Best Downgrades Steamship Mutual Bermuda and UK Ratings

March 29, 2007

In separate bulletins A.M. Best announced that it has downgraded the financial strength rating of The Steamship Mutual Underwriting Association (Bermuda) Limited (the Club) and its UK operation Steamship London to “B++” (Good) from “A-” (Excellent) and the issuer credit rating to “bbb+” from “a-“. The outlook for both ratings is stable.

Commenting on the Bermuda-based Club, Best said its rating actions “reflect potential volatility in the Club’s risk-adjusted capitalization, the continuing challenge the Club faces in achieving underwriting profitability and its reliance on investment income.”

Best noted that “the Club’s position as an important member of the International Group of P&I Clubs (the International Group) should be considered as a positive factor. Best said its analysis, however, is “based on stand-alone analysis of Steamship Bermuda as well as combined analysis of Steamship Bermuda, The Steamship Mutual Underwriting Association Limited (Steamship London) and The Steamship Mutual Trust (the Trust).”

The rating agency believes that “there is a substantial risk that the Club’s risk-adjusted capitalization will deteriorate in the period to February 2009 because Steamship Bermuda is likely to be dependent on investment to achieve a surplus. The Club’s risk-adjusted capitalization is also likely to be affected by increased exposure to reserving risk following higher than anticipated underwriting losses for the 2006-07 financial year stemming from the International Group’s pooling agreement. This factor is partially offset by the Club’s retention reinsurance, which somewhat reduces the possible impact of reserve deterioration for the 2005 and 2006 years.

“In the 2007-08 financial year, a continuation of Steamship Bermuda’s weak underwriting performance, driven by strong competition within the protection and indemnity (P&I) market, is likely to prevent a significant strengthening in its risk-adjusted capitalization. The Club is expected to make a substantial underwriting loss—after administration expenses—at year-end February 2007 of $50 million, and A.M. Best anticipates a further loss in 2007-08.”

Concerning Steamship London, Best said its rating actions “reflect the downgrade in the ratings of The Steamship Mutual Underwriting Association (Bermuda) Limited.” It also noted that “Steamship Bermuda provides Steamship London with explicit support in the form of an annually renewable reinsurance covering 90 percent of the first $30 million of net liabilities for any policy year and 100 percent of liabilities in excess of $30 million.

“The absolute level of Steamship London’s capitalization is likely to remain low at an estimated $16 million as at year-end February 2007, reflecting the relatively modest level of the company’s net exposure after reinsurance.”

Best explained that “Steamship London commenced underwriting in 2003 in anticipation of European Union (EU) regulation requiring the use of EU-based insurers by EU resident ship owners.” Best believes that Steamship London’s portfolio is likely to grow in the longer term “as business naturally migrates from Steamship Bermuda to Steamship London.”

Best also stressed that “Steamship Bermuda remains an important member of the International Group with an estimated 62 million tons of owned and chartered gross entered tonnage at year-end February 2006 (55 million tons at year-end 2005). The Club ranks sixth (by free reserves) of the 13 members of the International Group, which provides cover for 90 percent of worldwide gross shipping tonnage.”

Topics Europe Underwriting London

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