S&P Releases New Lloyd’s Syndicate Financial Assessments

Standard & Poor’s Ratings Services has announced the results of its latest public information Lloyd’s Syndicate Assessment (LSA) review, which considered the 2007 syndicate financial statements and additional publicly available information and news flow up to Aug. 13, 2008.

S&P said that following the review it had raised its LSA on two syndicates and lowered its LSAs on two others. It also assigned three new LSA’s and withdrew five.

S&P noted that the LSAs “evaluate the relative dependency of syndicates on Lloyd’s infrastructure and Central Fund, reflecting their ability to offer business continuity to policyholders. Standard & Poor’s insurer financial strength rating (FSR) on the Lloyd’s Market (Lloyd’s; A+/Stable) is the principal measure of financial strength for all syndicates underwriting at Lloyd’s.”

In analyzing the overall findings, S&P noted that the “continued stability of the assessments reflects another year of strong operating performance, assisted by the second consecutive year of below-average catastrophe losses.” However, the rating agency added that “uncertainty remains regarding the adequacy and appropriateness of syndicates’ response to the increasingly challenging pricing environment. In addition, the improvements we believe were made to syndicates’ catastrophe risk controls following large losses in 2005 have yet to be fully tested.”

S&P said it “believes that many syndicates have made significant progress in controlling their exposure to large events and aggregations of losses, and that the continued scrutiny of the Franchise Performance Directorate will reinforce underwriting discipline. Our ability to evaluate these prospective factors for each syndicate is constrained by the extent of the information available in the public domain.” But S&P added that on an interactive basis it “can more effectively assess a syndicate’s enterprise risk management capabilities. As a result, five of the 12 interactive LSAs currently have a positive outlook.”

S&P said it had “assessed 40 out of the 71 syndicates (excluding the five special-purpose syndicates) currently trading at Lloyd’s, 12 on an interactive basis. These 40 syndicates accounted for 67 percent of the Market’s 2007 underwriting capacity (71 percent in 2006). In addition, one unassessed syndicate’s dedicated corporate member, which accounts for a further 2 percent of capacity, carries an insurer FSR, based on an explicit parental guarantee.

“The reduction in assessed capacity reflects the withdrawal of five assessments at the latest review. We withdrew these assessments for one of two reasons:
— The potential conflict of interest associated with performing a public information based assessment on a syndicate that forms a material part of an interactively rated group; or
— Uncertainty related to the recent purchase of the managing agent, which has the potential to dilute the relevance of historical financial information that is available in the public domain.”

S&P gave the following specific details of the assessments:
“At the 2008 review, we withdrew our assessments on Atrium Underwriting – Syndicates 570 and 609 due to the purchase of the managing agency by Ariel Holdings Ltd. (not rated); that on Equity Syndicate Management – Syndicate 0218 due to its ownership by Insurance Australia Group (AA-/Stable/–); and that on Talbot Underwriting – Syndicate 1183 due to its ownership by Validus Holdings Ltd. (corporate credit rating, BBB-/Stable/–).

“We also withdrew the assessment on Navigators Underwriting Agency – Syndicate 1221, owned by Navigators Group (core operating entities rated A/Stable) in April 2008 due to our relationship with the rated parent.

“In total, these syndicates account for 8 percent of total capacity. The increasing attractiveness of Lloyd’s to new entrants, including interactively rated entities, may lead us to withdraw increasing numbers of assessments in the future.

“Currently, only QBE Underwriting – Syndicate 0386 is assessed at ‘LSA 5’, indicating a very low level of dependency. Following the latest review, a further seven syndicates are assessed at ‘LSA 4’, and 15 syndicates assessed at ‘LSA 3’. Seventeen syndicates display higher dependency, split between 13 at ‘LSA 2’ and four at ‘LSA 1’.

“We upgraded Managing Agency Partners – Syndicate 2791 to ‘LSA 4pi’ from ‘LSA 3pi’, to reflect its above-average performance over a sustained period of time. We also upgraded Faraday Underwriting – Syndicate 0435 to ‘LSA 3pi’ from ‘LSA 2pi’, again reflecting improved operating performance and the continued support of its parent, General Reinsurance Corp. (main operating entities rated AAA/Stable/–).

“We downgraded KGM Underwriting Agencies – Syndicate 0260 to ‘LSA 1pi’ from ‘LSA 2pi’, reflecting the syndicate’s consistent underperformance compared with the market average for motor insurance, and downgraded Beaufort Underwriting Agency – Syndicate 0318 to ‘LSA 2pi’ from ‘LSA 3pi’, again reflecting underperformance within the context of its Lloyd’s peers.

“We assigned three new assessments at the 2008 review: Chaucer – Syndicate 1301 at ‘LSA 2pi’, Ascot Underwriting – Syndicate 1414 at ‘LSA 3pi’, and HCC Underwriting Agency – Syndicate 4040 at ‘LSA 1pi’. The assessments on Syndicates 1301 and 4040 reflect the fact that these operations now have a sufficient track record to allow us to offer a meaningful opinion. The Ascot Syndicate has been assigned a public information assessment following the withdrawal of the explicit guarantee the syndicate’s ultimate parent previously provided to its dedicated corporate member (see “Research Update: Ascot Corporate Name Ltd. ‘AA+’ Rating Withdrawn Following Cancellation Of Guarantee” published on RatingsDirect on Oct. 1, 2007).”

S&P offered the following summary of its assessments:
Assessments Raised –
Managing Agency Partners – Syndicate 2791
Lloyd’s Syndicate Assessment 4pi 3pi
Faraday Underwriting – Syndicate 0435
Lloyd’s Syndicate Assessment 3pi 2pi

Assessments Lowered –
KGM Underwriting Agencies – Syndicate 0260
Lloyd’s Syndicate Assessment 1pi 2pi
Beaufort Underwriting Agency – Syndicate 0318
Lloyd’s Syndicate Assessment 2pi 3pi

Assessments Withdrawn –
Atrium Underwriting – Syndicate 570
Lloyd’s Syndicate Assessment N.A. 3pi
Atrium Underwriting – Syndicate 609
Lloyd’s Syndicate Assessment N.A. 3pi
Equity Syndicate Management – Syndicate 0218
Lloyd’s Syndicate Assessment N.A. 4pi
Talbot Underwriting – Syndicate 1183
Lloyd’s Syndicate Assessment N.A. 3pi
Navigators Underwriting Agency – Syndicate 1221
Lloyd’s Syndicate Assessment N.A. 3pi

Assessments Assigned –
Chaucer – Syndicate 1301
Lloyd’s Syndicate Assessment 2pi N.A.
Ascot Underwriting – Syndicate 1414
Lloyd’s Syndicate Assessment 3pi N.A.
HCC Underwriting Agency Ltd. – Syndicate 4040
Lloyd’s Syndicate Assessment 1pi N.A.
N.A.–Not assessed.

Source: Standard & Poor’s – www.standardandpoors.com