A.M. Best Co. has affirmed Lloyd’s financial strength rating (FSR) of “A” (Excellent) and the issuer credit rating (ICR) of “a”. Best also affirmed the ICR of “a-” of the Society of Lloyd’s and the debt rating of “bbb+” of subordinated loan notes issued in two tranches in November 2004 as follows: 6.875 percent subordinated notes of £300 million ($560 million) maturing 17 November 2025 and 5.625 percent subordinated notes of €300 million ($382 million) maturing 17 November 2024. The outlook for all ratings remains stable.
Best said it “believes that Lloyd’s central solvency capital is likely to stay strong through 2006, remaining at a comparable level to year-end 2005 (£1.85 billion ($3.183 billion), despite an anticipated increase in Central Fund drawdowns from existing insolvent members. A stable overall position is likely to incorporate a significant increase in Central Fund net assets (approximately 25 percent increase anticipated) as a result of the increase in the contribution rate to 1 percent, up from 0.5 percent in 2005.”
Best also indicated that it “believes there is sufficient tolerance within central assets to withstand a significant stress scenario without threatening the market’s solvency. The major catastrophe losses of 2005 have had an impact on earnings and member level capital, driving an increase in Lloyd’s balance sheet liabilities in 2005 of 26 percent, which in turn led to a decline in net resources of nearly 10 percent. However, the catastrophe losses have not had an impact on central assets, other than a modest impact from members already in run off.”
The rating agency specifically recognized Lloyd’s “enhanced management of risk and performance,” indicating that, “although Lloyd’s is likely to continue to be affected by catastrophe experience, A.M. Best believes that the more extreme performance downside from which Lloyd’s suffered in previous cycles has been curtailed.” Best foresees good results for the period 2006 to 2008, “although deterioration is anticipated across this period as a result of weakening in market conditions.”
Best expects Lloyd’s overall combined ratio to be approximately 98 percent in 2006 “(subject to full year catastrophe experience), a modest deterioration from 97 percent in 2004 and considerably better than 112 percent in 2005.” For 2007 and 2008 Best said it believes that Lloyd’s is likely to achieve a combined ratio close to 100 percent, “with performance affected by increasingly competitive market conditions.” The forecasts “incorporate a substantial allowance for catastrophe losses and some modest prior year deterioration is also assumed, despite the near neutral position for prior years reported at year-end 2005 (release of £14 million ($24 million)),” said the bulletin.
“Lloyd’s continues to benefit from excellent market access worldwide and a high level of brand recognition,” it continued. Bets “anticipates that for the immediate future, Lloyd’s will focus on improving its access to certain key developing markets. It is likely Lloyd’s will establish a representative office in India in 2006 and a licensed reinsurance company in China early in 2007. A.M. Best believes that Lloyd’s will maintain its strong market position in the United States, particularly the surplus lines market, which remains its leading underwriting territory.”
As a cautionary note, Best indicated the “inherent uncertainty over Equitas’ reserve development remains a long-term offsetting factor in A.M. Best’s rating analysis, albeit a diminishing one. The importance of the risk of a failure at Equitas has reduced as the level of Equitas’ net technical reserves decreases and the potential impact of a severe adverse development becomes less significant, taking into account the relative size of the current Lloyd’s trading market.”
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