S&P, Moody’s Bullish on Lloyd’s

September 25, 2003

Standard & Poor’s and Moody’s Investors’ Service both issued favorable comments yesterday on the current prospects at Lloyd’s. The announcements followed a number of first half reports from syndicates indicating strong profit growth on increasing premiums.

Stephen Searby, S&P’s director of financial services ratings, indicated that the overall outlook was positive despite uncertainties surrounding Lloyd’s, including question marks over the commitment of some U.S. and Bermudan investors to the market. “We see a significant improvement in operating performance for the overall Lloyd’s market for the 2002 and 2003 years of account,” Searby told a news conference.

Moody’s latest forecasts indicate “that Lloyd’s could produce around GBP3.7 billion [$6.1 billion] of profit for the 2002 and 2003 years of account, following a loss of some GBP2.1 billion [$3.48 billion] for 2001.” Moody’s said it “has increased its forecast profit for 2002 to around GBP1.9 billion [$3.15 billion] and anticipates further profit potential for 2003 of around GBP1.7 billion [$2.81 billion], assuming a ‘normal’ loss year.”

Moody’s forecasts, based on its Underwriting Index, indicate that “market conditions for the 2002 and 2003 years of account are comparable to those last seen in 1993/1994,” marked by “almost full capacity utilisation and a relative absence to-date of major loss activity.” The rating agency has increased its forecast for 2002 “to a significant profit of around 14.5% of capacity,” and it also noted that “market conditions have remained exceptionally strong for 2003, with improving conditions in certain sectors off-setting reductions in others, and with overall market conditions remaining similar to 2002.” If conditions remain “normal,” Moody’s said it “currently predicts a 12% return on capacity for the market,” but expects that there will be a “wide variance between the results of the best and worst performing syndicates, with a number of syndicate results likely to be around or in excess of 20% of capacity.”

S&P noted Lloyd’s overall return to profit after six years of losses, culminating in the Sept. 11 attacks. “A number of Lloyd’s syndicates have recently unveiled robust half-year profits on the back of strong premiums, including Cox, Britain’s largest motorcycle insurer, and Hiscox,” said the bulletin.

S&P also noted that determining individual ratings on the 71 syndicates currently operating at Lloyd’s is a difficult task, due to the market’s complex structure. It said that its “Lloyd’s Syndicate Assessments” (LSAs) “evaluate individual syndicates on the basis of their dependency on the overall Lloyd’s structure. The greater dependency a syndicate has on Lloyd’s chain of security – the general funds used to guarantee claims payments when individual syndicates are unable to do so – the lower the rating, “because the syndicate is more reliant on the mutual capital in the Lloyd’s market than on its own reserves.”

S&P said it had lowered its assessment of 10 syndicates, “citing their business position, liquidity and operating performance after the market’s weak showing in 2000 and 2001,” but that those downgraded, including Munich Re’s syndicate 457 and Brit’s syndicate 389, represented “under 20 percent of total capacity in the Lloyd’s market.”

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