Moody’s See Positives in Lloyd’s of London Turnaround But Wary of Risk

Moody's Investor Service said Tuesday that Lloyd's of London's turnaround plans are credit positive but carry risk.

Source: Morningstar | Published on September 4, 2019

Lloyd's is looking to return to profit following two consecutive years of market losses of GBP1.00 billion in 2018 and GBP2.00 billion in 2017. The insurance market is looking to cut costs and modernise its processes.

Moody's said the actions are credit positive but carry high execution risk.

"The centrepiece of the plan is a set of digital platforms to streamline Lloyd's inefficient underwriting and claims management processes, which will facilitate product innovation and the adoption of new business models and technology," said Moody's analyst Helena Kingsley-Tomkins. "We view the plan as credit positive, but it carries a high execution risk as it will likely require substantial investment, as well as significant cultural change."

Lloyd's is the world's biggest subscription insurance market, made up of around 100 competing syndicates backed by a shared pool of capital.

The plan is designed to protect its position as the leading marketplace for specialty insurance and reinsurance against competition from its peers and other centres, including Bermuda and those in Asia.

Lloyd's removed just under GBP3.00 billion of "poorly performing" business from its market in 2018, as part of its turnaround process.

Moody's believes Lloyd's earnings will improve in the next 12 to 18 months but will "remain marginal".

"Firmer prices and stronger underwriting discipline should improve underwriting margins, which are currently negative across almost all lines of business. However, prices for property catastrophe reinsurance remain below 2012 levels, held back by an abundance of capital," Moody's said.

Lloyd's saw GBP2.9 billion in major claims in 2018 compared to the long-term average of GBP1.9 billion.

The credit ratings agency added: "Falling yields, rising claims inflation, a stubbornly high expense ratio and the cost of the modernisation programme will also hold back profitability in the short term."