Lloyd’s of London Upgraded

A.M. Best Co. upgraded the financial strength rating to “A” (excellent) from “A-” (excellent) of Lloyd’s of London, and assigned an issuer credit rating of “a” to Lloyd’s. The outlook is stable. The rating reflects Lloyd’s improving prospective capitalization, strong operating performance, its global reach and improvements in risk management. A partially offsetting factor is Lloyd’s exposure to long-term uncertainty relating to the adequacy of Equitas’ reserves, although Best believes that Lloyd’s is unlikely to be adversely affected by Equitas in the near term.

Best believes the absolute level of central solvency capital (including the net assets of the corporation of Lloyd’s, the Central Fund and the callable layer) will be increased to approximately $3.7 billion between 2004 and 2008. Over this period, as part of Lloyd’s underwriting cycle management strategy, underwriting capacity will likely shrink if market conditions continue to deteriorate. It is expected that other sources of finance, in addition to members’ contributions (currently charged at 1.25 percent of capacity and paid into the Central Fund), will be used to enhance central capital.

Best expects growth of the Central Fund is unlikely to be materially affected by reserving issues relating to U.S. casualty business written between 1997 and 2001. In addition, Funds at Lloyd’s requirements for members are likely to increase as a result of upward pressure arising from application of the risk-based approach to capital developed by the U.K. Financial Services Authority. Best believes Lloyd’s loss ratio development supports pure year results for the open 2002 and 2003 years of account above Lloyd’s current estimates of $3,053 million and $3,254 million. In 2004, on an annually accounted basis, Best expects substantial earned premium derived from the 2003 underwriting year and continuing good market conditions for Lloyd’s specialist classes to support a combined ratio close to the 2003 level of 89.2 percent and a profit before tax of approximately $3.5 billion. A combined ratio below 95 percent is likely to be achieved in 2005, despite some deterioration in loss ratios as rates reduce in a softening market.

Improvements in risk management are expected to improve Lloyd’s response to any emerging performance problems. Best believes Lloyd’s now has a clearer focus on its downside with detailed performance analysis; increased sophistication in capital modeling; a clear strategy for claims and reinsurance recoveries; management of open years and syndicate run-offs, all contributing to an enhanced risk management environment.