AM Best September 2019 Lloyd’s

AM Best September 2019 Lloyd's

Best's Rating of Lloyd's 2019

Lloyd's

September 2019

One Lime Street London EC3M 7HA United Kingdom

Web: AMB#: 85202 AIIN#: AA-1122000

Lloyd's Credit Report

Best's Credit Ratings:

Rating Effective Date: July 10, 2019

Best's Financial Strength Rating:

A

Best's Issuer Credit Rating:

a+

Outlook: Outlook:

Best's Credit Ratings for Group Members:

Rating Effective Date: July 10, 2019

Stable Stable

Action: Action:

Affirmed Affirmed

AMB# 85202 78649 95926

Best's Financial Strength Ratings

Company

Rating Outlook Action

Lloyd's

Rating Unit A

Stable Affirmed

Lloyd's Ins Co (China) Ltd

A

Stable Affirmed

Lloyd's Insurance Co. S.A.

A

Stable Affirmed

Best's Issuer Credit Ratings

Rating Outlook Action

a+

Stable Affirmed

a+

Stable Affirmed

a+

Stable Affirmed

Five Year Credit Rating History:

Best's Financial Strength Ratings

Date

Rating

Outlook Action

07/10/2019

A

Stable

Affirmed

07/12/2018

A

Stable

Affirmed

07/20/2017

A

Stable

Affirmed

07/21/2016

A

Stable

Affirmed

07/22/2015

A

Stable

Affirmed

07/24/2014

A

Positive

Affirmed

Best's Issuer Credit Ratings

Rating

Outlook Action

a+

Stable

Affirmed

a+

Stable

Affirmed

a+

Stable

Affirmed

a+

Stable

Affirmed

a+

Stable

Affirmed

a+

Positive

Affirmed

Contents

Best Credit Report: Lloyd's 1

Best Credit Report:

Society of Lloyd's

18

Rating Lloyd's Operations 21

Appendices

29

Analytical Contacts:

Jessica Botelho-Young, CA, London Jessica.Botelho@ +44 207 397 0310

Timothy Prince, London Timothy.Prince@ +44 207 397 0320

Rating Rationale:

Balance Sheet Strength: Very Strong ? Themarkethasthestrongestlevelofrisk-adjustedcapitalisation,asmeasuredbyBest's

CapitalAdequacyRatio(BCAR). ? Arobustcapital-settingregime,whichincorporatesarisk-basedapproachtosetting

member-levelcapital,helpsprotectrisk-adjustedcapitalisationfromvolatility. ? Member-levelcapitalissubjecttofungibilityconstraintsasitisheldonaseveralratherthan

jointbasis. ? BalancesheetstrengthisunderpinnedbyastrongCentralFundthatisavailable,atthe

discretionoftheCouncilofLloyd's,tomeetthepolicyholderobligationsofallLloyd's members. ? Anoffsettingfactoristhemarket'ssignificantexposuretocatastropheriskandits dependenceonreinsurancetomanagethisrisk.

Operating Performance: Strong

? Lloyd'slong-termhistoricaloperatingperformanceisstrong,demonstratedbyaten-year (2009-2018)averagecombinedratioof96.6%andareturnonequityratioof7.1%.

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Lloyd's

? Technicalperformanceissubjecttovolatilityduetothenatureofbusinessunderwritten.In 2018,majorlossesadded11.6pointstothecombinedratio(2017:18.5points).

? Adjustedforaveragecatastropheexperience,recenttechnicalperformancehasbeenoutside ofAMBest'sexpectationsforastrongassessment.However,robustremedialactionsbythe Corporationandindividualmanagingagentsareexpectedtosupportfurtherincremental improvementsinattritionalaccident-yearperformanceoverthenextthreeyears.

? Themarket'sexpenseratioishighcomparedtothatofpeers.Actionstoreducethecost ofplacingbusinessatLloyd'saresubjecttoahighdegreeofexecutionriskduetoinitial investmentandculturechangerequired.

Business Profile: Favourable ? Lloyd'shasastrongpositionintheglobalgeneralinsuranceandreinsurancemarketsasa

leadingwriterofspecialtypropertyandcasualtyrisks. ? AlthoughLloyd'ssyndicatesoperateasindividualbusinesses,thecollectivesizeofthe

marketallowsthemtocompetewithinternationalgroupsundertheLloyd'sbrand. ? ThemarketsinwhichLloyd'soperatesarehighlycompetitiveandhaveexperiencedsoft

marketconditionsforanumberofyears.Lloyd'srelianceonbrokerstounderwritespecialty andreinsurancebusinessmakesitvulnerabletoprice-basedcompetition. ? TheportfolioiswelldiversifiedbutwithsomegeographicalbiastowardsNorthAmerica andproductbiastowardscommercialspecialtylinesproducts. ? Productriskismoderatetohigh.Higher-risklinesincludereinsurance,energy,aviation, somemarinebusinessandahighproportionofthecasualtyandpropertybusinesswritten. Themajorityofsmallcommercialandconsumerbusiness,aswellassomeofthebusiness writtenthroughcoverholders,islowerrisk.

Enterprise Risk Management: Appropriate ? Lloyd'senterpriseriskmanagementframeworkiswelldevelopedandappropriateforthe

sizeandcomplexityoftheLloyd'smarket. ? Riskmanagementcapabilitiesarealignedwiththemarket'sriskprofile. ? TheCorporation'sriskmanagementfunctionoffersthemarketadditionaloversight.

However,asmanagingagentsofindividualandcompetingsyndicateshavetheirownrisk appetitesandstrategiestherearesomelimitationsonitsabilitytoactivelymanagethe market'srisks. ? Aninternalcapitalmodel,inplacesince2012,isusedtocalculatethesolvencycapital requirementunderSolvencyIIaswellastostresstestthemarket'srisk-adjusted capitalisation.InAMBest'sopinion,theinternalcapitalmodelstronglysupportsthe Corporation'sabilitytoassessthecapitaladequacyofthemarket.

Outlook ThestableoutlooksreflectAMBest'sexpectationthatrisk-adjustedcapitalisationwillremainat thestrongestlevel,supportedbyLloyd'scapitalmanagementstrategyandtherequirementfor memberstoreplenishtheirFundsatLloyd'sfollowinglosses.Long-termoperatingperformance isexpectedtoremainsupportiveofthestrongassessment,albeitsubjecttovolatilityfrom catastrophelosses,subjecttothesuccessofremedialactionsthatarebeingtaken.Lloyd's isexpectedtomaintainitsfavourablebusinessprofile,underpinnedbythestrongLloyd's brandandunderwritingexpertise.Thebusinessprofileassessmenttakesintoaccountthe competitiveconditionsinLloyd'scoremarketsandpressurefromchangingmarketdynamics, includingtheregionalisationofinsurancebusiness.

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Lloyd's

Rating Drivers Upwardratingmovementsareconsideredunlikelyintheshortterm.Longerterm,positive ratingpressurecouldariseifLloyd'sbusinessprofilestrengthens.

NegativeratingactionscouldariseifLloyd'sunderlyingperformancedoesnotimproveinline withexpectationsoverthenextthreeyears.

Negativeratingactionscouldarisefollowingamaterialdeteriorationinthemarket'sriskadjustedcapitalisation,forinstance,duetoasubstantiallosstotheCentralFundorareduction inmember-levelcapitalrequirementssetbyLloyd's.

Key Financial Indicators

(000)

2018

Premiums

Direct premiums - non life

24,457,000

Gross premiums written - non life

35,527,000

Net premiums written - non life

25,681,000

Capital & surplus

27,428,000

Total assets

118,008,000

Local Currency: British Pound

US $ per Local Currency Unit 1.27047 = 1 British Pound (GBP)

Source:

? Best's Financial Suite ? Global

2017

2016

23,031,000 20,454,000 33,591,000 29,862,000 24,869,000 23,066,000 26,767,000 27,714,000 108,396,000 101,602,000

2015

2014

18,097,000 26,690,000 21,023,000 24,216,000 83,629,000

16,771,000 25,259,000 20,006,000 22,528,000 79,713,000

(%)

Combined Ratio Net Premiums Written to Equity Liquidity

Liquid assets to total liabilities Total investments to total liabilities

2018 104.5

93.6

67.5 78.6

Source:

? Best's Financial Suite ? Global

2017 114.0 92.9

72.0 83.2

2016 97.9 83.2

80.7 91.6

2015 90.0 86.8

85.9 95.8

2014 88.4 88.8

85.0 96.0

Best's Capital Adequacy Ratio Summary ? AMB Rating Unit (%)

Confidence Level

95.0

99.0

99.5

99.6

BCAR Score

70.8

56.3

50.0

47.9

Source: Best's Capital Adequacy Ratio Model - Universal

Credit Analysis:

Balance Sheet Strength: Very Strong Lloyd'sbalancesheetstrengthassessmentofverystrongreflectsrisk-adjustedcapitalisation atthestrongestlevel,asmeasuredbyBest'sCapitalAdequacyRatio(BCAR),aswellasthe market'sgoodfinancialflexibility.Themarkethassignificantexposuretocatastrophelosses andisdependentonreinsurancetomanagethisrisk.However,arobustmarket-widecapitalsettingregime,whichincorporatesarisk-basedapproachtosettingmember-levelcapitaland therequirementformemberstoreplenishtheirfundsatLloyd'safteraloss,helpsprotectriskadjustedcapitalisationagainstvolatility.

3

Lloyd's

BalancesheetstrengthisunderpinnedbyastrongCentralFundthatisavailable,atthe discretionoftheCouncilofLloyd's,tomeetthepolicyholderobligationofallLloyd'smembers. Itistheexistenceofthispartiallymutualisinglinkthatisthebasisforamarket-levelrating.

Themarket'smember-levelcapitalisheldonaseveralratherthanjointbasisandisonly availabletomeettheliabilitiesofthatparticularmember.Theresultingfungibilityconstraints onavailablecapital,thesignificantproportionofmember-levelcapitalprovidedthroughletters ofcredit(LOCs),themarket'ssignificantexposuretocatastropherisk,anddependenceon reinsurancetomanagethisrisk,arelimitingfactorsforthebalancesheetstrengthassessment.

Capitalization TheBCARscoresshowninthisreportarebasedonthe2018figurespublishedinthe Lloyd'sannualreportwhichcontainsthefinancialresultsofLloyd'sanditsmembers inproformafinancialstatementsandincludesthefinancialstatementsoftheSociety ofLloyd's(referredtointhisreportastheSocietyortheCorporation,whichareused interchangeably).Theproformafinancialstatementsincludetheaggregatedaccounts, whicharebasedontheaccountsofeachLloyd'ssyndicate,members'fundsatLloyd's (FAL)andtheSociety'sfinancialstatements.

TheSocietywasformedin1871,whenthethenexistingassociationofunderwritersatLloyd's wasincorporatedbytheLloyd'sAct.TheSocietyproducesconsolidatedfinancialstatements thatcoverLloyd'sactivitiesoutsidetheunderwritingmarketandLloyd'scentralresources(the CentralFund).

Lloyd'sbenefitsfromrisk-adjustedcapitalisationatthestrongestlevel,asmeasuredbyBCAR. Thisassessmenttakesintoaccountcapitalresourcesavailableatmemberlevel,intheformof Members'FAL,andcentrallyintheformoftheCentralFundandnetassetsoftheCorporation. CapitalcreditisgiveninBCARforsubordinateddebtissuedbytheSociety,aswellasfor FALprovidedthroughLOCsasifdrawntheseLOCswillturnintoTier1capitalforLloyd's. Nonetheless,theextensiveuseofLOCsasFALreducesthequalityofavailablecapital.AMBest doesnotgiveexplicitcreditforcontingentcapitalinthe`callablelayer'whichistheabilityof theCorporationtosupplementcentralassetsbycallingfundsfrommembersofupto3%of theiroverallpremiumlimits.

AnyassessmentofLloyd'scapitalstrengthiscomplicatedbythecompartmentalisationof capitalatmemberlevel.Member-levelcapitalintheformofFALandmembers'balancesare heldonaseveralratherthanjointbasis,meaningthatanymemberneedmeetonlyitsshareof claims.However,Lloyd'scentralassetsareavailable,atthediscretionoftheCouncilofLloyd's, tomeetpolicyholderliabilitiesthatanymemberisunabletomeetinfull.Thislinkinthechain ofsecuritycomprisestheCentralFundandothercentralassets,aswellassubordinateddebt. Thesecentralassetscanbesupplementedbyfundscalledfrommembersofupto3%oftheir overallpremiumlimits.Itistheexistenceofthispartiallymutualisingthirdlink,andtheliquid CentralFundinparticular,thatisthebasisforamarket-levelrating.

Lloyd'sInternalModel(LIM)capturesLloyd'suniquecapitalstructureandtakesintoaccount fungibilityconstraintsonmember-levelcapitalandthemutualnatureofcentralassets.If aseveremarketlossledtotheexhaustionofsomemembers'FAL,centralassetswouldbe exposedtoanyfurtherlossesfacedbythesemembers.Themodelcapturesthismutualised exposure,sothat,atdifferentreturnperiods,theexposureofbothmember-levelcapitaland centralcapitalisdemonstrated.

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