A Bermuda company, Lancashire Holdings Limited, and its Bermuda insurer are facing a negative outlook for ratings issued by credit rating agency AM Best.

Although recognising several positive attributes of performance and management processes, the agency has expressed concern about volatility in Lancashire’s operating performance results and believes it will take some time for management action to completely resolve the issues.

AM Best revised the outlook to negative from stable for the long-term issuer credit rating and affirmed the financial strength rating of A (Excellent) and the long-term ICR of “a+” (Excellent) of Lancashire Insurance Company Limited of Hamilton, Bermuda. and Lancashire Insurance Company (UK) Limited, collectively referred to as Lancashire. The outlook of the FSR is stable.

Additionally, AM Best has revised the outlook to negative from stable and affirmed the long-term ICR of “bbb+” (Good) of the parent company, Lancashire Holdings Limited.

The credit ratings reflect Lancashire’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

AM Best said Lancashire maintained the strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio.

In addition to the strongest level of risk-adjusted capitalisation, the assessment of balance sheet strength is supported by the group’s financial flexibility and history of prudent reserving.

Also reflected in the ratings is Lancashire’s historically strong overall performance, driven by underwriting results in non-catastrophe-affected years and complemented by investment income and fee income.

But Best’s negative outlook on the long-term ICR reflects the trend in outsized volatility in Lancashire’s operating performance results relative to its current assessment composite.

Although management has taken steps to mitigate this volatility, AM Best expects these steps will take time to translate to results and that, over the near term, the group’s results likely will continue to display heightened volatility relative to the composite during active catastrophe years.

Best said Lancashire was a specialty underwriter with a good degree of geographic and product line diversification because the company’s offerings included primary insurance, reinsurance and retrocessional coverages written on a global basis through traditional capacity, Lloyd’s and its Kinesis platform.

The group’s ERM is considered embedded and appropriate for Lancashire’s elevated risk profile.