Standard & Poor's has lowered its long-term counter party credit and insurer financial strength ratings on Bermuda-based European Speciality Reinsurance Ltd. to triple `B' from single `A' minus.

The company is a core member of the ESG Re Ltd. group. The outlook for the company, however, is stable and the downgrade reflects ESG's weak earnings performance, concerns over internal control mechanisms for its North American reinsurance activities, and the company's early departure from its original business development strategy.

The group's extremely strong capitalisation partly offsets these factors. ESG is basically a start-up reinsurance operation.

Since 1994, the group has provided underwriting management services on behalf of certain reinsurers. In 1997, ESG transformed itself into a reinsurer, raising $237 million through a successful IPO in December of that year.

The factors for the rating included weak earnings performance and poor performance in the North American health reinsurance market, combined with the under performance of health care initiatives in the German health market, resulted in ESG posting a loss of $23 million in the third quarter of 1999.

Full-year losses for 1999 are expected to be about $20 million. ESG's earnings were also below expectations in 1998, with a return on equity of 6 percent, compared with an expected 9 percent.

Standard & Poor's has some concerns over the lack of operational control exhibited by ESG so far, as shown in the group's poor underwriting results in North America. The management team has also experienced significant changes for a start-up operation, with both the original CEO (Wolfgang Wand) and the North American senior executive replaced during 1999.

There has also been an early departure from the company's original business development strategy. The North American office followed a low-margin, high-growth strategy that is totally at odds with the company's original stated strategy. Control of the geographic diversification of ESG's portfolio was abandoned early on, in the face of rapidly growing premium volumes from North America.

ESG's entry to the London reinsurance market is also at odds with its original stated strategy. Furthermore, the group's strategic investment strategy ventured beyond that originally envisaged, into areas offering little synergy with its core activities.

The company has extremely strong current capitalisation.