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Rating Action:

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

09 Jun 2017

London, 09 June 2017 -- Moody's Investors Service has affirmed the Baa2 senior unsecured debt and issuer ratings of Lancashire Holdings Ltd and the A3 insurance financial strength ratings (IFSR) on Lancashire Insurance Company Limited and Lancashire Insurance Company (UK) Limited. The outlooks on these entities remain stable.

RATING RATIONALE

The rating affirmation reflects Lancashire's strong market position in its chosen niche segments; its well diversified portfolio across multiple lines and geographies; and strong financial metrics, including a conservative investment portfolio and continued outperformance of peers with a strong focus on underwriting discipline and ability to operate nimbly across the cycle. These strengths are tempered by high, albeit now reduced, underwriting risk with a material portion of the group's portfolio exposed to natural catastrophes, as well as the difficult trading environment, which is pressuring the group's gross written premiums base and profitability returns.

The group has a strong position in its chosen niche market. While Lancashire Insurance is one of the smallest specialist insurers in Bermuda, the company is known for offering large policy limits and leading approximately 80% of the business it writes. Through its Cathedral syndicates, the group also benefits from Lloyd's global market franchise and brand in writing specialty books of business.

However, these strengths are outweighed by the group's relatively small size in the global specialty (re)insurance market, which increases uncertainty about its commercial prospects in the wake of significant catastrophe losses. Furthermore, Moody's notes that Lancashire's gross written premiums have declined over the past five years, a trend which continued into the first quarter of 2017, with Lancashire reporting a 15% decline, although this also includes the impact of multi-year policies.

Moody's views positively Lancashire's focus on underwriting discipline, particularly against a backdrop of difficult trading conditions. This is reflected in Lancashire's strong profitability track record, with the group consistently outperforming peers, as indicated by the very good 5 year average return on capital at 12.5% and excellent historic combined ratios.

However, the industry is facing significant challenges, including disruption from inflows of alternative capital (most acutely in property catastrophe reinsurance), low investment returns, and intense competition in nearly all product lines. In Moody's opinion, Lancashire's business model and the strategy has positioned it to withstand some of these challenges and response to opportunities when they arise. However, Lancashire is not immune to market forces, which in addition to higher large losses, drove down the group's operating profits by 11% to $169 million in 2016. Similarly, for the first 3 months of 2017, Lancashire reported a 22% decline in operating profit with the combined ratio up 12.9ppts to 85.6%. Moody's notes however, that the group's 2016 return on capital remained broadly flat at 10% (YE2015: 11%), as a result of capital management actions.

Moody's believes Lancashire's capitalisation is good, as reflected in the group's gross underwriting leverage, which remained low at 1.1x at YE2016. Moody's also notes that, given market conditions, the group is currently carrying additional capital headroom and has reduced its aggregate catastrophe exposures by making use of more reinsurance protection. 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. In this regard, we note that shareholders have approved an issue of up to 15% of Lancashire's share capital on a non-pre-emptive-basis, providing the group with additional flexibility should the need or opportunity arise over the course of 2017.

OUTLOOK

The outlook on these entities is stable. This reflects Moody's view that Lancashire will continue to outperform peers and remain committed to protecting both its underwriting profitability and equity through underwriting discipline and by maintaining lower aggregate catastrophe exposures during the current soft cycle. While Moody's expects the group to continue to actively manage its capital base to boost returns, the stable outlook is predicated on financial leverage not materially exceeding 20% with earnings coverage of interest remaining above 5x.

RATING DRIVERS

Downward pressure on Lancashire's ratings could result from: (1) Material loss of business or market position in the group's core lines; (2) A deterioration in the group's profitability with cross-cycle ROC falling close to or below the peers average; (3) Adjusted financial leverage materially above 20% with EBIT fixed charge coverage below 5x in consecutive years; (4) More than a 10% decline in shareholders' equity over a rolling twelve month period as a result of losses, capital management actions; and/or (5) failure to adhere to internal risk limits that restrict catastrophe modelled losses to a percentage of capital.

While there is unlikely to be positive rating action in the near to medium term, the following factors could positively influence the group's credit profile: (1) Adjusted debt-to-capital ratio below 15% cross-cycle; (2) EBIT fixed charge coverage above 7x cross-cycle; and (3) Cross-cycle operating return on adjusted equity above 15%.

RATING LIST

The following ratings have been affirmed:

Lancashire Holdings Ltd. -- senior unsecured debt at Baa2, 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 the entities remain stable.

Lancashire Holdings Ltd reported gross premiums written of USD634 million and profit after tax of USD154 million for the 12 months ended 31 December 2016 with total shareholders' equity of USD1,208 million for YE2016.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Reinsurers published in April 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
Asst Vice President - Analyst
Financial Institutions Group
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

Antonello Aquino
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

No Related Data.
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