AM Best has negative outlook for Lancashire

AM Best has revised the outlook to negative from stable for the long-term issuer credit rating (Long-Term ICR) and affirmed the financial strength rating (FSR) of A (‘excellent’) and the Long-Term ICR of a+ (‘excellent’) of Lancashire Insurance Company Limited (Hamilton, Bermuda) and Lancashire Insurance Company (UK) Limited (United Kingdom)–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 (Hamilton, Bermuda).

The 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 (ERM).

Lancashire maintains the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio. In addition, AM Best’s 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.

However, the 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, AM Best said.

“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,” the rating agency said.

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