AM Best Affirms Credit Ratings of Lloyd’s

July 11, 2019

AM Besthas affirmed the Financial Strength Rating of “A” (Excellent) and the Long-Term Issuer Credit Ratings of “a+” of Lloyd’s (United Kingdom), Lloyd’s China and Lloyd’s Brussels.

Concurrently, AM Best has affirmed the Long-Term ICR of “a” of the Society of Lloyd’s (United Kingdom) and the Long-Term Issue Credit Ratings of “a-” on the £500 million 4.750% subordinated loan notes maturing Oct. 30, 2024 and on the £300 million 4.875% subordinated notes maturing Feb. 7, 2047. The outlooks of these credit ratings remain stable.

The ratings reflect Lloyd’s balance sheet strength, which AM Best categorized as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management.

AM Best said the Lloyd’s market benefits from its risk-adjusted capitalization being at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Capital adequacy is supported by a robust risk-based approach to setting member-level capital and a strong central fund, which is available to meet the policyholder obligations of all Lloyd’s members.

AM Best said its assessment of the Lloyd’s balance sheet strength “takes into account the fungibility constraints of capital held at the member level and the market’s good financial flexibility, which is enhanced by the diversity of its capital providers.”

AM Best noted that the market’s exposure to catastrophe risk is an offsetting rating factor. However, the requirement for members to replenish their funds at Lloyd’s to meet their current underwriting liabilities, as part of the “coming into line” process, partly mitigates the potential for volatility in risk-adjusted capitalization due to operating losses.

Despite pre-tax losses in 2017 and 2018, due to above average natural catastrophe losses, risk-adjusted capitalization was stable as member-level capital was replenished in line with expectations, said the ratings agency, AM Best continued.

The operating performance assessment reflects Lloyd’s long-term record of strong technical performance over the underwriting cycle as demonstrated by the 10-year (2009-2018) average combined ratio and return on equity of 96.6% and 7.1%, respectively.

Technical performance is subject to volatility due to the nature of the business underwritten and in 2018, major losses added 11.6 points to the combined ratio. Adjusted for average catastrophe experience, recent technical performance has been outside AM Best’s expectations for the strong assessment. However, AM Best expected that robust remedial actions by the Corporation of Lloyd’s and individual managing agents to support further incremental improvements in attritional accident-year performance over the next three years.

AM Best noted that the market’s expense ratio continues to be higher than its peers, but actions are being taken to reduce the cost of placing business at Lloyd’s. However, these actions “are subject to a high degree of execution risk due to the initial investment and culture change required.”

The favorable business profile assessment reflects the strong position of Lloyd’s in its core markets, as a leading writer of reinsurance and specialty property and casualty insurance. AM Best said that Lloyd’s has an excellent brand in these markets but an increasingly difficult operating environment poses challenges to the market’s competitive position.

The market’s business mix is well-diversified but with some geographical bias toward North America and product bias towards moderate to high-risk commercial specialty lines products, the ratings agency affirmed.

The ratings of Lloyd’s China and Lloyd’s Brussels reflect reinsurance support from Lloyd’s in the form of quota share contracts between Lloyd’s and the syndicates participating on the China and Brussels platforms.

Source: AM Best

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