Best Affirms Steamship Mutual ‘A-‘ Rating

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) of The Steamship Mutual Underwriting Association (Bermuda) Ltd. (Steamship), but has changed the outlook to negative from stable.

“The rating reflects improving operating performance due to increased investment returns and excellent, albeit reduced, financial flexibility,” said Best. “The lack of material underwriting profits (net of administration and acquisition costs as calculated by A.M. Best), despite substantial rate increases, continues to be the main offsetting factor.”

The rating agency indicated that the negative outlook reflects its “concern regarding the maintenance of excellent risk-adjusted capitalisation should technical results not improve.”

Best indicated that, “Steamship’s improving investment performance (expected investment return in excess of 9.5% at year-end February 2004) reflects a significant improvement in equity markets and is expected to contribute to operating profits of over USD 30 million at February 2004 (from a loss of USD 57 million in the prior year).”

It noted, however, that “underwriting results, although improving with a reduction of approximately 24 percentage points expected in the year-end loss ratio to 91 percent (110 percent combined ratio), will remain negative despite a 25 percent average increase in rates.” Best said it believes that the combined ratio is unlikely to fall below 100 percent in the short term, notwithstanding a further planned rate increase of 20 percent.

“Steamship’s mutual status and long-standing relationships with the majority of its members have historically provided significant financial flexibility,” said the announcement. “Steamship still retains the option to ‘call’ further funds from its members should the need arise,” however ,in Best’s opinion “further calls could weaken the company’s business profile, particularly after the rate increases proposed for February 2004.”

Best said it “expects free reserves to increase by more than USD 30 million at year-end February 2004, reflecting the improved operating performance. At year-end February 2003, Steamship suffered a greater than expected depletion in the level of free reserves of USD 56.9 million to USD 88.8 million.”

It concluded that “against a background of investment and claims volatility, Steamship will find it challenging to maintain its existing risk-adjusted capitalisation level.”