rating downgrade for a Chicago-based insurer.

A.M. Best said on Thursday it had downgraded Alliance General Insurance Company of Chicago to C (Weak) for B (very good) and placed the rating under review with negative implications.

The downgrade reflected the company's significant 70 percent drop in its policyholder's surplus, following increases in its nonadmitted agents' balances and provision for reinsurance during 1998, A.M. Best said.

The reinsurance penalty was the result of reserve strengthening on prior accident years, wherein Alliance's two Bermuda affiliates, Armagh Insurance Co., Ltd. and Beacon Insurance, Ltd. participate on treaties as unauthorised reinsurers.

"Alliance General's reduced surplus, down to a level just below $4.5 million, substantially increases the company's underwriting, investment and reinsurance risks and furthermore impacts the company's operations in states that maintain a significantly higher minimum excess-and-surplus capital threshold,'' the agency said.