AM Best


A.M. Best Affirms Ratings of Lloyd's, Lloyd's Insurance Company
(China) Limited and Society of Lloyd's


CONTACTS:


David Drummond
Senior Financial Analyst
+(44) 20 7397 0327
david.drummond@ambest.com

Catherine Thomas
Director – Analytics
+(44) 20 7397 0281
catherine.thomas@ambest.com


Christopher Sharkey
Manager, Public Relations
+(1) 908 439-2200, ext. 5159
christopher.sharkey@ambest.com

Jim Peavy
Assistant Vice President, Public Relations
+(1) 908 439 2200, ext. 5644
james.peavy@ambest.com

FOR IMMEDIATE RELEASE

LONDON - JULY 24, 2014 10:25 AM (EDT)
A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of "a+" of Lloyd's (United Kingdom) and Lloyd's Insurance Company (China) Limited (LICCL) (China). At the same time, A.M. Best has affirmed the ICR of "a" of Society of Lloyd's (the Society) (United Kingdom) and the debt ratings of "a-" on the subordinated loan notes issued by the Society in two tranches in November 2004 (GBP 153 million 6.875% subordinated notes maturing 17 November 2025 and EUR 214 million 5.625% subordinated notes maturing 17 November 2024), as well as the debt rating of "bbb+" on GBP 392 million 7.421% junior perpetual subordinated loan notes issued in June 2007. The outlook for all ratings remains positive.

The positive outlook reflects Lloyd's strong operating performance in recent years, in spite of the exceptional record of natural catastrophes in 2010 and 2011, together with A.M. Best's assessment of the robust oversight of the market by Lloyd's and its demonstrable success in reducing earnings volatility. The outlook also recognises the steady improvement in the market's risk-adjusted capitalisation.

Offsetting these positive rating factors are the increasingly challenging conditions in Lloyd's core markets, particularly for reinsurance business. A.M. Best will continue to monitor closely the impact of deteriorating rates, together with changes in terms and conditions, on Lloyd's underwriting performance.

The stability of Lloyd's central capital base supports A.M. Best's view that capitalisation will remain strong in 2014 and into 2015. Central assets for solvency fell by 2% in 2013 to GBP 3,157 million, reflecting a buy-back of approximately GBP 180 million of subordinated debt in May 2013, but are likely to remain close to this level throughout 2014. Lloyd's intentions regarding the potential buy-back of approximately GBP 178 million of euro-denominated debt at its call date in November 2014 have not been finalised at this stage.

The exposure of central resources to insolvent members continues to diminish as run-off liabilities decline. In addition, Lloyd's robust risk-based approach to setting member level capital, as well as its close monitoring of syndicates' performance and catastrophe exposure, reduces the risk of material drawdowns on the central fund. A.M. Best believes that Lloyd's internal capital model, which is already being used to determine its solvency capital ratio under transitional arrangements pending the implementation of Solvency II, enhances Lloyd's understanding of the likelihood and potential magnitude of claims being made upon central assets from future member insolvencies.

When setting the member level capital requirement, Lloyd's applies a 35% economic capital uplift to each syndicate's solvency capital requirement. This level of uplift has been retained for 2015, but should it change in the near future, A.M. Best will review the implications for risk-adjusted capitalisation and react accordingly.

Lloyd's reported an excellent profit in 2013 of GBP 3,205 million, reflecting a generally benign year for natural catastrophes. The result was supported by prior-year reserve releases of GBP 1,575 million, but the low interest rate environment continued, depressing investment returns.

Assuming a normal year for catastrophe events, performance in 2014 is expected to be marginally weaker than in 2013. There have been some significant losses in the first half of 2014, but a combined ratio between 90% and 95% is anticipated (2013: 85%). Underwriting results are again likely to be supported by prior year reserve releases, albeit at a more modest level than in recent years.

Lloyd's benefits from an excellent position in the global insurance and reinsurance markets. The collective size of the market and its unique capital structure enable syndicates to compete effectively with large international insurance groups under the well-recognised Lloyd's brand. Good financial flexibility is enhanced by the diversity of capital providers, which include corporate and non-corporate investors.

The ratings of LICCL acknowledge the explicit support it receives from Lloyd's in the form of quota share retrocession contracts that transfer all reinsurance risk underwritten to syndicates that elect to write reinsurance business through LICCL. In addition, the ratings take into account the operating model LICCL uses to write direct insurance business, employing mechanisms that comply with local regulatory requirements, but that transfer the greater part of the risk to Lloyd's.

Lloyd's continued strong operating performance and capitalisation could lead to positive rating actions, but an unexpectedly weak performance or a lower level of capital would put downward pressure on all ratings.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures:A.M. Best Europe - Rating Services Limited Supplementary Disclosure.

This rating announcement has been issued by A.M. Best Europe - Rating Services Limited, which is a subsidiary of A.M. Best Company. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.


Related Companies

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AMB# Company Name
085202 Lloyd's
078649 Lloyd's Insurance Company (China) Ltd
051215 Society of Lloyd's