AM Best has affirmed the financial strength rating of A (Excellent) and the issuer credit rating (ICR) of ‘a' of Lloyd's. AM Best has also affirmed the ‘a-' ICR of the Society of Lloyd's and the ‘bbb+' rating of subordinated loan notes issued in two tranches in November 2004 as follows: 6.875% subordinated notes of £300m maturing 17 November 2025 and 5.625% subordinated notes of €300m maturing 17 November 2024. The outlook for all ratings remains stable.
The ratings reflect Lloyd's strong prospective capitalisation both with respect to Funds at Lloyd's and central solvency capital. The ratings also reflect excellent anticipated operating performance and Lloyd's strong business profile. A partially offsetting factor continues to be Lloyd's exposure to long-term uncertainty relating to the adequacy of Equitas' reserves.
AM Best believes the absolute level of central solvency capital is likely to remain strong, increasing to approximately £1.7bn ($3bn) by year-end 2008 despite the March 2005 settlement with the Central Fund insurers, which reduced the net assets of the Central Fund by £324m, offset by a related tax credit of £97m. Over the next two years, AM Best anticipates further reductions in Lloyd's capacity to reflect reduced underwriting opportunities in a softening market, following an 8.7% decrease to £13.7bn ($23.9bn) in 2005.
AM Best believes that Lloyd's open year performance is likely to be excellent, with a pure year result after personal expenses of above £2bn ($3.5bn) anticipated for 2003 and of approximately £1bn ($1.7bn) for 2004. In 2005, on an annually accounted basis, AM Best believes the offsetting impact of softening in rates for Lloyd's specialist classes of business and a return to normal catastrophe experience are likely to lead to a comparable combined ratio to the 2004 level of 96.8% and a profit before tax of approximately £1.4bn ($2.4bn). AM Best believes a combined ratio of approximately 100% is likely in 2006, reflecting further deterioration in loss ratios as rates reduce further.
Lloyd's continues to benefit from its global network of licenses and a high level of recognition of its brand. In 2005, AM Best anticipates that Lloyd's will consolidate its position in continental European markets following a period of rapid growth between 2001 and 2003, facilitated by the restricted availability of capacity in domestic markets. Lloyd's is expected to maintain its strong market position in the US, particularly the surplus lines market, which remains its leading underwriting territory.
Uncertainty as to the adequacy of Equitas' reserves continues to be a long term factor in the Lloyd's rating. In the absence of a major legislative change that effectively crystallises Equitas' losses early, AM Best believes it is likely to be some years before it is possible to determine whether Equitas can run-off its liabilities.
