Kroll Bond Rating Agency (KBRA) has assigned an “AA-” insurance financial strength rating (IFSR) to Lloyd’s with a stable outlook.
Newly appointed to provide an additional independent opinion of the market’s financial strength, KBRA joins three other agencies that rate Lloyd’s.
KBRA said the rating reflects Lloyd’s sound risk-adjusted capitalization, unique capital structure, conservative underwriting leverage, sound technical reserves, strong liquidity profile, diversified earnings sources, broad distribution channels and comprehensive risk management program.
The rating considers Lloyd’s capital growth at a compound annual growth rate of 6.5% since end-2014 despite elevated catastrophe and attritional losses since 2016. Lloyd’s maintains strong capital and solvency positions, with net resources increasing to £33.9 billion ($47.1 billion) in 2020 and central and market wide solvency ratios of 209% and 147%, respectively.
KBRA said the ability to request members to bring their capital in line after major loss events enhances Lloyd’s overall financial strength.
“Balancing these strengths are recent unfavorable underwriting performance, an elevated expense ratio, heavy reliance on reinsurance and exposure to event risk,” confirmed KBRA.
KBRA then commented on these four areas.
- Underwriting performance. While Lloyd’s has reported a cumulative result before tax from 2015 – 2020 of £2.9 billion ($4 billion), the result has been driven solely by investment income as underwriting losses for the same period were £4.5 billion ($6.3 billion), said the ratings agency. Much of the Lloyd’s underwriting loss is attributable to major and catastrophe events, including £3.4 billion ($4.7 billion) in incurred losses in 2020 for COVID-19. However, KBRA said it was more concerned about the elevated attritional losses seen since 2017. This has been “somewhat offset by Lloyd’s continued focus on performance management which has generated a trend of improving results by capitalizing on the current price firming across the industry.”
- Elevated expense ratio. The Future at Lloyd’s program may mitigate Lloyd’s elevated expense ratio over the medium to longer term, but it faces “material execution risk,” said the ratings agency. KBRA explained that the program is large and complex and Lloyd’s cannot mandate adoption of new digital processes and practices by managing agencies.
- Heavy reliance on reinsurance. “Since each syndicate structures and purchases its own reinsurance program, Lloyd’s is more heavily dependent on reinsurance than peers who utilize reinsurance more strategically although this weakness is partially offset by central management’s detailed monitoring of counterparty credit risk across the Lloyd’s market.”
- Exposure to event risk. The market writes broad lines of business and has a wide geographic footprint, so it incurs claims for most catastrophic events around the world, explained KBRA. “While exposure to catastrophes is partially mitigated by appropriate risk tolerances and high-credit quality reinsurance, KBRA expects Lloyd’s to continue to provide material cover for large loss-generating events going forward.”
Diversity of Views
“We are delighted to appoint Kroll Bond Rating Agency and add an ‘AA-‘ stable outlook rating to sit alongside our financial strength ratings from our existing agencies,” said Burkhard Keese, CFO, Lloyd’s.
“At Lloyd’s we highly value our ratings as they are vital indicators to our customers, our market, and our investors of our exceptional financial position. As shown in our 2020 full-year results, our capital and solvency positions are strong and resilient, which is reflected in our current ratings,” he added.
“We believe it is important to have a diversity of views in the ratings market and welcome KBRA as a new entrant that will provide a fresh perspective on Lloyd’s.”
In addition to KBRA’s “AA-” rating, Lloyd’s has a Standard & Poor’s rating of “A+” (Strong) with a stable outlook, an “A” (Excellent) rating from AM Best with a stable outlook, and a “AA-” (Very Strong) rating from Fitch.
Source: Lloyd’s and KBRA
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