A.M. Best Lowers Rating of Steamship Mutual

December 16, 2002

A.M. Best Co. announced that it has lowered the financial strength rating to A- (Excellent) from A (Excellent) of The Steamship Mutual Underwriting Association (Bermuda) Limited, and changed its outlook from negative to stable.

“The rating reflects the forecast reduction in free reserves in the year to Feb. 20, 2003, which, coupled with challenges associated with improving the Club’s operating performance, results in a prospectively lower risk-adjusted capital level. However, the rating continues to factor Steamship’s leading business profile as a member of the International Group of P&I Clubs and its excellent financial flexibility through the ability to call on its members should the need arise,” said Best.

The rating agency took note of the $74.9 million reduction in Steamship’s free reserves over the last two years, and the necessity of making a supplementary cash call from its members to raise an additional $110 million. Best said it “expects a significant reduction in free reserves (between 25%-30%) for the current financial year to February 2003, renewing pressure on the risk-adjusted level.” It added, however that “The Club’s unique mutual status provides access to additional funds and hence excellent financial flexibility, which to some extent offsets this pressure.”

The announcement noted that “increased claims inflation and a higher frequency of attritional losses have exerted downward pressure on the Club’s underwriting results — combined ratio of 117.3% for the year ended Feb. 20, 2002 — with a similar level forecast by A.M. Best for the current financial year.”

Steamship’s earnings have also been impacted by the global decline in investment values, which has become more or less a leitmotif for the insurance industry over the past two years. Best noted that the company “has experienced significant investment losses due to a high exposure to equities (over 35% of total invested assets).” Losses were estimated at around $32.6 million.

“At the end of 2001, Steamship was ranked fourth within the International Group, as measured by gross tonnage. The Club’s long-standing relationships with members and its ongoing successful focus on client service were also demonstrated, with renewal levels of 94% combined with new entries resulting in little overall change in tonnage levels, despite the call for additional funds,” said the announcement.

Best said it expected the company to “experience a substantial operating loss during the current year primarily from underwriting activities, combined with a lack of investment income.” But it also indicated that “results should improve in the following year due to a review of underwriting activities, including the levying of a 25% standard increase in common with the majority of other International Group clubs and a return to profitability in the investment portfolio.”

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