Fitch Upgrades Lloyd’s Ratings

March 29, 2007

Even before it announced record profits (see related article) Lloyd’s received good news from Fitch Ratings, who announced that it has upgraded Lloyd’s Insurer Financial Strength (IFS) rating by one notch to “A+,” and the Society of Lloyd’s Issuer Default rating (IDR) by one notch to “A.” Both ratings have stable outlooks. Fitch also upgraded Lloyd’s subordinated debt issues rating by one notch to “A-.”

Fitch said it had taken the rating actions following the confirmation that Berkshire Hathaway and Equitas had “finalized the transaction announced in October 2006” (See IJ web site March 28).

After giving details of the agreement, Fitch indicated that it had “previously regarded the potential for reserve deterioration through Equitas as being a significant drag on the Lloyd’s ratings. The additional buffer provided by the transaction with Berkshire removes much of this risk and is the prime driver behind the upgrade.”

Fitch also noted: “It is possible that the relationship between Equitas and Berkshire will proceed to a second phase. This second phase would involve the transfer of Lloyd’s members’ pre-1993 liabilities into Equitas or a UK-based subsidiary of Berkshire and the provision of additional reinsurance protection of up to $1.3 billion. A premium of up to £40 million [$78.5 million] would be paid to Berkshire, with Lloyd’s paying a further £18 million [$35.4 million].”

While Fitch said its upgrade “is based largely on the completion of the Berkshire transaction,” it also recognized the “absence of catastrophic losses in 2006,” which would “enhance Lloyd’s results.” Fitch noted that it “draws comfort from the progress of Lloyd’s management reforming the market’s operating practices and managing underwriting exposures as most lines of business experience price softening.”

All that was music to the ears of Lloyd’s CEO Richard Ward, who called the upgrade “great news for the Lloyd’s market.” He also noted that the “successful completion of Phase I of the Equitas deal obviously played a significant part in Fitch’s decision but the upgrade also reflects our ongoing work to improve and strengthen Lloyd’s financial position, brand and licenses.”

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