Best Affirms Lloyd’s ‘A’ Ratings; Revises Outlook to Positive

March 30, 2007

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A” (Excellent) and the issuer credit rating (ICR) of “a” of Lloyd’s of London, and the ICR of “a-” of the Society of Lloyd’s. Best also affirmed the debt rating of “bbb+” of subordinated loan notes issued in two tranches in November 2004: the 6.875 percent subordinated notes of £300 million ($587 million) maturing 17 November 2025 and 5.625 percent subordinated notes of €300 million ($400 million) maturing 17 November 2024.

Best then announced that the “outlook on the ICRs of Lloyd’s, the Society and the rating of the subordinated notes issued by the Society has been revised to positive from stable. The outlook on the FSR of Lloyd’s remains stable.”

The rating agency noted that in an earlier bulletin last October it had indicated that the “change in the outlook for Lloyd’s ICR reflects successful completion of phase one of the two-phase transaction to reinsure and subsequently transfer the insurance liabilities of Equitas.” Best also expressed satisfaction with Lloyd’s strong 2006 earnings performance (See IJ web site March 29).

Best noted that in its view “phase one of the transaction in isolation has substantially reduced Lloyd’s exposure to uncertainty relating to Equitas’ reserve development. This uncertainty has been a long-term offsetting factor for the Lloyd’s rating, albeit diminishing more recently.” The agreement with Berkshire Hathaway’s National Indemnity “provides Equitas with $14.4 billion of reinsurance cover for a premium comprising all of Equitas’ assets less £172 million ($337 million) and an overall contribution of £90 million ($176 million) from Lloyd’s,” Best explained. “The additional protection under the contract is $5.7 billion after taking account of Equitas’ existing undiscounted claims reserves of $8.7 billion (at 31 March 2006).”

Best believes that the additional protection “significantly reduces Lloyd’s potential exposure to any future failure at Equitas through the application of overseas deposits and the assets of present-day Names who also underwrote prior to 1993, as well as through Lioncover and Centrewrite.”

The rating agency also indicated that if “phase two of the transaction–the transfer of Equitas’ insurance liabilities–is not implemented, the additional $5.7 billion reinsurance cover will remain in place.” Best noted that there are “a number of hurdles to overcome before phase two can be implemented, including a change in UK legislation and High Court approval. Even if both these obstacles are overcome, the transfer may not be recognized by all overseas jurisdictions.” Best said that it believes that implementation of phase two would also be beneficial to Lloyd’s.

Commenting on Lloyd’s earnings, Best said they has exceeded its expectations, noting the drop in the combined ratio to 82 percent from 112 percent in 2005), and Lloyd’s net profit before tax of £3.7 billion ($7.3 billion).

“The result was driven by improved market conditions, especially in catastrophe affected regions, combined with favorable overall claims experience during 2006,” Best said. “There was a 2.1 percent prior year release part of the overall combined ratio, despite 3.3 percent attributable to deterioration in Lloyd’s exposure to the 2005 windstorm losses.”

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