Stockton Reinsurance has had its financial strength rating downgraded by AM Best from A- (Excellent) to B++ (Very Good).

Best said the rating action reflects Stockton's poor underwriting results in finite reinsurance and in its investments in Lloyds syndicates during fiscal years 2000 and 2001. Best assigns a negative outlook to the rating due to its concern over prospects for additional production in Stockton's core finite business and the potential for ongoing earnings volatility.

Best said it will closely monitor Stockton's performance on a quarterly basis to ensure that results track management's plans to reposition the company in the marketplace and return it to solid, consistent, long term operating results.

Dan Malloy, president of Stockton, said: "The concerns Best cites going forward centre around Stockton's ability to produce attractive finite business based on our new business development arrangement and, to a lesser extent, the potential for volatility in investment results.

"We are committed to working with Best's to demonstrate that we should be viewed not only as having a very strong balance sheet, but also as a firm that will produce attractive operating results over the long term."

Best said that the company's emphasis in the future will be on more highly structured contracts and convergence products, which benefit from its Bermuda domicile.

Because Stockton has outsourced the majority of its business production activities and has narrowed its underwriting focus, Best is concerned with the company's ability to generate significant volumes of high quality new finite accounts in the future.

Stockton also sustained substantial losses in connection with its Crowe Insurance Group subsidiary, a Lloyd's managing general agency.

Crowe managed six syndicates, some of which are now in run off and Stockton's participation in Lloyd's is substantially lower in 2001 than it was 1999 and 2000.

Although Stockton believes prospects in the UK motor business are currently attractive, Best is still concerned with Crowe's relatively small share in this line of insurance and its historic returns, which have lagged the market average.

Mr. Malloy's response to these factors is positive.

"As a result of a number of actions taken during Fiscal 2001 we start our new fiscal year with a much reduced exposure to Lloyd's, reduced operating expenses and an emphasis on highly structured finite contracts and convergence products which capitalise on our Bermuda domicile and diversified investment strategy.''

Best did express concern at potential volatility and liquidity issues, although returns from the diversified investments have offset negative underwriting results and contributed significantly to Stockton's growth.

Mr. Malloy said the investment strategy is structured to generate attractive long term investment returns.

"Management emphasises rigorous risk controls to contain downside volatility to within an acceptable range. During fiscal year 2002 we will maintain this investment approach which over time has significantly outperformed traditional fixed income investments. We believe our underwriting and investment strategies make us an attractive partner for the long term,'' he said.