S&P Removes Lloyd’s from CreditWatch, Affirms ‘A’ Rating

May 14, 2002

Standard & Poor’s announced that it has removed the Lloyd’s insurance market from CreditWatch, where it was placed on Sept. 20, 2001, and has affirmed its single-‘A’ insurer financial strength rating.

“The rating actions reflect the continuing commitment of capital providers to the Market and the consequent increase in Lloyd’s capacity to write business,” indicated Stephen Searby, a director at Standard & Poor’s Financial Services Group in London.

Lloyd’s capacity for this year is £12.3 billion, almost $18 billion, depending on the exchange rates, an increase in excess of $1.75 billion over 2001, by and large Lloyd’s corporate capital providers have increased , rather then reduced their investments in the Lloyd’s market. S&P indicated that this it expects the amount to increase to about £13 billion ($18.9 billion) during the year

Additional positive factors cited by S&P for its move included, “the stabilization of the gross and net September 11 loss estimates (although uncertainty remains as to the ultimate quantum of the claims); the benefit of strong premium rate increases for the lines of business that Lloyd’s writes; and Lloyd’s ability to meet the March 2002 U.S. situs trust funding requirements.”

It cautioned, however, that “These factors are partly offset by Lloyd’s reduced financial flexibility as a result of open-year losses; the liquidity strain placed on parts of the Market by the September 11 losses; the poor historic returns experienced by many capital providers; the exposure of the Market to reinsurance failure; and the projected significant utilization of Central Fund insurance.”

Searby cautioned that “Although Standard & Poor’s has removed its rating on Lloyd’s from CreditWatch, the key issues remain the intentions of capital providers and the adequacy of the Central Fund.” S&P noted that its actions were based on “clear expectations:” that “major capital providers will remain in the Market; capacity in 2003 will be at or above the level of 2002; and operating performance must reach expectations in 2002 and 2003.”

It warned that “Failure by Lloyd’s to meet these expectations would signal that investor interest in the Market might be on the wane, and could therefore result in the rating being lowered.” It also stressed the need to push ahead with the previously announced market reforms.

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