Best Affirms Lloyd’s ‘A’ Ratings

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a+” of Lloyd’s of London and Lloyd’s Reinsurance Company (China) Limited (LRCCL). Best also affirmed the ICR of “a” on the Society of Lloyd’s and the debt ratings of “a-” on the subordinated loan notes issued in two tranches in November 2004 (6.875 percent subordinated notes of £300 million ($489.47 million) maturing 17 November 2025 and 5.625 percent subordinated notes of €300 million ($419.42 million) maturing 17 November 2024), and “a-” on the 7.421 percent ¨£500 million ($815.8 million) junior perpetual subordinated loan notes issued in June 2007 by the Society. The outlook for all of the ratings remains stable.

Best said it “believes Lloyd’s will maintain a solid and flexible capital base through 2009 and into 2010.” Central solvency capital is expected to remain strong at over $2.5 billion ($4.08 billion) (2008: £2.608 billion [$4.255 billion]), after allowing for the buy-back of £102 million ($166.5 million) of subordinated debt.

“The potential impact of future drawdowns on the Central Fund is expected to diminish, owing to a further decline in run-off liabilities and the reduced likelihood of future insolvencies as a result of increased oversight of syndicates by Lloyd’s. Additionally, the High Court order in June 2009 approving the statutory transfer of 1992 and prior non-life business of members and former members of Lloyd’s to Equitas Insurance Limited has further reduced Lloyd’s already remote exposure to liabilities related to this business.”

Best also noted: “Financial flexibility is good, and Lloyd’s continues to attract international investment, particularly from other insurers drawn by its capital-efficient structure and global licenses. In 2008 and the first half of 2009, a number of non-Lloyd’s insurance groups entered the market by either acquiring a managing agent or establishing a new syndicate. Some existing syndicates were also able to raise additional capital to support underwriting, despite capital market constraints.”

Best said it “expects Lloyd’s financial performance to remain good in 2009, although some deterioration is anticipated, partly due to the absence of the previous year’s foreign exchange gains. Prior year reserve releases are likely to have a positive, albeit reduced, impact on underwriting earnings. An anticipated rise in attritional claims is likely to offset modest overall rate increases, and the market’s overall combined ratio is expected to increase to approximately 95 percent from 91 percent in 2008 (subject to full year catastrophe experience).”

Best also indicated that it anticipates Lloyd’s pre-tax 2008 profit to be around £1.899 billion ($3.1 billion), which “represents a good result for Lloyd’s, given the magnitude of the year’s catastrophe events and the challenging investment environment. However, results were enhanced by a £853 million [$1.4 billion] gain on foreign exchange, largely as a result of the weakening of sterling against the U.S. dollar.”

Lloyd’s was understandably pleased with Best’s endorsement. In a press bulletin Lloyd’s noted: “At a time of prolonged economic gloom, even the predictable but positive is warmly welcomed. It’s in that context that the reaffirmation of Lloyd’s AM Best rating of ‘A’ (Excellent) is received. The rating comes after Lloyd’s recent strong 2008 performance, which is mentioned by AM Best, and a reiteration of confidence in a strong market focused on strategic, long term intent, such as underwriting discipline and managing the cycle.”

Luke Savage, Lloyd’s Finance Director, commented: “We are very pleased that AM Best has reaffirmed our ratings and focused on our strong performance in difficult times. We have always known the attractiveness of our capital-efficient structure and our global licenses are strengths for Lloyd’s, and we are pleased these have received special mentions.”

Source: A.M. Best – www.ambest.com and Lloyd’s of London – www.lloyds.com