Fitch Ratings upgraded Lloyd’s of London’s insurer financial strength rating to “AA-” from the “A+,” the rating agency announced Tuesday, with an expectation of better “cross-cycle underwriting performance” than the market has historically achieved.

The outlook for the rating is stable.

Fitch said its expectation about future underwriting performance is that it will be better both in absolute terms and compared with peers.

The upgrade is also supported by Lloyd’s strong financial profile, including a level of Fitch risk-adjusted capitalization that is in line with the new rating level, low financial leverage and a significant market position in both insurance and reinsurance classes.

Fitch views the market oversight by Lloyd’s Performance Management Directorate (PMD) and other market functions as having played a key role in a reduction in cross-cycle earnings volatility, since the directorate was established in 2003, the rating agency said in its announcement.

Processes, including business plan reviews and syndicate benchmarking, have assisted the Corporation of Lloyd’s and syndicates in improving key aspects of underwriting, including pricing, reserving, claims management, risk-adjusted capital setting and catastrophe modeling techniques.

As a result of the PMD’s work, Fitch said it has “increased confidence that, on an aggregate basis, prior underwriting years will continue to develop favorably across the rating horizon.”

Fitch also highlighted Lloyd’s substantial investment in preparing for Solvency II, which have enhanced risk and exposure management practices across the market.

Still, Lloyd’s faces the same headwinds confronting the rest of the industry—a persistently low yielding investment environment and softening prices across certain major insurance and reinsurance classes. In Fitch’s view, a conservative—and therefore lower yielding—investment portfolio is the greatest risk to earnings for Lloyd’s.

On the underwriting side, the diversity of insurance and reinsurance portfolio by line and geography “is expected to provide resilience to a protracted period of premium price softening, should this occur,” Fitch said.

Fitch has also upgraded the Society of Lloyd’s long-term issuer default rating (IDR) to “A+” from “A” and Lloyd’s Insurance Company (China) Ltd’s IFS rating to “AA-” from “A+.”

Source: Fitch Ratings