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Lloyd’s debuts with international debt raising

Lloyd’s capped a year of success this week with the news that it would make its first ever foray into the international debt markets by raising £500mn of longer term subordinated debt.

In the 13 October announcement the corporation said the funds would be used to bolster the Central Fund for solvency purposes and that the proceeds of the notes were expected to be categorised as Lower Tier II capital in the Financial Services Authority’s new capital adequacy regime.

Nick Prettejohn, Lloyd’s CEO, commented: "Lloyd's today is financially strong. We are now aiming to strengthen that position further by establishing a long-term, robust and flexible capital structure, which is economically efficient for those firms that choose to operate at Lloyd's.

With this aim, we have been working for over a year on an innovative strategy to finance the Society’s central assets through a mix of traditional direct contributions by members, a new syndicate loan arrangement for 2005 which we announced last month, and this prospective issue of subordinated debt. Our strategy has widespread support from the market, our membership and the rating agencies. We believe there is currently a good appetite for this type of issue in the capital markets.

The Corporation said the size and terms of the transaction would be finalised after an investor roadshow to Sterling and Euro investors, and would be subject to market conditions.

Citigroup and Royal Bank of Scotland have been appointed as joint book-runners for the transaction.

Rating agency Fitch reacted by affirming its long-term rating of “A” on the Corporation, adding that it expected to announce a “BBB+” rating on the proposed subordinated notes.

It commented: “Capitalisation of the Lloyd’s market has improved substantially over the last year with net assets increasing 35 percent to £10.1bn in 2003 from £7.5bn in 2002, following an 85 percent growth in net assets in 2002.

It said the enhanced capital position of Lloyd’s was also reflected in the 227 percent coverage of the regulatory required minimum margin for solvency in 2003, up from 187 percent in 2002, and that central assets also increased steadily reaching £781mn at end 2003 from £363mn in 2001.

But Fitch highlighted its expectation that capacity would “be managed downwards as Lloyd’s enters a period of softer underwriting conditions”, while also praising the tighter controls and resulting lower volatility established by the Franchise Board.

Fitch’s action follows its upgrade of Lloyd's rating to “A” from “A-” on 24 September 2004 with a stable outlook (see Insider Week passim), which followed a similar action by AM Best.

AM Best also assigned a debt rating to the notes of “bbb+”, while also assigning an issuer credit rating of “a-” to Lloyd’s.

It observed: “AM Best believes that the notes introduce a manageable level of gearing into the Society’s central mutual capital whilst enhancing its financial flexibility.

The move to boost the Central Fund was predicted by Insider Week’s sister publication The Insurance Insider as long ago as April 2004 (Issue No 70).

In a lead article, The Insurance Insider noted that the mooted debt raising was in response to the FSA’s increasingly stringent approach to insurer’s capital adequacy.

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