AM Best believes Lloyd’s will produce strong technical performance over the underwriting cycle and that capital will continue to be attracted to the market.

This commentary from the rating agency comes despite the fact that recent underwriting performance has been below AM Best’s expectations for the strong assessment level they have provided to Lloyd’s. The marketplace has had a five-year (2017-2021) combined ratio of 104.9 per cent.

Best is counting on improving pricing conditions, as well as the robust performance oversight by the corporation, which has started to materialise in measurable improvements in underwriting performance, as demonstrated by the year-end 2021 combined ratio of 93.5 per cent.

The rating agency said: “Nonetheless, the market’s expense ratio continues to be higher than its peers. Actions are being taken through the Future at Lloyd’s initiative to reduce the cost of placing business at Lloyd’s, the benefit of which should start to be realised over the short-term.

“The business profile assessment reflects the strong position of Lloyd’s in its core markets, as a leading writer of reinsurance and specialist property/casualty insurance. Lloyd’s has an excellent brand in these markets, which are experiencing improving pricing conditions. The market’s business mix is well-diversified but with some geographical bias towards North America and product bias towards moderate-to-high risk commercial specialty lines.”

AM Best made these observations as they affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Ratings of “a+” (Excellent) of Lloyd’s (United Kingdom), Lloyd’s Insurance Company (China) Limited, and Lloyd’s Insurance Company S.A. (Belgium).

Concurrently, AM Best has affirmed the Long-Term ICR of “a” (Excellent) of Society of Lloyd’s and the Long-Term Issue Credit Ratings of “a-” (Excellent) on the GBP 500 million 4.750 per cent subordinated loan notes maturing 30 October 2024 and on the GBP 300 million 4.875 per cent subordinated notes maturing 7 February 2047. The outlook of these Credit Ratings is stable.

The ratings reflect Lloyd’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management.

The Lloyd’s market benefits from risk-adjusted capitalisation being at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR).

Capital adequacy is supported by a robust risk-based approach to setting member-level capital and Lloyd’s Central Fund, which is available at the discretion of the Council of Lloyd’s to meet the policyholder obligations of all Lloyd’s members.

The protection afforded to members through the Central Fund was enhanced in 2021 following the purchase of Central Fund insurance by the Corporation of Lloyd’s (the Corporation).

AM Best’s assessment of Lloyd’s balance sheet strength 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 catastrophe risk is an offsetting factor. However, the requirement for members to replenish their Funds at Lloyd’s to meet their underwriting liabilities, as part of the “coming into line” process, together with the corporation’s enhanced oversight of accumulation risk, partly mitigates the potential for volatility in risk-adjusted capitalisation due to operating losses.