A.M. Best Affirms Lloyd’s Rating

July 6, 2001

A.M. Best Co. affirmed the “A” (Excellent) rating of Lloyd’s and its financial size category of XV. The rating continues to carry a negative outlook.

According to A.M. Best, the affirmation of the rating reflects the excellent financial strength, strong business profile, strengthening of regulatory control and prospective improvements in operating performance. The rating applies to the business underwritten by all active syndicates, and to all policies underwritten since the 1993 year of account. The rating does not apply to the obligations of Equitas Ltd.

A.M. Best stated its belief that Lloyd’s benefits from a high profile brand, strong position in many specialist classes, global licenses and improved management processes. These positive factors are partially offset by poor operating performance in recent years, capital continuity disadvantages associated with the annual venture and increased concentration of capital provision. A.M. Best’s current concerns over accelerating asbestos-related claims inflation, which could create a shortfall in Equitas reserves, have led us to maintain a negative outlook pending the announcement of the Equitas results for the year ending March 2001 expected in late July.

A.M. Best will review the Lloyd’s rating at that point. A.M. Best is concerned that, although not legally bound, Lloyd’s could be put under pressure by regulators to meet any shortfall in Equitas reserves. The Premiums Trust Funds and Funds at Lloyd’s of members who underwrote prior to 1993 would also be exposed. As highlighted in previous rating updates, the uncertainty over Equitas reserve development will remain a long-term factor in A.M. Best’s rating analysis. A.M. Best believes that Lloyd’s improving financial flexibility provides comfort that the market could respond to a range of potential adverse developments in the Equitas balance sheet.

A.M. Best stated it initially (April 2000) placed the Lloyd’s rating on negative outlook, following concerns over deterioration in earnings, apparent difficulty in accurate forecasting of results and the ability of the Lloyd’s market to continue to leverage its superior underwriting expertise to attract new capital. A.M. Best has recognized that these concerns have now been addressed by improved prospective operating performance, improved forecasting by market participants and a 10 percent increase in underwriting capacity for 2001 over 2000.

The excellent financial strength is underpinned by the Central Fund, which provides a mutual pool of capital that can be called upon should a member not be able to meet its obligations to policyholders. Additionally, the Lloyd’s Risk Based Capital (RBC) model imposes stringent capital requirements upon members. Although the bottom of the current underwriting cycle has yet to be fully recognized in syndicate forecasts, the RBC system appears to be allocating capital effectively with calls to the Central Fund having had only a minor impact to date. The Central Fund is protected by an insurance policy that was purchased in 1999 and expires on Dec. 31, 2003.

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