Fitch Ratings has revised its outlook for the underlying fundamentals of the London Market to negative as a result of the ongoing coronavirus pandemic that has killed thousands across the globe.
The ratings agency, which had previously rated the sector as stable, said the revision “reflects increased concerns over the COVID-19 disruption and the related impacts on the credit quality of London Market insurers”.
Fitch’s outlook for ratings levels in the sector remains stable, although it expects to revisit the rating outlook again as its analytical work related to the coronavirus outbreak advances.
And while the ratings agency says it believes that the ratings of London Market insurers will be less affected by the pandemic than those of European life insurers, whose rating outlooks were recently revised to negative, it has not ruled out the outbreak having an impact on London Market ratings in the future.
“Near-term downgrades are possible, but currently viewed as unlikely,” Fitch added.
The ratings agency said that the current financial conditions facing the market would affect the capital position of London Market insurers, but that any impact on underwriting performances would be more limited.
“Falling equity markets, widening credit spreads and declining interest rates are all negative for capital. London market insurer bond portfolios are mostly highly-rated, but widespread downgrades could weaken capital ratios,” it said. “We expect the impact on underwriting performance to be more limited, with the biggest exposure coming from event cancellation, business interruption and accident & health lines.
“The low interest rates add to pressure on investment earnings from already ultra-low bond yields.”
The sector last received an outlook revision in November 2019 when Fitch improved the outlook to stable from negative as a result of “improved pricing conditions and the expectation that improved underwriting results would start to emerge from 2020” although the ratings agency still considered a number of “significant challenges” for the market, including high expense ratios, low investment yields and a need for reserve strengthening in US casualty lines.
The outbreak of coronavirus, however, is expected to introduce a number of operational risks for the market, leading to the latest revision back to a negative outlook.
“The rapid spread of COVID-19 could increase operational risks for the implementation of the Future at Lloyd’s project, which aims to modernize the market and make it more cost efficient,” Fitch said. “Business transacted in the London Market typically relies heavily on face to face interaction and this could be significantly disrupted if the COVID-19 outbreak is prolonged.”