A.M. Best Affirms Rating of Lloyd's of London.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--July 17, 2003

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Lloyd's of London. The outlook remains stable.

The rating reflects Lloyd's maintenance of an excellent business profile and capitalisation, its improving performance, stable investment returns and enhanced standards of risk management. Offsetting factors include uncertainty as to the ultimate adequacy of Equitas' reserves and increasing risk to the Central Fund from large members.

Excellent business profile--In 2002 Lloyd's strengthened its relationship with its main market, the United States, increasing its U.S. surplus lines premium income by 21% in 2002 to USD 4,082 million. Lloyd's has also achieved significant premium growth in continental Europe, traditionally an area where Lloyd's has had a modest profile. Overall gross premiums written (net of brokerage) in continental Europe increased from GBP 1.4 billion (USD 2.2 billion) in 2001 to GBP 1.8 billion (USD 2.9 billion) in 2002. Lloyd's continues to benefit from its high profile global brand and network of licenses.

Excellent capitalisation--A.M. Best believes that Lloyd's prospective capitalisation will remain excellent, taking into account its potential inability to make recoveries under the Central Fund insurance contract. Lloyd's total financial resources increased 23% in 2002 to GBP 27.0 billion (USD 43.3 billion), including an increase of nearly 46% in net Central Fund assets to GBP 476 million (USD 764 million). Lloyd's determines its capital requirements using a risk-based capital (RBC) system, which is designed to equalise each member's expected loss to the Central Fund but does not specifically address the risk to the Central Fund of a large loss from one of its members. A.M. Best continues to monitor closely the issue of Central Fund exposure to large members.

Improving performance--A.M. Best expects marked improvement in Lloyd's performance for the 2002 to 2004 years of account, subject to normal loss experience. Lloyd's 2002 net incurred loss ratio after 15 months was 22%, down from 44% for 2001 at the same stage. In particular, A.M. Best believes that Lloyd's current estimate of a pure year profit for the 2002 year of GBP 1,484 million (USD 2,381 million) may well be exceeded. Lloyd's continues to benefit from the strong upturn in market conditions that began in 2001 and maintains relatively stable investment returns. Syndicate investments largely comprise fixed income securities, and equities form a small part of investment portfolios at Lloyd's. Better performance from 2002 is partially offset by Lloyd's recent record of substantial losses, a record which is set to continue when the 2001 year is closed.

Enhanced risk management--A.M. Best views positively the steps taken by Lloyd's to create a professional risk management function, including both the Risk Management Division and the Franchise Performance Directorate (FPD). These two divisions represent a considerable commitment by Lloyd's to managing the next market down cycle. However, A.M. Best continues to have some reservations as to whether the FPD will be as effective as Lloyd's plans in some respects. In particular, Lloyd's objective of managing performance to pre-determined profit targets, without at the same time having direct management responsibility for franchisees, will be difficult to accomplish.

Equitas--Uncertainty as to the adequacy of Equitas' reserves remains a long-term negative factor in the rating. Equitas' reserves are discounted, and a sophisticated approach is taken to managing interest rate risk, including traditional bond portfolio duration matching and interest rate sensitive financial reinsurance. However, there is an inevitable degree of risk associated with Equitas' strategy of matching an evolving liability structure, particularly in view of the scale of its reserves relative to surplus.

Expectations:

-- A.M. Best anticipates a marked uplift in Lloyd's closed-year

performance from 2002 and a more active role for risk

management into the next down cycle.

-- If current positive factors affecting Lloyd's develop

favourably, then this will be reflected in the rating.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.