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Lloyd’s insurers gear up for growth

Lloyd’s insurers have geared up balance sheets to cash in on attractive post-Katrina underwriting conditions, according to research by equity house Numis Securities Ltd.

Analysts at the firm calculated that the average gearing across the Lloyd’s listed vehicles they cover has risen since the start of the year, “as companies have generally sought to maximise regulatory capital in order to fund income growth during favourable trading conditions”.

The second half of 2006 has already seen a number of companies boost capital with debt funding, including Beazley with a £150mn subordinated debt issue, Chaucer’s $50mn issue, Hardy with $30mn, Wellington with two tranches of $41mn and EUR11mn, and last week’s $35mn issue by Kiln.

Numis analyst Nick Johnson noted the increased popularity of subordinated debt funding, “its attraction enhanced by its qualification as regulatory capital”.

“It is interesting to note that letters of credit remain an important source of finance across the sector.

“However, with regulatory uncertainty over the use of LOCs as solvency capital in the long term, companies are exhibiting an increasing trend to replace LOCs with other methods of funding,” he added.

The highest geared of the companies covered by Numis is Chaucer, with current debt equivalent to 85 percent of net tangible assets as at 30 June 2006. Almost half of the total debt was made up of subordinated debt, with the balance from letter of credit facilities.

Rival Advent had the highest percentage of subordinated debt to net tangible assets, with the full 80 percent of its current debt to net tangible asset ratio accounted for by subordinated debt.

Advent is one of a number of insurers that are understood to have accessed the Dekania Europe 1 programme of subordinated debt launched last year (see July 2005 issue of our sister publication The Insurance Insider).

At the other end of the scale, Omega Underwriting has zero gearing.

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