Fitch Ratings has reaffirmed Lloyd's Insurer Financial Strength ("IFS") rating at 'A'. The rating agency has also affirmed the Society of Lloyd's Issuer Default rating ("IDR") and its subordinated debt issue rating.
Chris Waterman, senior director in Fitch's Insurance Group, said: "The ratings reflect Lloyd's strong capital position, enhanced risk-management framework, prospective strong earnings and strong franchise. Partially offsetting these rating factors is Lloyd's continued exposure to Equitas."
Lloyd's capitalisation remains strong. Central assets in the form of the Central Fund, the Corporation of Lloyd's net-assets and subordinated debt-issue have increased steadily since 1997. This has resulted in Lloyd's coverage of the 2005 regulatory solvency margin rising to 384% (300% in 2004) despite an increase in Central Fund drawdowns from insolvent members. Lloyd's 'capital and reserves' declined 10% in 2005 to GBP10.5 billion due to a reduction in members balances following the active 2005 hurricane season, but remains supportive of Lloyd's current Fitch ratings. Fitch expects Lloyd's capital position to improve further in 2006 following an increase in the Central Fund levy to 1% from 0.5%.
The establishment of the Franchise Board in January 2003 has led to significant improvements in the market's risk-management framework and a focus on franchise performance. Tangible benefits from this framework were derived in 2005 following the introduction of the Gulf of Mexico Realistic Disaster Scenario ("RDS"), which was successful in reducing Lloyd's gross and net loss exposure to the 2005 hurricanes. Fitch takes comfort from additional RDS development that has taken place in 2006. Fitch notes that Lloyd's enhanced risk-management framework is likely to reduce the historic volatility of Lloyd's earnings; however, this is unlikely to become fully apparent until the next soft phase of the underwriting cycle.
Lloyd's 2005 earnings were affected significantly by the 2005 hurricane season. The market recorded an aggregate combined ratio of 112% of which 29% related to catastrophe losses. Despite these large losses, Lloyd's reported a small pre-tax net loss for the year of GBP103 million, which represented a 0.9% loss on net premium earned. Fitch therefore views the 2005 hurricanes as an earnings event for Lloyd's rather than a capital issue and also views positively some stabilisation seen in prior-year reserve development. The agency expects Lloyd's to report strong results for 2006 and forecasts the market's aggregate combined ratio to be below 95% (subject to normal catastrophe experience).
Lloyd's has a strong global franchise and operates in over 200 countries. Its broad set of international licenses support Lloyd's standing as a specialist insurance market and a leading market for marine, aviation and energy insurance. It is the sixth largest reinsurer in the world based on premium income and the second largest US surplus lines underwriter.
Offsetting these positive rating factors is uncertainty regarding the ultimate run-off of Lloyd's pre-1993 underwriting liabilities that were reinsured into Equitas in 1996. Although the large majority of Lloyd's current capacity would not be legally required to meet any shortfall, members may do so to protect the franchise and to maintain access to US licenses.
