S&P Sees No Change in Lloyd’s Ratings

April 8, 2004

Standard and Poor’s Ratings Services announced that its ‘A’ insurer financial strength rating on Lloyd’s will not be affected by the company’s 2003 pro forma annual accounting result (See IJ Website April 7).

“The 2003 pro forma annual accounting result, which is designed to be generally comparable with the rest of the insurance industry, was a pretax profit on ordinary activities of GBP1.89 billion ($3.4 billion),” said S&P. “This is slightly ahead of Standard & Poor’s expectations, and compares to a GBP0.83 billion profit in 2002.

“This improvement is a result of the very strong pricing environment and the low level of catastrophe losses recorded by the market in 2003; consequently, the combined ratio improved to 90.7 percent (2002: 98.6 percent).”

S&P also explained that “Within these reported results, and like many of its peers, Lloyd’s also experienced some adverse development on earlier years, particularly in respect of primary U.S. casualty business written in 2001 (GBP545 million or 4.7 combined ratio points). The 2003 combined ratio represents an outperformance of comparable market averages. However, Lloyd’s results have historically been more volatile than its peers and Standard & Poor’s would expect Lloyd’s to outperform at this stage of the cycle.”

The rating agency observed that “premium rates and other terms and conditions held up better than expected at the January 2004 renewals–more significant softening in the shorter tails lines had been anticipated. In addition, Lloyd’s has a significant amount of unearned premiums (in excess of GBP7.3 billion [$13.43 billion]) at 2003 rates to be earned out in 2004. Therefore, although 2003 will mark the peak of the premium pricing cycle for Lloyd’s, profitability in 2004–assuming an average year for catastrophe losses–should be better than in 2003”

S&P recognized that calculating Lloyd’s results also requires analyzing the figures on the traditional three-year accounting basis, which is still in use for years prior to 2002. It noted that the “2001 year of account closed with a loss after personal expenses of GBP2.38 billion [$4.38 billion] (2000: GBP2.40 billion [$4.42 billion] loss), while the forecasts for the 2002 and 2003 open years were for profits of GBP1.7 billion [$3.13 billion] and GBP1.8 billion [$3.31 billion]. Although the 2001 year was worse than had been anticipated by Standard & Poor’s, 2003 is expected to improve significantly prior to closure.”

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