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LONDON-The first marketwide rating of Lloyd's of London by two major agencies is another step in the renewal process that helps Lloyd's continue to build its case for confidence in the market.
Standard & Poor's in London and A.M. Best Co. announced ratings last week that put Lloyd's among the most secure insurers and reinsurers. The agencies said those ratings are based on many factors, including: the financial security provided by the members, Lloyd's strong business mix, leadership in many lines, and financial and regulatory improvement since the implementation of the reconstruction and renewal plan. The ratings are based on Lloyd's business written after 1992.
Standard & Poor's released its A+ rating for the Lloyd's market Wednesday morning. S&P's highest rating is AAA. S&P's announcement was followed that afternoon by an A rating from Oldwick, N.J.-based Best. Best's highest rating is A++.
Both agencies had worked closely with Lloyd's, accessing non-public financial information on which to base their assessments of the market's security.
Best's rating puts Lloyd's on par with companies such as Bermudian reinsurer Starr Excess Liability Insurance Co. Ltd. and London-based CNA Reinsurance Co. Ltd. S&P's assessment puts Lloyd's in the same category as Travelers/Aetna Property Casualty Corp. and ACE Ltd.
Lloyd's did not receive the highest rating available from either agency because of uncertainties relating to its short track record since the completion of the R&R program and the future viability of Equitas Ltd., the runoff reinsurer of Lloyd's pre-1993 liabilities.
Chicago rating agency Duff & Phelps Credit Rating Co. announced last week that if it had rated Lloyd's, the market likely would fall in the "secure" claims-paying ability range. New York-based Moody's Investors Service Inc. said it will issue a report-without Lloyd's central cooperation-in the near future. Lloyd's declined to work with Moody's, saying the market at this point could work only with two rating agencies.
Lloyd's Chairman Sir David Rowland said he was "very pleased with the results" of the rating agencies' work, particularly the affirmation they indicate of the security provided by the Central Fund. He said that when he assumed the Lloyd's chairmanship five years ago, he "believed that one of the critical things for Lloyd's was to.*.*.justify its position to clients." But there was "no conceivable way we could have sensibly invited rating agencies in" until the R&R plan had been completed.
Previously, the only rating agency information that insurance buyers have had on Lloyd's is S&P's crown-ranking system of individual syndicates. Those rankings look at the prospects for longevity of a syndicate rather than its financial strength and do not encompass claims-paying ability. S&P plans to introduce a new system for those rankings this year.
Both S&P and Best had just three months after the release of Lloyd's results for the 1994 year of account to complete the ratings in time for the reinsurance renewal season, which is under way.
To some Lloyd's brokers, underwriters and agents, Lloyd's desire for a rating was a brave gamble-a low claims-paying ability rating could have hurt business. But many observers say the gamble paid off.
Louisiana Insurance Commissioner James Brown said the ratings "will give a comfort level to many American businesses that it's time to do business (with Lloyd's)."
Last year, U.S. regulators made a number of recommendations and requirements to strengthen Lloyd's funding position in the United States. In Louisiana, the market was required to start providing actuarial certifications for individual syndicates and to increase its trust funds fivefold. "I think the requirements are to some degree the reason why the high ratings were given," said Mr. Brown. "Lloyd's has rolled up its sleeves and increased its accountability."
Regulators in the New York Insurance Department, who declined to comment on the ratings, brought in even more stringent requirements, demanding Lloyd's establish a number of new trust funds with amounts posted representing assessed liabilities, with no credit for possible reinsurance recoveries.
However, Lloyd's will not see any relaxation in U.S. regulators' demands because of the positive ratings, Mr. Brown said. Several issues remain unresolved, including the viability of Equitas, he said.
Both agencies have rated Lloyd's in its post-reconstruction and renewal form-free of the liabilities of the past. However, the agencies have warned that problems with Equitas also could pose problems for Lloyd's, even though Equitas is a separate company. Neither Best's nor S&P's rating applies to Equitas.
"Lloyd's remains potentially handicapped by Equitas over the next several years," Best wrote in its report. "Although Equitas is an independent and separately licensed U.K. runoff reinsurance company, Best believes the market will view Equitas and Lloyd's as one and the same." Any problems with Equitas will reflect on Lloyd's financially-if Lloyd's gave Equitas funds to help its liquidity-or in a marketing sense, Best said.
S&P said it had "made allowance for Lloyd's contingent exposure to Equitas," though it noted that Lloyd's would not be obligated to make good any shortfalls in Equitas' accounts.
A marketwide rating was possible because of Lloyd's chain of security, which consists of: members' funds retained by the market, generated by the requirement that members put up a percentage of the capacity they are underwriting; members' premium trust funds; other personal wealth that backs up members' liability for losses; and the Central Fund. Earlier this year, Lloyd's announced that over the next three years, it will increase the amounts members must post to back their Lloyd's participation, boosting the security chain.
This chain "has allowed (Lloyd's) to maintain an outstanding claims payment record," said Best.
S&P, which has yet to come out with a full report, assessed Lloyd's capital adequacy as "consistent with an A category rating," adding that "the total capital at risk in the Lloyd's market is at excellent levels using Standard & Poor's standards applied to insurance companies."
Other major rating factors for S&P included Lloyd's "excellent business position," with diversity across classes, types of business and location, and a strong brand name and license network. Within classes of business, Lloyd's has "strong market shares in many of its chosen classes" and leadership positions.
In addition, earnings after Lloyd's R&R plan was completed successfully last year have been "excellent," with "substantial profits" in the pipeline.
S&P also noted Lloyd's much-improved and now "strong" regulatory management and its good prospective financial flexibility.
Best echoed many of these comments, adding Lloyd's suffered some lost policyholder confidence and credibility in the early 1990s and a flight of members from the loss-plagued market, but that it has largely overcome those problems.
Best also pointed out that Lloyd's has little financial flexibility beyond the ability to call 200 million pounds ($323.2 million) from capital providers, a contingency that members approved prior to the R&R plan. Lloyd's already gave 440 million pounds ($711 million) from the Central Fund to the R&R settlement and took a 300 million pounds ($484.8 million) loan as part of the renewal process.
Insurance buyers and others see the ratings as good news.
Ina Barker, executive director of the Assn. of Insurance & Risk Managers, welcomed the ratings. "From AIRMIC's point of view, we see the Lloyd's market as having innovative ideas and solutions, so the ratings should therefore enhance decision-making in using it," she said.
Though he thinks Lloyd's getting a rating is a good move, Alan Fleming, head of group risk management for Guinness P.L.C. in London, said there is "a limit to the amount you can read into" the ratings. Corporate capital is still very much in its infancy at Lloyd's, he pointed out, but he does not foresee buyers being deterred because Lloyd's didn't receive a higher rating.
Alan Rees, director of international market security for Aon in London, said the ratings have "very positive implications and will enable (Aon's) customers to make a meaningful comparison between Lloyd's and its corporate competitors." Not only do the ratings provide "the transparency frequently sought by our clients," said Mr. Rees, but customer feedback already has been "extremely positive."
Others saw the ratings as final proof that Lloyd's reconstruction has worked. "This is excellent news," said Graham McKean, director of Lloyd's broker Ballantyne, McKean & Sullivan Ltd. and a member of Lloyd's ruling Council. "It's a final accolade on Lloyd's reconstruction and renewal," he said. The next stage will be to improve upon the current ratings, he said.