A subsidiary of Bermuda-based Stirling Cooke Brown has had its rating downgraded to marginal and tagged with "negative outlook" by ratings agency AM Best, partly due to concerns about the parent company.

The ratings agency put the rating at to C++ (Marginal), down from B+ (Very Good) of Realm National Insurance Company, New York.

A statement from Best said: The rating action reflects Realm's exposure to a high level of reinsurance recoverables and additional deterioration in operating performance and capitalisation through 2001.

"The significant reinsurance recoverables affect not only capitalisation but also raise concerns about operating cash flow. Additionally, AM Best has concerns regarding tightened financial flexibility at Realm's ultimate parent company, Stirling Cooke Brown Holdings, Ltd., Bermuda."

It said that from 1996, Realm significantly changed its business mix towards programme business in order to facilitate its parent's business strategies.

The rapid growth in program business has resulted in the "adverse development" of loss reserves, significant reinsurance recoverables and an increase in reinsurance disputes, which "negatively affect cash flow".

Best added: "While management believes the current level of disputed reinsurance is manageable, the level of recoverables introduces greater uncertainty regarding the stability of capitalisation."

It said that over the past two years, management has undertaken a number of actions to stabilise and strengthen the overall operations at Realm, which include setting loss reserves at higher levels, implementing stronger agency controls and making additions to the senior management team.

Beginning in 2000 and through 2001, Realm made the transition from a programme insurer to a direct writer, focusing prospective underwriting efforts on its core monoline workers' compensation, commercial property and general liability speciality risks.

However, in 2001, AM Best said Realm's operating performance further deteriorated as legal expenses associated with its reinsurance disputes and larger than expected losses associated with a large programme that is in run-off hindered improvement efforts.

A statement from AM Best said: "The negative outlook reflects AM Best's concerns regarding Realm's cash flow, reinsurance recoverables that represents multiples of its statutory surplus and ongoing reserve adequacy.

"Further, financial flexibility at Stirling Cooke is now somewhat constricted, which with operational issues and legal disputes, have increased uncertainty regarding its ability to support Realm."