Best Affirms Lloyd’s ‘A’ Ratings

July 6, 2010

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of Lloyd’s of London and Lloyd’s Reinsurance Company (China) Limited.

Best also affirmed the ICR of “a” of 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 [$455 million] maturing 17 November 2025 and 5.625 percent subordinated notes of €253 million [$320 million] maturing 17 November 2024, and the 7.421 percent £440 million [$667.7 million] junior perpetual subordinated loan notes issued in June 2007 by the Society.

The outlook for all of the ratings is stable.

Lloyd’s is expected to “maintain its strong capitalization despite anticipated deterioration in performance during the current more challenging phase in the insurance cycle,” Best explained. In 2010, central assets for solvency purposes are “likely to remain stable at close to the 2009 year-end level” (£2.811 billion [$4.265 billion]).

Best said it also believes the “potential for large draw downs on Central Fund assets is modest, as outstanding liabilities in respect of existing insolvent members remain at a manageable level, and Lloyd’s robust market surveillance reduces the likelihood of future insolvencies.”

In addition the rating agency noted that Lloyd’s financial flexibility is “enhanced by a diverse capital structure, and Lloyd’s continues to draw investment from both corporate and non-corporate capital. However, with rates under pressure across major classes of business, new capital entering the market is likely to be restricted in the near term.”

Best also indicated that Lloyd’s performance in 2010 is “likely to be weaker than the excellent level achieved in 2009, particularly following the Chilean earthquake and Deepwater Horizon oil rig catastrophes.

“The overall combined ratio of the market is expected to deteriorate to between 95 percent and 100 percent (85 percent in 2009), assuming a normal pattern of catastrophe losses for the remainder of the year.

“Underwriting earnings are expected to continue to be supported by favorable movements on prior year reserves, although at a reduced level.”

Lloyd’s pre-tax profit in 2009 was £3.868 billion [$5.869 billion], compared to £1.899 billion [$2.881 billion] in 2008, a record result. The profits reflected a “generally benign catastrophe experience and an improved investment environment,” said Best. “Moreover, these results were achieved after foreign exchange losses of £439 million [$666 million], a gain of £853 million [$1.294 billion in 2008.”

Best pointed out that “Lloyd’s benefits from an excellent position in the global insurance and reinsurance markets as a specialist provider of property and casualty business. Its competitive strength derives from its reputation for underwriting expertise, innovation and flexibility, while its network of licenses provides access to a wide international client base.

“Lloyd’s business profile continues to demonstrate resilience to the challenges posed by the financial crisis. In particular, its broker subscription model, which allows large and complex risks to be shared between market participants, supported the market after the financial turmoil of 2008 highlighted the benefit for insurance buyers of spreading risk among different counterparties.”

Source: A.M. Best

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