Lloyd's 'A' (Excellent) Affirmed
A.M. Best Company has affirmed its "A" (Excellent) Rating of Lloyd's and its Financial Size Category of XV.
The affirmation is based on Lloyd's latest market results and a comprehensive review of its operations. The recently published 1995 year-of-account results showed an underwriting profit after personal expenses of œ1.149 billion, compared with œ1.095 billion in 1994.
The rating applies to the business written by 155 active underwriting syndicates that have common policyholder security and to all policies written since the 1993 year of account. It does not apply to the obligations of Equitas Ltd, the company formed to run off Lloyd's pre-1993 underwriting liabilities.
The rating reflects the excellent financial strength, operating performance and market profile of Lloyd's. The rating also reflects the return of market confidence in Lloyd's following its Reconstruction & Renewal (R&R) and its excellent capital position. The increased requirements for members to deposit funds at Lloyd's has increased the total resources of the market, largely offsetting the weakening of the capital position caused by the accumulation of reserves from long-tail liabilities. The R&R process benefited the market by removing the problematic pre-1993 liabilities.
The 1995 underwriting year results were excellent, with a return on net premium of 19.6%. A.M. Best believes this represents an out performance of the company market by at least 3%. Results for the 1996, 1997 and 1998 underwriting years are expected to be profitable, but show steady declines. A.M. Best expects Lloyd's to continue outperforming the company market, albeit by a decreasing margin.
Lloyd's is a society of corporate and individual members that provide capital to back the underwriting liabilities of its syndicates. Lloyd's world insurance market share has halved in the past 15 years, but it has maintained a leadership position in marine, aviation and a number of smaller, specialist classes of business. Lloyd's maintains a 13% share of the global marine market and a 22% share of the world's aviation market. It remains a center of excellence for these and other complex types of risk.
Offsetting Lloyd's strengths are the challenges it will face over the medium and longer term. These include intense competition, the high costs associated with operating in the Lloyd's market, competitive disadvantages in Lloyd's structure, the diverse aims and strategies of its constituents, and the need to enhance distribution channels.
The "annual venture"--a unique feature of Lloyd's whereby the capital backing the market changes every year--is a negative rating factor. This procedure adds considerable cost and creates a "drag" on earnings that is estimated by a Lloyd's working party to be equivalent to a 6% return on capital employed.
Fierce competition, excess market capacity and rock-bottom reinsurance rates, combined with an unusually low incidence of catastrophes, have resulted in the most difficult trading environment seen for some time. In addition to the traditional market, competition is coming from alternative sources--such as the property catastrophe market in Bermuda--which has become a successful competitor.
Equitas continues to perform within management's expectations. However, the Best Rating recognizes that Lloyd's has potential adverse marketing and financial implications from Equitas, in the event it is not able to adequately run off its liabilities. While Lloyd's has the option of supporting Equitas were this required, A.M. Best would question the willingness of Lloyd's members to provide Equitas with financial support. Lloyd's also has limited financial flexibility, which is unlikely to improve until the syndicated loan--required to assist the funding of R&R--has been repaid or significantly reduced.