Fitch upgrades Lloyds across the board; rating outlook stable

Fitch Ratings has upgraded Lloyd's of London's Insurer Financial Strength (IFS) rating to 'AA-' from 'A+'.

Fitch has also upgraded the Society of Lloyd's Long-term Issuer Default Rating to 'A+' from 'A' and Lloyd's Insurance Company (China) Ltd's IFS rating to 'AA-' from 'A+'.

Additionally, the agency has upgraded Lloyd's subordinated debt issues to 'A-' from 'BBB+'. 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.

Furthermore, 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.

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.

Credit metrics are not expected to strengthen significantly across the rating horizon, so a further upgrade is unlikely in the near to medium term.

A downgrade may occur however if the normalised combined ratio remains above 97 percent or if leverage, as measured by net premiums written to equity, rises above 1.2x.