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Equitas deal wins Fitch upgrade for Lloyd’s

Yesterday’s (27 March) closing of the Equitas deal with Berkshire Hathaway has already begun to pay dividends for Lloyd’s, with Fitch Ratings upgrading its insurance financial strength rating on the Society from A to A+.

The rating agency also raised its issuer default rating on Lloyd’s by a notch to A-, placing both on a stable outlook, as it cited the “additional buffer” provided by the transaction as the “prime driver” behind the upgrades.

Following the finalisation of the deal, which removes a significant drag on Lloyd’s ratings, other agencies, including Standard & Poor’s, are expected to take similar positive action on the Society.

Under the transaction, first announced in October last year, Berkshire Hathaway subsidiary National Indemnity Company (NIC) will reinsure Equitas liabilities and provide up to $5.7bn in reinsurance protection in excess of the run-off reinsurer’s current reserves.

NIC will also take on Equitas staff, operations and management in the deal, which say the pre-1993 Lloyd’s run-off vehicle pay Berkshire Hathaway £358mn, of which the Corporation contributed £72mn.

In a statement, Fitch noted it “previously regarded the potential for reserve deterioration through Equitas as being a significant drag on the Lloyd's ratings”.

“The additional buffer provided by the transaction with Berkshire removes much of this risk and is the prime driver behind the upgrade,” explained the agency.

Fitch added that, while the upgrade was driven by the Equitas deal, an absence of catastrophic losses in 2006 is expected to boost Lloyd’s results when they are announced tomorrow, while the agency “draws comfort” from progress made in reforming the market’s operating practices and “managing underwriting exposures as most lines of business experience price softening”.

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