• Following a review of Catlin Underwriting Agencies – Syndicate 2003 under our revised Lloyd’s Syndicate Assessment criteria, we are raising our assessment to ‘4+’ from ‘4’.
• The revision predominantly reflects our view of the syndicate’s very strong business risk profile and very strong enterprise risk management (ERM) framework, offset by its high risk position.
• The stable outlook on Catlin reflects our expectation that the syndicate will maintain its very strong competitive position, supported by its leadership position at Lloyd’s, and strong profitability to support an upper adequate financial risk profile.
Standard & Poor’s Ratings Services said today that it revised upward its Lloyd’s Syndicate Assessment (LSA) on Catlin Underwriting Agencies – Syndicate 2003 (Catlin) to ‘4+’ from ‘4’. The outlook is stable.
We revised the assessment upward as we consider Catlin to have one of the strongest franchises within the Lloyd’s Market. In addition, we have a very strong opinion of Catlin’s strategic and enterprise risk management. Under the new criteria, this provides a one-notch uplift to the ‘4’ anchor.
We attribute no additional notches beyond Syndicate 2003’s stand-alone credit assessment for its core status within the Catlin Group. The syndicate is the cornerstone of Catlin’s global operating structure and still contributes 60% of the group’s total premium.
Our assessment of Catlin’s very strong business risk profile is based on its intermediate industry and country risk assessment and a very strong competitive position. Catlin’s industry and country risk exposure is well-diversified across the global property/casualty (P/C) reinsurance sector. It also operates in a number of primary insurance markets, of which the most material are the U.K., the U.S., Canada, Australia, and Western Europe. For the purposes of our industry and country risk analysis, we view the syndicate’s subscription business written at Lloyd’s as reinsurance. In our opinion, the risk profiles are similar.
We view Catlin’s competitive position as very strong, based on its long history of success in the Lloyd’s market, the variety of products it offers to its clients, and its international platform. The latter should help the syndicate to continue to manage the cycle effectively and provides strong access to new business. Catlin Syndicate 2003 produces about 60% of the group’s premium income and is the largest syndicate at Lloyd’s. Catlin is a recognized leader in numerous business classes in the Lloyd’s market, generating a significant market share in several classes. The syndicate has consistently written over 7% of total market premium in recent years. We forecast that overall gross premium at the syndicate will grow by about 5% annually in 2013-2015.
We assess Catlin’s capital and earnings as strong, based on the capital requirements Lloyd’s imposes on the syndicate. Catlin has delivered strong results historically that have been broadly in line with the Lloyd’s Market average. The syndicate’s five-year (2008-2012) weighted-average combined (loss and expense) ratio is 95.8% and its return on revenue (ROR) is 9%. Reserves have been stable or have exceeded the amount required (enabling the syndicate to release the excess) in each of the past nine years.
Our base-case scenario anticipates combined ratios of less than 95% in 2013-2015, assuming average historical catastrophe loss experience. We also expect the underlying underwriting performance, measured by the attritional loss ratio, to remain strong in the low 50% range. In the same period, we expect annual ROR to be about 10%.
In our opinion, Catlin exhibits a high risk profile, primarily based on its catastrophe risk exposure, which could lead to high capital and earnings volatility. Risks to capital are heightened as Catlin’s capital requirements tend to increase every year because of business growth. Catastrophe losses represent an average 9% of annual net premium earned. Although catastrophe exposure is still a material risk, Catlin has exhibited less earnings volatility from catastrophe losses than most of its peers.
Financial flexibility is viewed as adequate. Catlin Group’s financial leverage (23%) and coverage (5x) levels support the current assessment. We expect this to continue through 2015.
We regard Catlin’s enterprise risk management (ERM) and management and governance practices as very strong, and therefore assess its stand-alone credit profile (SACP) as one notch higher than the anchor. Our assessment of ERM as very strong reflects our positive view of the risk management culture, risk controls, and strategic and emerging risk management of the group, including the syndicate. Our assessment of the group’s economic capital model, which we consider to be good, also supports our assessment of its ERM. We anticipate that the syndicate’s ERM capabilities will enable it to continue to optimize capital allocation and earnings and enhance its risk-return profile.
Catlin’s management and governance is satisfactory, in our opinion. We attribute this to Catlin management’s substantial expertise and experience, conservative risk tolerances, and consistency of strategy across the group. Catlin has successfully built on its strong trading history in new markets, while optimizing cycle management and managing earnings volatility.
The stable outlook balances Catlin’s high risk position against its very strong competitive position, which we expect to be sustained by its leadership position, active cycle management, and diversification strategy.
We might lower the assessment if Catlin underperforms the Lloyd’s Market, if there is a significant shortfall in capital adequacy at the group, or if we have a less positive view of Catlin’s leadership position at Lloyd’s. Failures in the ERM framework could also lead to a downward revision in our assessment of ERM, and hence the LSA.
