AM Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit rating (ICR) of “a” of Lloyd's. It also said the outlook for the ratings remains stable.
In a statement last night, Luke Savage, director finance and risk management said: "We are delighted that AM Best has affirmed our rating of A (Excellent) for the second year running, highlighting the resilience and strength of the Lloyd's market and its prospective performance.
"Given last year's record natural catastrophes we are particularly pleased that AM Best has recognised the progress that Lloyd's has made in preparing for and dealing with catastrophes."
AM Best said it believes that Lloyd's central solvency capital is likely to stay strong through 2006, remaining at a comparable level to year-end 2005 (£1.85m) despite an anticipated increase in Central Fund drawdowns from existing insolvent members.
The ratings agency said a stable overall position is likely to incorporate a significant increase in Central Fund net assets as a result of the increase in the contribution rate to 1%, up from 0.5% in 2005.
AM Best also believes there is sufficient tolerance within central assets to withstand a significant stress scenario without threatening the market's solvency.
It noted the major catastrophe losses of 2005 have had an impact on earnings and member level capital, driving an increase in Lloyd's balance sheet liabilities in 2005 of 26%, which in turn led to a decline in net resources of nearly 10%.
However, it said, the catastrophe losses have not had an impact on central assets, other than a modest impact from members already in run off.
Although Lloyd's is likely to continue to be affected by catastrophe experience, AM Best believes that the more extreme performance downside from which Lloyd's suffered in previous cycles has been curtailed as a result of enhanced management of risk and performance.
AM Best believes that Lloyd's performance in the period 2006 to 2008 is likely to be good, although deterioration is anticipated across this period as a result of weakening in market conditions.
A combined ratio of approximately 98% is anticipated in 2006 (subject to full year catastrophe experience), a modest deterioration from 97% in 2004 and considerably better than 112% in 2005.
Further ahead, AM Best believes that Lloyd's is likely to achieve a combined ratio close to 100% in 2007 and 2008, with performance affected by increasingly competitive market conditions.
AM Best anticipates that for the immediate future, Lloyd's will focus on improving its access to certain key developing markets.
It is likely Lloyd's will establish a representative office in India in 2006 and a licensed reinsurance company in China early in 2007.
AM Best believes that Lloyd's will maintain its strong market position in the United States, particularly the surplus lines market, which remains its leading underwriting territory.
Inherent uncertainty over Equitas' reserve development remains a long-term offsetting factor in AM Best's rating analysis, albeit a diminishing one.
