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S&P Sees No Change in Lloyd's Ratings

April 7, 2005

Standard & Poor's Ratings Services joined A.M. Best in stating that its ratings and outlook on the Lloyd's Market ("A" / Stable) and The Society of Lloyd's (also "A" /- Stable) as well as its "BBB+" rating on the subordinated debt issued by the Society remain unaffected by yesterday's earnings announcement for the financial year ended Dec. 31, 2004 (See IJ Website April 6).

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"Lloyd's has reported strong net profits before tax of £1.4 billion ($2.6 billion) (£1.9 billion in 2003) and a combined ratio of 96.9 percent (90.7 percent in 2003)," the announcement noted. "These figures are generally better than Standard & Poor's last published operating expectations of £0.8 billion-£1.2 billion [between $1.5 and $2.26 billion] and 93 to 97 percent, respectively, which excluded any impact of a Central Fund insurance arbitration settlement," stated S&P credit analyst Marcus Rivaldi.

S&P noted, however, that "performance was lower than the original expectations set for the Market in September 2004 (net profits before tax of £1.8 billion-£2.2 billion [$3.4 to $4.15 billion] and a combined ratio of 87 to 90 percent), which did not factor in the impact of a series of large catastrophes."

S&P also took account of the impact associated with the Central Fund insurance arbitration settlement (which has reduced the size of the Fund by £226 million ($426 million) and contributed 2.7 points to the Market's combined ratio. "The Lloyd's results include the net impact of significant catastrophe claims in 2004 (£1.3 billion [$2.45 billion] or 11.3 combined ratio points), and amounts relating to reserve strengthening on prior years and costs relating to run-off syndicates, net of releases on initial reserves set for the 2002 and 2003 accident years (in aggregate, £300 million [$565.6 million] or 2.6 combined ratio points)," said the bulletin.

"Nevertheless, underlying profitability is very strong," it continued. "Besides strong operating performance, the stable outlook on Lloyd's and the Society continues to be based on (1) the main capital providers remaining committed to the Market (the 8 percent decline in capacity for 2005 to £13.7 billion [$25.83 billion] being consistent with prudent underwriting cycle management);

"(2) there being no material deterioration in the solvency of Equitas Ltd. in the short term. (In the medium term, Standard & Poor's currently considers that a £500 million [$942.6 million] capital deficiency at Equitas could be managed by Lloyd's.);

"(3) the Franchise Performance Directorate remaining proactive in guiding the Market, particularly if underwriting conditions deteriorate more significantly; and (4) material progress before 2006 in business process reform with, in particular, improvements in policy production and claims handling."