OREANDA-NEWS. Fitch Ratings has affirmed Lloyd's of London's (Lloyd's) and Lloyd's Insurance Company (China) Ltd's Insurer Financial Strength (IFS) rating at 'AA-'. It has also affirmed the Society of Lloyd's Long-term Issuer Default Ratings (IDR) at 'A+' and its subordinated bonds at 'A-'. The Outlooks are Stable.

KEY RATING DRIVERS
The affirmation reflects Lloyd's strong market position and size, robust risk-adjusted capitalisation and strong underwriting. These positives are somewhat offset by Lloyd's fairly high exposure to international catastrophes.

Lloyd's strong market position, which Fitch considers as falling within the large market position and scale category, supports its rating. Lloyd's is one of a select band of global (re)insurance providers capable of attracting high-quality and specialised business. Lloyd's is also a global insurance and reinsurance market comprising 94 syndicates. It writes business from over 200 countries and territories, and in 2014 reported gross written premiums of GBP25bn.

Fitch views Lloyd's strong track record of underwriting profitability positively. In 2014, Lloyd's Fitch-calculated combined ratio was strong at 87.5% (2013: 83.8%). Robust performance in the past two years is predominantly reflective of the absence of major catastrophic events. However, Lloyd's five-year average combined ratio also remained strong at 92%, consistent with the 'AA' category, according to the median guidelines specified in our insurance methodology.

Fitch believes that Lloyd's exposure to worldwide natural and man-made catastrophes is somewhat higher than its peers. This is reflected in Lloyd's combined ratio being more sensitive to catastrophic events than peers. However, Fitch believes that Lloyd's exposure management through its modelling capabilities and through the reinsurance being put in place allows the market to mitigate tail risks effectively.

Fitch's assessment of Lloyd's risk adjusted capitalisation is 'Very Strong' according to the agency's Prism Factor Based Model (FBM). Fitch expects capitalisation to continue to support the ratings, assuming future losses fall within limits expected by Lloyd's.

RATING SENSITIVITIES
An upgrade is unlikely in the near to medium term unless Lloyd's consistently outperforms its 'AA-' rated (re)insurance peers, while maintaining 'Very Strong' capital adequacy.

A downgrade may occur if the net combined ratio remains above 97% for a prolonged period of time or if capital adequacy, as measured by Fitch's Prism FBM, falls to a 'Strong' level (2014: 'Very Strong'). An extended period of underperformance or a proportionally larger net catastrophe loss versus peers or market share could also lead to a downgrade.