Winning the ratings game

THERE was a time not so long ago when the idea of lending money to Lloyd's of London would have brought forth hoots of derision from the capital markets.

It is a sign of how far the insurance society has come in the past few years that its chief executive Nick Prettejohn could today announce plans with the help of Citigroup and RBS to float a 20-year bond to raise £500m of new capital to support the markets' operations.

Lloyd's is playing the ratings game. Although most of the players in the London market view the ratings agencies with scorn, and berate them for failing to understand the insurance business, the fact is that they wield huge power. A rating downgrade can cause a massive outflow of business, as the Swiss insurer Converium is currently finding to its cost.

Conversely, if the ratings agencies give an insurance business a higher rating than that of its peers, the money flows in. Lloyd's is already one of only a handful of insurers to get a ratings upgrade this year. Raising this capital now can only add to the good impression.

The customers should like it too. The new money, plus the £800m already in the Lloyd's central fund together with the proceeds of Lloyd's compulsory loan from syndicates, means there is now some £1.bn of capital backing policies which is over and above the reserves in the syndicates and the companies operating under the Lloyd's umbrella.

That is big enough buffer to cope with a catastrophe or three on top of the inevitable market downturn. But meanwhile in these buoyant times it all helps reinforce the quality and soundness of the Lloyd's brand.

The society has never raised capital in this way before - preferring in the past to impose a levy on its names when it sought to rebuild reserves. In a way it is a reward for cleaning up its act.

Losses from the recent hurricanes and Japanese typhoon will hit the market for £1.3bn - but it will still make a profit of £1bn this year. It has opened itself up to the outside world and can still make good money.

Pension ripostes

THE second best comment on Adair Turner's pensions document yesterday comes from Robert MacGregor of consultants Andrew Forbes:

'Mr Turner has come up with an interim report that would be appreciated by the great supercomputer Deep Thought from The Hitchhiker's Guide to the Galaxy. It is long and complex yet comes out with no answers.

'By the time we know the outcome, no one will remember what the original question was that the Government asked Mr Turner.'

The best comment comes via Donald Duval of Aon but is a poem by AP Herbert, which reads as follows:

Save, save, they say, and put away What you would like to spend today. Don't drink, or smoke, or go abroad And all the parties will applaud. But when the money's in your banks, Expect no more the nation's thanks. Your earnings now have changed their name, They're capital, a cause for shame. While any yield they may bring Is dividend, a filthy thing.

But selling won't remove the stain. You make a beastly capital gain. You should be like the State, you fool, And make a capital loss the rule. Give some away to poorer men Oh no, you're dodging taxes then. In short, the patriots who save Remain in error till the grave.

So die as quickly as you can And pay death duties like a man.

Cazenove problem

LOOKING at the list of Cazenove shareholders the other day, and seeing all the big insurance companies such as Legal & General and Morley shoulder-to-shoulder on the list, neatly underlined the Cazenove dilemma. The friends of Caz are the big, long-only investment funds that traditionally have been the power in the London market.

But the difficulty for the broker now is that whenever there is a big takeover bid or even - as in the case of Philip Green's tilt at Marks & Spencer - the threat of a bid, then all those long-only funds rush for the exit. They sell their holdings to hedge funds, and it is these and American value investors who are increasingly calling the shots in Britain's bid battles.

The power has shifted to investors with whom Caz has little contact or influence. The long-only funds have become marginalised, and marginalised with them is the influence of Cazenove.