The A1 IFSRs assigned to both MS Amlin AG and Lloyds Syndicate 2001, collectively the "MS Amlin entities" reflect their A3 standalone credit profiles and two notches of uplift due to parental support.
Following the reorganisation of MSI's international divisions, Moody's has altered its analytic approach to separately evaluate the standalone credit assessment of each the MS Amlin entities. As a result, the standalone credit assessments for MS Amlin AG and Lloyd's Syndicate 2001 have been reduced to A3 from A2, while the extent of rating uplift due to parental support has increased to two notches from one notch previously, reflecting the entities' tighter integration with MSI.
Any reversal of this tighter integration or diminished strategic importance to MSI, including indications of MSI seeking to sell one or more of the entities would lead to downward pressure on the ratings.
Moody's believes that the MS Amlin entities benefit from strong parental support from MSI because they are a key component of MSI's strategy to grow and diversify outside its domestic Japanese market. Support is further underscored by the shared brand and increasing operational integration and reputational ties between the MS Amlin entities and the parent, along with demonstration of financial support in the form of an additional capital injection in 2018.
The reorganization of MSI's holdings in the MS Amlin entities increases the direct linkage between the individual MS Amlin entities and MSI, which is in line with MSI's intention to more closely align these entities with its overall strategy and to foster more collaboration. The reorganization should also support the implementation of MS Amlin's new underwriting strategy to focus on its three core markets of reinsurance, global specialty, and domestic specialty markets in continental Europe. As a result, Moody's expects the MS Amlin entities to align themselves more closely with the broader MSI operations as opposed to their previous focus on operating as a cohesive MS Amlin franchise.
More broadly, MS&AD has a strategic goal of growing its domestic life and international business to reach initially more than 50% of group adjusted profit by the end of March 2022 and growing its international business solely to reach 50% in the long term. The MS Amlin entities are collectively MS&AD's largest international business and account for approximately 13% of MS&AD's non-life insurance net premiums written. Furthermore, the MS Amlin entities' expertise in specialty and casualty commercial lines should enable MS&AD to expand within its domestic property and casualty market even as traditional consumer lines, such as auto insurance, will likely shrink.
-- STANDALONE CREDIT FUNDAMENTALS --
MS AMLIN AG
MS Amlin AG's standalone credit profile reflects its good product and geographic diversification, solid economic and regulatory capitalisation, conservative investment strategy and good profitability on a through-the-cycle basis. These strengths are offset by its modest standalone market position amongst global reinsurance peers and the inherent volatility and cyclicality in some of its lines of business, including high exposure to natural catastrophe perils.
MS Amlin AG's business is diversified across property and casualty reinsurance lines, albeit that the majority of its exposure it to property. Approximately half of its business is written in the UK and Europe, with the remainder spread between North America (about 30%) and the rest of the world (about 20%). While its business is relatively well diversified, it is concentrated within a smaller number of product lines and geographies than some of its larger reinsurance peers.
The company's capitalisation is good, with regulatory capitalisation based on the Swiss Solvency Test (SST) of 178% at year-end 2018 and Moody's gross underwriting leverage (GUL) of 2.5x. Over time, we expect that MS Amlin AG's standalone capitalisation might drift lower as it becomes more integrated into the MSI group, although we expect regulatory capital to remain comfortably above required levels. Good capital adequacy is supported by MS Amlin AG's conservative investment strategy, focused on a diversified portfolio of high quality investments.
MS Amlin AG's profitability has been good on a through the cycle basis, and the underwriting losses it incurred during 2017 were broadly in line with peers, which also experienced elevated losses due to above-average natural catastrophe events. Over the past five years, the company's average return on capital (ROC) was 5.6%. Going forward, we expect rising prices for reinsurance and underwriting actions taken by the company to result in improved underwriting profitability.
On a standalone basis, MS Amlin AG's market position is modest relative to other reinsurers, with gross premium written of CHF 1.3 billion in 2018, although company's association with the MS Amlin brand, and ownership by MSI enhance its market position, relative to other reinsurers of similar size.
LLOYD'S SYNDICATE 2001
Lloyd's Syndicate 2001's standalone credit profile reflects its strong franchise as the second largest Lloyd's syndicate, good product and geographic diversification and conservative investment strategy. These strengths are offset by weak profitability in recent years, modest excess capital on a standalone basis and the inherent volatility and cyclicality in some of its lines of business, including high exposure to natural catastrophe risks.
The syndicate has a strong market position within Lloyd's, as the second largest Lloyd's syndicate, and long-established reputation for underwriting expertise and client service. On a pure standalone basis, it lacks the diverse set of platforms provided by similarly-sized (re)insurance peers, although being part of the broader MSI group is an offset to this. The syndicate is well diversified by product and geography, with a good spread of business across property and specialty insurance and reinsurance lines, and global diversification.
The syndicate benefits from a conservative investment strategy, focused on a diversified portfolio of high quality investments, the majority of which are fixed income instruments.
More negatively, the syndicate has demonstrated weak underwriting results in 2017, and to a lesser extent, 2018, as a result of its elevated natural catastrophe exposure, and above average levels of severe weather events in those years, in addition to elevated man-made losses in certain casualty and specialty lines. The syndicate reported ROC of negative 15.6% and negative 79.8% in 2018 and 2017, respectively. While the syndicate, along with the Lloyd's in general, has taken actions to improve its underwriting performance, including discontinuing unprofitable lines, Moody's believes that the syndicate remains exposed to volatility and cyclicality in a number of its lines of business, including still high exposure to natural catastrophes perils.
Further, the syndicate's ex-cat underlying profitability has been under pressure from soft pricing for specialty insurance and reinsurance and the impact of low interest rates on investment income. While these pressures persist, prices are improving across many lines of insurance as markets respond to elevated catastrophe losses and pressure on casualty reserves. Looking ahead, we expect the syndicate to benefit from the increasing momentum behind price increases.
The syndicate's standalone excess capital is modest, relative to its exposures and Lloyd's capital requirements. This is highlighted by material cash calls made on members of £200 million and £527 million for the 2018 and 2017 underwriting years, respectively, to recapitalize the syndicate. In addition, the syndicate's GUL metric is weak, at 7x, albeit improving from 8.6x at year-end 2017. We expect the syndicate's capitalisation to improve modestly as underwriting profitability is restored, but do not expect MSI to allow significant excess capital to build up. Modest excess capitalisation on a standalone basis is offset by support from its parent, MSI, and failing that support from the Lloyd's central fund.
WHAT COULD CHANGE THE RATINGS UP / DOWN
Given that the ratings of MS Amlin AG and Lloyd's Syndicate 2001 benefit from support from their parent, any upward pressure on their ratings would be dependent on an upgrade of MSI's ratings. However, the following factors could lead to upward pressure on the entities' respective standalone credit assessments.
MS Amlin AG: (i) a meaningful increase in MS Amlin AG's market position and standalone franchise strength, (ii) sustaining strong core earnings with return on capital above 10% over the underwriting cycle; and (iii) sustained strong standalone capitalisation, with a SST ratio remaining above 160%.
Lloyd's Syndicate 2001: (i) Improved profitability, with return on capital above 10% over the underwriting cycle and a combined ratio sustainably below 95%, (ii) enhanced standalone capital adequacy including maintaining gross underwriting leverage at a level below 3.0x.
Conversely, Moody's said the following factors could lead to downward pressure on the MS Amlin entities' ratings: (i) deterioration in the credit profile of its parent, MSI, or indications of diminished support from MSI, (ii) a reduction in shareholders' equity in excess of 10% over a rolling 12 month period (including special dividends), (iii) sustained weakness in underwriting profitability with combined ratios consistently in excess of 97%, and (iv) a material increase in catastrophe exposure or general risk appetite.
LIST OF AFFECTED RATINGS -
The following ratings have been affirmed:
Lloyd's Syndicate 2001:
…Insurance financial strength rating at A1
Outlook remains stable
MS Amlin AG
…Insurance financial strength rating at A1
Outlook remains stable
The principal methodology used in these ratings was Reinsurers Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.