AM Best revises outlook for Lloyd’s; warns on competitive pressures

Rating agency AM Best has adjusted the financial strength rating of Lloyd’s from positive to stable on the back of what it described as pressure on Lloyd’s competitive position and prospective financial performance in an increasingly difficult operating environment.

It also noted the competition Lloyd’s is facing thanks to the growth of regional re/insurance hubs combined with the comparatively high cost of placing business at Lloyd’s, which it said is reducing the flow of business into the London market.

AM Best reduced the outlook of both Lloyd’s and Lloyd’s Insurance Company (China) to stable from positive.

At the same time, AM Best affirmed the financial strength rating of A (Excellent) and the issuer credit ratings of “a+” for both organizations.

AM Best also reduced the outlook to stable from positive for the Society of Lloyd’s while affirming its issuer credit ratings of “a”.

AM Best’s said that in its view an upgrade of the ratings in the short term is unlikely, owing to competitive pressures and a difficult operating environment.

It said that while the market’s operating performance has been good in recent years with an average five-year combined ratio of 91 percent between 2011 and 2015, prospective performance is expected to be weaker than in the recent past due to deterioration in premium rates and assuming average catastrophe experience and a lower level of reserve releases.

An increasingly difficult operating environment poses challenges to Lloyd’s competitive position, AM Best said. In particular, the growth of regional re/insurance hubs combined with the comparatively high cost of placing business at Lloyd’s is reducing the flow of business into the London market.

The rating agency admitted that there has been a proactive response by Lloyd’s to these threats. Improved access to international business is being supported by the Vision 2025 strategy and the establishment of regional platforms, and Lloyd’s continues to implement initiatives to improve efficiency and reduce operating costs.

The rating affirmations reflect Lloyd’s strong and stable risk-adjusted capitalization, excellent business profile and recent strong underwriting performance, the agency said.

Lloyd’s benefits from strong and stable risk-adjusted capitalization, supported by a robust risk-based approach to setting member level capital. The exposure of central resources to insolvent members has fallen significantly over the past ten years and is now at a very low level. Lloyd’s financial flexibility continues to be good, enhanced by the diversity of its capital providers, which include corporate and non-corporate investors.