hence lower yielding investment portfolio held by the Lloyd's Market leads the agency to view a deterioration in technical profits as the greatest risk to earnings across the rating horizon. The diversity provided by Lloyds' (re)insurance portfolio, by line of business and geographically, is expected to provide resilience to a protracted period of premium price softening, should this occur. The agency currently views revenues and profits generated from property catastrophe reinsurance lines as being of a level that is unlikely to result in profit metrics deteriorating to a level not commensurate with Lloyds' ratings.
Market participants at Lloyd's collectively underwrote GBP26.1bn of gross written premiums (GWP) in 2013, a y-o-y increase of 2.4%, which included a risk-adjusted rate reduction (RARC) of 0.3%. Profit before tax increased to GBP3.2bn (2012: GBP2.8bn). The Market achieved a combined ratio of 86.8% (2012: 91.1%), with the burden from major claims reducing to 4.4pp (2012: 9.7pp). Lloyd's has a global franchise and operates in over 200 countries and territories. It is a leading market for reinsurance and specialist property, casualty, marine, energy and aviation insurance.
A further upgrade is unlikely in the near to medium term, as credit metrics are not expected to strengthen significantly across the rating horizon.
A downgrade may occur if the normalised combined ratio remains above 97% or if leverage, as measured by net premiums written to equity, rises above 1.2x. The subordinated debt ratings are as follows:
GBP153m 6.875% per annum subordinated debt with final maturity in November 2025, callable from November 2015, upgraded to 'A-' from 'BBB+'
EUR214m 5.625% per annum subordinated debt with final maturity in November 2024, callable from November 2014, upgraded to 'A-' from 'BBB+'
GBP392m 7.421% per annum perpetual subordinated debt, callable in 2017, upgraded to 'A-' from 'BBB+'