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Rating Action:

Moody's affirms Lancashire's A3 insurance financial strength ratings; stable outlook

22 April 2020


London , April 22, 2020 – Moody's Investors Service ("Moody's") has affirmed the Baa2 senior unsecured debt and issuer ratings of Lancashire Holdings Ltd. ("Lancashire") and the A3 insurance financial strength ratings (IFSR) on Lancashire Insurance Company Limited and Lancashire Insurance Company (UK) Limited. The outlooks on all entities remain stable.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The rating affirmation reflects Lancashire's strong market position in its chosen niche segments; its diversified business portfolio across multiple lines and geographies; and strong financial metrics, including a conservative investment portfolio and a strong focus on underwriting discipline and ability to operate nimbly across the cycle. These strengths are tempered by relatively high underwriting risk with a material, albeit reduced in recent years, portion of the group's portfolio exposed to natural catastrophes. While pricing has continued to firm, Lancashire will be impacted by the Coronavirus outbreak, with profitability remaining below historic peak levels for at least the next 18-24 months.

The group has a strong position in its chosen niche market. While Lancashire is one of the smallest specialist insurers in Bermuda, the company is known for offering large policy limits and leading a substantial portion of the business it writes. Through its syndicates, the group also benefits from Lloyd's of London's global market franchise and brand in writing specialty books of business. However, the group's relatively small size in the global specialty (re)insurance market increases uncertainty about its commercial prospects in the wake of significant catastrophe losses.

Moody's views Lancashire's focus on underwriting discipline positively, particularly the group's willingness to walk away from business during a soft market. As a result, the group reported a 22% decline in gross written premiums (GWP) between 2014 and 2019. However, the rating agency believes this approach has positioned the group to take advantage of more favourable market conditions over the last two years, with GWP up 19% to $707 million for year-end 2019 (YE2019) from their lowest level in 2017, driven both by rate rises and new business.

Lancashire's disciplined approach to underwriting is also reflected in the group's strong track record of profitability, with Lancashire outperforming peers with excellent historic combined ratios and a five year average return on capital (ROC) of 12.5%, between 2012-2016. However, Lancashire's five year average ROC (2015-2019) has fallen to a lower than usual 5.4%, given significant industry-wide natural catastrophe losses in 2017 and 2018. Moreover, despite firming prices and high prior year reserve releases, profitability has remained subdued, with the group's 2019 ROC at 8.0%. Although we continue to expect Lancashire to outperform the market, low interest rates will continue to weigh on Lancashire's investment income in coming years.

Alongside its industry peers, the group will be affected by the Coronavirus outbreak both through its underwriting and investment portfolios. Whilst the group has no exposure to the most severely affected lines of business, it will likely see some increase in claims, predominantly related to its property (re)insurance portfolios. Losses could also be heightened across the group's energy and marine books given the restrictions on parts and labour.

Notwithstanding the impact of Coronavirus induced market volatility, Moody's believes Lancashire's capitalisation remains good. The group's YE2019 gross underwriting leverage was low at 1.3x and the rating agency also notes that the group has in recent years, amid soft market conditions, reduced its aggregate catastrophe exposures by making use of more reinsurance/retro protection and diversifying its portfolio. Nevertheless, because of its limited size, Moody's expects that a severe stress scenario would likely force the group to raise equity, cut risk exposures further and seek additional reinsurance protection to remain commercially relevant.

STABLE OUTLOOK

The outlook on these entities is stable. This reflects Moody's view that Lancashire will continue to grow its premium base gradually whilst protecting both its profit margins and equity through underwriting discipline and by maintaining lower aggregate catastrophe exposures.

While Moody's expects the group to continue to actively manage its capital base, the stable outlook is predicated on financial leverage not materially exceeding 20% with earnings coverage of interest remaining above 5x cross-cycle.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Lancashire's ratings could be upgraded as a result of: (1) material growth in premiums with increased diversification resulting in lower potential earnings volatility; (2) adjusted financial leverage falling below 15% with cross-cycle earnings coverage of interest above 7x; and (3) cross-cycle ROC above 10%.

Lancashire's ratings could be downgraded as a result of: (1) a material loss of business or market position in the group's core lines; (2) the group's cross-cycle ROC falling close to or below the peers average; (3) adjusted financial leverage materially above 20% with earnings coverage of interest below 5x in consecutive years; (4) more than a 10% decline in shareholders' equity over a rolling twelve month period; or (5) failure to adhere to internal risk limits that restrict catastrophe modelled losses to a pre-defined percentage of capital.

LIST OF AFFECTED RATINGS

The following ratings have been affirmed:

Lancashire Holdings Ltd.

-- senior unsecured debt at Baa2

-- long-term issuer rating at Baa2

Lancashire Insurance Company Limited

-- insurance financial strength at A3

Lancashire Insurance Company (UK) Limited

- insurance financial strength at A3

The outlooks on all entities remains stable.

Lancashire Holdings Ltd reported gross premiums written of $707 million and profit after tax of $118 million for the 12 months ended 31 December 2019 with total shareholders' equity of $1,194 million for YE2019.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Reinsurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187551 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helena Kingsley-Tomkins
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Simon James Robin Ainsworth
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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