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Rating Action:

MOODY'S DOWNGRADES THE INSURANCE FINANCIAL STRENGTH RATINGS OF FIVE LLOYD'S SYNDICATES AMID GROWING CONCERNS OVER THE STRENGTH OF LLOYD'S CENTRAL FUND AND FRANCHISE

31 Oct 2001
MOODY'S DOWNGRADES THE INSURANCE FINANCIAL STRENGTH RATINGS OF FIVE LLOYD'S SYNDICATES AMID GROWING CONCERNS OVER THE STRENGTH OF LLOYD'S CENTRAL FUND AND FRANCHISE Moody's Investors Service has announced today that it has downgraded the insurance financial strength ratings of five Lloyd's syndicates amid growing concerns over the adequacy of resources within the Lloyd's Central Fund, the market's mutual support mechanism, and over the strength of the Lloyd's franchise. These ratings remain under review for further possible downgrade, pending completion of analysis that is specific to each.


The rating agency stated that, previously it had expressed the view that, while financial strength may differ widely among the various Lloyd's underwriting syndicates, even the weakest syndicates provided policyholders with at least 'Adequate' security. Given recent events and trends, Moody's believes this may no longer be true, with the weakest syndicates now only giving security no better than the bottom end of the 'Adequate' range, with the potential to fall into the 'Questionable' range.


Moody's elaborated that the Lloyd's Central Fund, taking into account contingent capital in the form of aggregate excess of loss reinsurance, has potential resources of c.$1.5bn. Such a resource, though not sizeable in relation to the total volume of Lloyd's business, is a powerful force providing a base level of support for all underwriting syndicates operating within the market. However, Moody's stated that the Central Fund has come under increasing pressure recently from four main sources:

1) A significant portion of the Central Fund has already been earmarked;

2) Four consecutive years of underwriting losses, which Moody's had previously estimated to total over US$6 billion before consideration of the September 11th terrorist attacks;

3) The impact on capital and liquidity of losses stemming from the September 11th terrorist attacks;

4) Continued shifts in the underlying market structure that could limit the likelihood of future market-sponsored "bailouts".


With regard to the September 11 terrorist attacks, the rating agency said that Lloyd's has announced a net loss of US$1.9bn and it has subsequently been disclosed that the gross loss is in the order of US$8bn net of inter-syndicate reinsurance. Moody's expects that this figure will increase significantly, and, with catastrophe protection limits having already been reached or exceeded, any further deterioration of the gross loss is likely to be retained 100% by many syndicates.


Moody's noted that the exposure to reinsurance coverage disputes and reinsurance failure being run by Lloyd's is far in excess of most insurers or reinsurers. It added that liquidity will be an issue for syndicates until new funds are built up from the improved earnings now coming through, with this issue being exacerbated if the losses are not settled quickly and / or there is a further major loss in the interim. However, the main concern is the exposure on the run-off of the business written prior to September 11th. Another major event impacting this business at this juncture would put severe pressure on liquidity. Significant cash calls would be necessary, crystallising losses for members and putting even more strain on the Central Fund. It is for this reason that Moody's considers the security of the weakest entities trading at Lloyd's to be no better than the bottom end of the 'Adequate' range, with the potential to fall into the 'Questionable' range.


Moody's concluded that, although Lloyd's still has a powerful franchise and remains attractive as a market for policyholders and capital providers, the extent of the losses suffered in this downturn is already leading some entities to question their commitment to Lloyd's. Moody's concern is that the attraction of Lloyd's is lessening and that the perceived negatives are starting to further weaken Lloyd's. It is likely that Lloyd's will have to reverse this downward spiral of severe losses followed by a period of trying to maintain, rather than build on, its franchise, or it risks losing the support of both policyholders and capital providers.


The issues highlighted in this press release are discussed in greater detail in a Moody's Special Comment which will be published in the next few days.


The following Lloyd's syndicate insurance financial strength ratings have been downgraded:


SVB syndicate 1007 - Aa3 to A1, under review for further possible downgrade;

SVB syndicate 1212 - A1 to A2, under review for further possible downgrade;

Amlin syndicate 2001- A1 to A2, under review for further possible downgrade;

ACE syndicate 2488 - Aa2 to Aa3, under review for further possible downgrade;

Wellington syndicate 2020 - Aa3 to A1, under review for further possible downgrade.

No Related Data.
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