Kroll Bond Rating Agency (KBRA) has assigned an AA- insurance financial strength rating (IFSR) to Lloyd’s with a stable outlook.
According to KBRA, the latest rating reflects Lloyd’s strong risk-adjusted capitalisation, favourable capital trends and multi-faceted capital structure.
It also highlighted its conservative underwriting leverage, sound technical reserves, strong liquidity profile, diversified earnings sources, broad distribution channels and comprehensive risk management programme.
At end-2021, Lloyd’s market wide Solvency II ratio was 177% and its capital has grown at a compound annual growth rate of 5.2% over the last five years and is up 7.7% at end-2021 over prior year, IFSR noted.
As Lloyd’s capital structure incorporates multiple successive layers of claims paying resources, KBRA believes that the increase in the callable layer from 3% to 5% plus a £650m layer of reinsurance to protect the Central Fund, in conjunction with reduced risk and improved performance, materially enhances the market’s financial position.
In combination, these changes resulted in a central Solvency II ratio of 388% at end-2021. KBRA believes that this represents an extremely strong backstop over and above capital resources at the market level.
KBRA said: “Compared to peers, Lloyd’s maintains conservative premium and reserve leverage metrics. At end-2021, net carried reserves exceeded market and central actuarial best estimates.
“Lloyd’s credit profile is enhanced by its expansive coverholder distribution network that provides it broad access to risks across the globe.
“Lloyd’s has a robust, dynamic risk management framework and processes characterised by well-articulated risks and conservative risk tolerances which are regularly monitored and subject to various stress tests and scenario analysis.”
Balancing these strengths are recent unfavourable underwriting performance, an elevated expense ratio, heavy reliance on reinsurance and exposure to event risk.
According to KBRA, while Lloyd’s has reported a cumulative result before tax from 2017-2021 of £0.9bn, it has been driven by net investment income of £9.1bn, offset by cumulative underwriting losses of £6.0bn.
The rating agency noted that some of the underwriting loss was due to major and catastrophe events in 2017, 2018 and 2020, attritional losses during 2017 – 2019 were elevated as well.
Even though Lloyd’s reported attritional loss ratio improvement in 2020 and in 2021 – due to continued focus on performance since 2018 -, KBRA expects Lloyd’s to report attritional loss ratios generally in line with 2020 and 2021 over the medium term.
The rating company said: “While Lloyd’s expense ratio showed continued improvement in 2021, it remains elevated compared to peers. As implementation of the Future at Lloyd’s programme begins, KBRA expects more meaningful expense reductions will materialise.
“Since each syndicate structures and purchases its own reinsurance programme, Lloyd’s is more heavily dependent on reinsurance than peers which utilise reinsurance more strategically although this weakness is partially offset by central management’s detailed monitoring of counterparty credit risk across the market.”
