AM Best has affirmed the financial strength rating of A (Excellent) and the long-term issuer credit rating of “a” (Excellent) of Bermudian-based Lumen Re Ltd.

The outlook of these credit ratings is stable.

The agency said the ratings reflect Lumen Re’s balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.

Lumen Re’s risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio, is at the strongest level.

Its liquidity, asset/liability management, quality of assets and use of internal capital models provide ample support of its balance sheet assessment.

Partially offsetting these rating factors, AM Best said, is Lumen Re’s relatively high dependence on third-party retrocession.

However, all retrocession will be written on a fully collateralised basis, thus minimising its exposure to losses and third-party credit risk.

The company’s leverage, as measured by the ratio of retained limits to equity, is low.

AM Best assesses Lumen Re’s overall operating performance as adequate.

Increased losses from peak and secondary peril events in 2021 has led the company to begin a de-risking and re-underwriting process to improve contract terms and raise attachments in order to prevent outsize loss experiences going forward.

The company’s pricing strategy is to focus on underwriting profits and not on asset returns.

AM Best assesses Lumen Re’s business profile as limited, as the company predominantly writes catastrophe excess of loss contracts and limited reinsurance protection programmes with well-established cedants in highly developed markets.

Product concentration is mitigated somewhat by risk diversification across regions, perils and the number of cedants.

Pricing sophistication, modelling capabilities including reliance on vendor models and independent modelling tools, and coverage exclusions for start-up companies create a strong environment for management to execute its pricing strategy.

AM Best assesses Lumen Re’s ERM as appropriate, based on the company’s robust ERM framework and governance that ensures a systematic and controlled process for the identification, monitoring and reporting of underwriting and investment risks, as well as other relevant risks that affect its reinsurance operations.