Standard & Poor's has revised its outlook on The Society of Lloyd's and Lloyd's to stable from positive. 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.
The rating agency comments "The competitive environment across the reinsurance sector as a whole and in Lloyd's key lines of business in particular, is increasingly unfavourable. Although the market's recent operating results have been strong, surplus capacity, the inflow of new capital, and changing buyer demand mean that we anticipate continued negative pressures on profitability and revenues in Lloyd's core business sectors: reinsurance and specialty lines. A number of smaller syndicates will face particular challenges in maintaining their market share, in our opinion. As a result, we consider an upgrade to be unlikely in the near future, and have therefore revised our outlook to stable.
We continue to regard Lloyd's competitive position as very strong based on its franchise, strong diversification by line, and the loyalty of its policyholders. However, we feel that the increased level of competition in the global market will force Lloyd's to focus efforts on defending its competitive position, particularly the market shares of its smaller, more narrowly-focused managing agents. We consider Lloyd's Vision 2025 to be a positive step toward increasing its geographic diversification and expanding outside its traditional Anglosphere markets and capital providers. However, this effort remains very much a work in progress; we have seen limited additional diversification to date. In 2013, North American and UK risks accounted for 61% of Lloyd's premiums. Although broker facilities have not yet challenged its premium inflow, Lloyd's does remain relatively dependent on brokers for its distribution and many broker panels are consolidating and seeking single-capacity providers.
The ratings reflect our views of Lloyd's business risk profile as very strong and financial risk profile as moderately strong. These factors lead to an anchor of either 'a' or 'a+'. We used an 'a+' anchor because we consider that Lloyd's overall creditworthiness relies more on its very strong competitive position through its positive brand and reputation differentiation and the diversification of its product offering. The financial risk profile is constrained to a certain extent by Lloyd's high risk position, which partly offsets its extremely strong capital adequacy and positive operating performance. However, we continue to regard Lloyd's capital and earnings as very strong. Its capitalization, measured using our capital model, comfortably exceeds the 'AAA' level. In 2013-2014, Lloyd's has produced strong results, partly because there have been few major losses but also because of its work overseeing and managing the syndicates' business plans.
In our base-case scenario, we expect Lloyd's to continue to exhibit strong earnings to sustain its extremely strong capital adequacy. We forecast a combined ratio of 88-90 in 2014 and 98-102 in 2015-2016, assuming average catastrophe loss levels. Historically, such losses have contributed about 12 percentage points to the combined ratio. In our view, over 2014-2016, Lloyd's should generate a return on capacity of 12% and a return on revenue of 10%-15%. We base these projected returns on strong net income of £2.8bn in 2014 and £1.5-£2bn in 2015-2016.In revising the outlook to stable from positive, we are indicating that we consider an upgrade unlikely in the next 12-24 months.An upgrade would require a marked improvement in the reinsurance sector's pricing environment. We do not regard a downgrade as likely 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. "
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