Fitch ups Lloyd’s ratings based on Equitas-Hathaway deal

Fitch Ratings has upgraded Lloyd’s of London’s (“Lloyd’s”) Insurer Financial Strength (“IFS”) rating by one notch to ‘A+’.
At the same time, the agency has upgraded the Society of Lloyd’s Issuer Default rating (“IDR”) by one notch to ‘A’.
Both ratings have stable outlooks.
The rating action follows the confirmation yesterday that Berkshire Hathaway (“Berkshire”) and Equitas (the vehicle established to reinsure and run-off the 1992 and prior-years’ liabilities of Lloyd’s members) have finalized the transaction announced in October 2006, Fitch said in a press release.
Under this agreement, Berkshire will reinsure all of Equitas’ liabilities and provide up to US$5.7 billion in reinsurance protection above Equitas’ current reserves. In addition to reinsurance cover, Berkshire will take on the staff, operations and management of the run-off of Equitas.
As part of the transaction, Equitas paid Berkshire 358 million (Cdn$814 million), of which Lloyd’s contributed 72 million (Cdn$163.7 million).
Fitch previously regarded the potential for reserve deterioration through Equitas as being a significant drag on the Lloyd’s ratings, Fitch said in its release. The additional buffer provided by the transaction with Berkshire removes much of this risk and is the prime driver behind the upgrade.
Fitch noted it is possible the relationship between Equitas and Berkshire will proceed to a second phase. This would involve the transfer of Lloyd’s members’ pre-1993 liabilities into Equitas or a U.K.-based subsidiary of Berkshire and the provision of additional reinsurance protection of up to US$1.3 billion.
A premium of up to 40 million (Cdn$90.9 million) would be paid to Berkshire, with Lloyd’s paying a further 18 million (Cdn$40.9 million).
Although the upgrade is based largely on the completion of the Berkshire transaction, Fitch also notes the absence of catastrophic losses in 2006, which the agency expects to enhance Lloyd’s results, Fitch added. Fitch also draws comfort from the progress of Lloyd’s management reforming the market’s operating practices and managing underwriting exposures as most lines of business experience price softening.