Best Upgrades Lloyd’s Rating to ‘A’; Mgmt. Comments

A.M. Best Co. announced that it has upgraded Lloyd’s financial strength rating to “A” (Excellent) from “A-” (Excellent), and has assigned an issuer credit rating of “a” with a stable outlook.

Lloyd’s management welcomed the decision as underscoring the financial strength of the London market. In the wake of the decision Best also took a number of rating actions on individual Lloyd’s syndicates (see following article).

“The rating reflects Lloyd’s improving prospective capitalisation, strong operating performance, its global reach and improvements in risk management,” said Best. The report noted, however, that a “partially offsetting factor is Lloyd’s exposure to long-term uncertainty relating to the adequacy of Equitas’ reserves. But Best said it thought it unlikely that this would adversely affect Lloyd’s in the near term.

Best said it “believes the absolute level of central solvency capital (including the net assets of the Corporation of Lloyd’s, the Central Fund and the callable layer) is likely to be increased to approximately GBP 2 billion (USD 3.7 billion) between 2004 and 2008. Over this period, as part of Lloyd’s underwriting cycle management strategy, underwriting capacity will most likely be reduced if market conditions continue to deteriorate.”

The rating agency added that it anticipates that “other sources of finance will be used to enhance central capital addition to members’ contributions (currently charged at 1.25 percent of capacity and paid into the Central Fund).”

It also indicated that the rating “reflects A.M. Best’s expectation that growth of the Central Fund is unlikely to be materially affected by reserving issues relating to U.S. casualty business written between 1997 and 2001. In addition, Funds at Lloyd’s requirements for members are likely to increase as a result of likely upward pressure arising from application of the risk-based approach to capital developed by the U.K. Financial Services Authority (FSA).”

Best cited Lloyd’s strong operating performance, noting that it “believes that Lloyd’s loss ratio development (including paid and outstanding claims) supports pure year results for the open 2002 and 2003 years of account above Lloyd’s current estimates of GBP 1,670 million (USD 3,053 million) and GBP 1,780 million (USD 3,254 million).”

For 2004 Best said it “expects substantial earned premium derived from the 2003 underwriting year and continuing good market conditions for Lloyd’s specialist classes to support a combined ratio close to the 2003 level of 89.2 percent and a profit before tax of approximately GBP 1.9 billion (USD 3.5 billion) (subject to catastrophe experience in the second half of the year).” It also “believes a combined ratio below 95 percent is likely to be achieved in 2005, despite some deterioration in loss ratios as rates reduce in a softening market.”

In recognition of the substantial changes Lloyd’s management has made in its operational practices Best cited “improved internal risk management” as a significant factor in determining the new rating. It noted that “improvements in risk management are expected to facilitate an earlier response from Lloyd’s to any emerging performance problems than achieved in the past.”

In conclusion Best said it “believes that Lloyd’s now has a clearer focus on its downside with detailed performance analysis; increased sophistication in capital modeling; a clear strategy for claims and reinsurance recoveries; management of open years and syndicate run-offs, all contributing to an enhanced risk management environment.”

The upgrade came as both music to the ears of Lloyd’s management and as a vindication of the strategy that has transformed the way the 315 year-old insurance market does business.

Welcoming the decision, Lloyd’s Chief Executive, Nick Prettejohn stated: “I am delighted that A.M. Best has recognized and rewarded Lloyd’s underlying financial strength and excellent prospects for the future. I am particularly pleased that A.M. Best has highlighted the significant progress we are making to ensure Lloyd’s is consistently high-performing and financially resilient. The agency has recognized the industry-leading results we delivered in 2003, and expects further strong underlying performance this year.”

Roger Sellek, Commercial Director, commented: “This upgrade to A (Excellent) is particularly significant given the difficult rating environment. Today’s announcement will be recognized as a hard-earned vote of confidence in Lloyd’s, enhancing the attractiveness of the Lloyd’s market to policyholders and capital providers.”