Lloyd's Upgraded To 'A+' On Completed Equitas Reinsurance Transaction And Process Reform - April 2007
On April 23, 2007, Standard & Poor’s Ratings Services raised its insurer financial strength rating on the UK-based Lloyd's insurance market (Lloyd's or the Market) to 'A+' from 'A'. At the same time, Standard & Poor's raised its counterparty credit rating on The Society of Lloyd's to 'A+' from 'A'. The outlook is stable.
The upgrade reflects the recent successful conclusion of phase 1 of the Equitas group's transaction with National Indemnity Co., progress with regard to phase 2, and the unstoppable momentum behind improving London Market business processes.
In the Equitas transaction, National Indemnity Co. (NICO; AAA/Stable/--) will provide up to £3.8 billion ($7.0 billion) of reinsurance for the Equitas group's (Equitas) loss reserves, rendering the likelihood of a future Equitas deficit and any related contribution from Lloyd's remote. Phase 1 involves a £3.1 billion reinsurance, and phase 2 involves a novation of liabilities from Lloyd's members to Equitas and the provision of a further £0.7 billion of reinsurance.
The ratings reflect Lloyd's strong competitive position, strong operating performance, strong capitalization, and strong financial flexibility. These positive factors are partly offset, however, by relatively high reinsurance reliance and continuing operating performance volatility. The consistency and effectiveness of strengthened catastrophe risk controls are also yet to be tested.
Major ratings factors
- Subject to normal catastrophe loss experience for 2007, Lloyd's will post a combined ratio below 95% and ROR greater than 12%. Performance will weaken in 2008 in line with an anticipated continuing softening operating environment.
- Lloyd's main capital providers will remain committed to the Market.
- There will be further rapid improvement in the London Market's administrative processes. Momentum should continue to build with regard to claims processing, accounting and settlement, and policy placement, and legacy issues will start to be addressed.
- Catastrophe-related operational weaknesses will prove to have been successfully strengthened.
- Capital adequacy will remain strong, as reflected in central assets available for solvency purposes remaining at about £1.75 billion and Lloyd's solvency ratio remaining above 300%.
- Operating performance of the continuing Market (that is, syndicates not in run-off) will not be negatively affected by further net deterioration in technical reserves. The drag on Lloyd's from run-off syndicates will continue to decline.
- Undertakings given to insolvent members will continue declining (charge for undertakings was £114.6 million in 2006).
- Equitas will successfully complete phase 2 of the NICO transaction.
An outlook revision to positive is unlikely in the medium term, and would depend on Lloyd's significantly outperforming targets over a sustained period. An outlook revision to negative is also unlikely, but would likely be driven mainly by operating performance returning to levels recorded prior to 2002, reflecting poor management of the softening underwriting cycle. Failure to complete the administrative process reform would also result in a negative outlook.
About Miller
Miller Insurance Services Limited is a leading independent specialist insurance and reinsurance broker, operating in the international markets and at Lloyd’s. Founded in 1902, Miller now employs over 500 people and handles an annual premium in excess of US$1.5 billion.
For more information, please visit www.miller-insurance.com
For more information please contact:
Hina Gandhi
Tel: +44 (0)20 7031 2996 Email: hina.gandhi@miller-insurance.com
Amanda Richardson
Tel: +44 (0)20 7031 2677 Email: amanda.richardson@miller-insurance.com