Lloyd’s flexibility showing in 2004/5: Benfield

The financial strength of Lloyd’s, as well as its flexibility, have been evident since 9/11, according to a new report on the London market by reinsurance broker Benfield Group.
Lloyd’s maintains a strong competitive position with the significant increase in market capital seen over the past three years. And while capacity for 2005 is likely to drop 5-10% according to Lloyd’s, the market’s long-term central assets are strong and structured for greater efficiency.
The focus has shifted from member assets to central fund strength, Benfield notes, and this “core strength” should help create economies of scale and greater operational control. Lloyd’s central fund assets are expected to reach 2 billion pounds (Cdn$) by 2008.
At the same time, the market has shown greater flexibility, specifically with its first foray into the capital markets a 500 million pound subordinated debt issue which was oversubscribed. Benfield notes the issue helped to “underline investors’ confidence in Lloyd’s”, as well as increase the market’s competitive position.
Many of these moves have been geared towards increasing Lloyd’s financial strength ratings, with rating agency A.M. Best already responding with an upgrade, while S&P affirmed Lloyd’s at the “A” level. Each of A.M. Best, Fitch and S&P has Lloyd’s at the “A” level with a stable outlook, a status which Benfield says will serve the market well moving into the soft side of the cycle.
Moving forward, a key will be management’s determination to maintain control of capacity as the market softens and analysts will have a keen eye capital allocation by business class, Benfield predicts.
2004 will likely produce weaker profits than the record 1.9 billion pounds recorded in 2003, but income will be significant nonetheless. Even with the market bearing a 1.3 billion pound loss from U.S. hurricanes and Japanese typhoons this year, the spread of this risk across market participants means its impact should not be serious.