Standard & Poor's Ratings Services yesterday lowered its counterparty credit and insurer financial strength ratings on Bermuda-based insurer The United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Ltd. (also known as The Club) to single-'A'-plus from double-'A'-minus. The outlook is stable.

"The rating action reflects the sharp deterioration in the club's operating performance, caused by a sizable underwriting deficit during the financial year and the effect of poorly performing equity markets," said Standard & Poor's credit analyst Alison Pritchard.

"This resulted in a significant decline in the club's free reserve levels," she added.

Overall, capital remains at a strong level, but is left more vulnerable to continued underwriting losses and equity market volatility. The Club - although the largest protection and indemnity (P&I) club - remains a midsize insurer, focusing exclusively on marine risks. Positive rating factors continue to be its very strong financial flexibility - given its ability, albeit as a last resort, to make unlimited supplementary calls on its members - and its strong business position.

Major rating factors include the club's sharply deteriorating operating performance. The underwriting deficit, combined with the effect on investment income of weak equity markets, resulted in a post-tax loss of $138 million for the year ended February 20, 2002.

As a result, adjusted free reserves fell by 40 percent in 2002 to $211 million from $349 million in 2001.

Ms Pritchard added: "Standard & Poor's expects the club's operating performance to gradually improve, returning to bottom-line profitability in 2004."

S&P said a small operating deficit is expected for 2003 and that premium rates are expected to increase significantly at renewal in February 2003, with further moderate increases expected for future years.

The level of incurred claims should reduce slightly in 2003 and 2004 and the club should also see a return to positive investment income. "The business position will remain strong despite competition from other high quality members of the IG," Ms Pritchard added.