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 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 is Lumen Re’s 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. The company’s de-risking and re-underwriting process appears to be having the intended effect as the loss ratio has come down significantly compared with the prior year. Lumen Re’s operating performance is expected to improve given the hardening market and tightening underwriting.

The ratings agency 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.