An operating performance assessment of Lloyd’s reflects the expectation that the business will produce strong technical performance over the underwriting cycle and that capital will continue to be attracted to the market, said AM Best.
The rating agency said technical performance is subject to volatility due to the nature of the business underwritten, and since 2017, the market has experienced higher-than-average CAT losses and lower favourable prior-year reserve releases.
Adjusted for average CAT experience, recent technical performance has been outside AM Best’s expectations for the strong assessment. However, the agency expects that improving market conditions and robust remedial actions by the Corporation of Lloyd’s and individual managing agents will support further incremental improvements in the attritional accident-year performance over the next three years.
The market’s expense ratio continues to be higher than that of its peers. Actions are currently being taken through the Future at Lloyd’s initiative to reduce the cost of placing business at Lloyd’s, the benefits of which should start to be realised over the short term.
AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a+” of Lloyd’s (UK), Lloyd’s China and Lloyd’s Brussels. Concurrently, AM Best has affirmed the Long-Term ICR of “a” of Society of Lloyd’s, the Long-Term Issue Credit Ratings of “a-” on the GBP500m ($628m) 4.750% subordinated loan notes maturing 30 October 2024 and on the GBP300m 4.875% subordinated notes maturing 7 February 2047. The outlook of these credit ratings is stable.
Capitalisation
The ratings reflect Lloyd’s balance sheet strength, which AM Best categorises as very strong, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management.
The Lloyd’s market benefits from its risk-adjusted capitalisation being at the strongest level, as measured by Best’s Capital Adequacy Ratio. 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’s assessment of the balance sheet strength of Lloyd’s 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.
The market’s exposure to CAT 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 capitalisation due to operating losses. Despite losses associated with the coronavirus pandemic, risk-adjusted capitalisation has been stable as member-level capital has been replenished in line with expectations. M