Fitch Ratings has placed Lloyd’s of London’s ‘AA-‘ Insurer Financial Strength (IFS) ratings on rating watch negative, on the uncertainty and increased risk to Lloyd’s earnings and underwriting performance due to claims from the COVID-19 pandemic.

The negative rating watch also includes Lloyd’s Insurance Co. S.A. and Lloyd’s Insurance Co. (China) Ltd.’s, both currently rated ‘AA-‘.

“At this point, we do not expect underwriting losses to be of a magnitude to cause significant capital depletion. A majority of syndicates at Lloyd’s are also owned by large multinational insurance companies, who should be able to provide capital as required,” said the ratings agency.

Lloyd’s has exposure to COVID-19-related claims through event cancellation, business interruption, directors & officers’ liability and trade credit lines of business.

Fitch said Lloyd’s ratings have been on negative outlook since June 2017, mainly due to its weak underwriting performance. Although improved in 2019, Lloyd’s underwriting performance was below Fitch’s expectations.

In addition, any outsized COVID-19-related losses could add further pressure to Lloyd’s earnings, added Fitch.

Lloyd’s reported a pre-tax profit of £2.5 billion in 2019 (2018: pre-tax loss of £1 billion) and a combined ratio of 102.1% (2018: 104.5%). The improvement to the pre-tax result was primarily driven by stronger investment performance.

“The better headline combined ratio followed the market’s ‘Decile 10’ performance reviews and nine consecutive quarters of rate rises, but the pace of improvement was slower than we originally expected,” said Fitch.

The ratings agency pointed to Lloyd’s attritional loss ratio, which showed a 1.7% improvement in 2019 to 57.6%, compared to 59.3% in 2018, but the deterioration in older underwriting years was a drag on the result.

In addition, Lloyd’s combined ratio, excluding major losses, deteriorated to 95.1% in 2019 from 92.9% in 2018. (Editor’s note: A combined ratio above 100% indicates an underwriting loss).

The deterioration was a result of lower reserve releases, below average at 0.9% in 2019 (2018: 3.9%), due to a loss creep on 2018 losses as well as reserve strengthening on U.S. casualty lines, said Fitch.

Lloyd’s ratings reflect Fitch’s assessment of the impact of the COVID-19 pandemic, including its economic impact. Fitch looks at such factors as the effects of interest-rate levels and the declines in the market values of stocks, bonds, derivatives and other capital market instruments typically owned or traded by insurance companies.

Nevertheless, Fitch said it views Lloyd’s capitalization as strong. “This is further supported by our expectation that Lloyd’s will be able to restore its capitalization through the ‘coming into line’ exercise in June 2020,” said the ratings agency. (Editor’s note: Every year, in June and at year-end, in an exercise known as “coming into line,” managing agents have to provide so-called “Funds at Lloyd’s,” or the capital that backs their syndicates’ underwriting).

*This story ran previously in our sister publication Insurance Journal.