A.M. Best has downgraded the financial strength rating of Bermuda-based The Steamship Mutual Underwriting Association Ltd. and its UK operation Steamship London to B++ (Good) from A- (Excellent). The outlook for both ratings is stable.

Best said its rating actions "reflect potential volatility in the Club's risk-adjusted capitalisation, the continuing challenge the Club faces in achieving underwriting profitability and its reliance on investment income".

In a statement on the Bermuda operation, Best said: "There is a substantial risk that the Club's risk-adjusted capitaliszation will deteriorate in the period to February 2009 because Steamship Bermuda is likely to be dependent on investment to achieve a surplus.

"The Club's risk-adjusted capitalisation is also likely to be affected by increased exposure to reserving risk following higher than anticipated underwriting losses for the 2006-07 financial year stemming from the International Group's pooling agreement. This factor is partially offset by the Club's retention reinsurance, which somewhat reduces the possible impact of reserve deterioration for the 2005 and 2006 years.

"In the 2007-08 financial year, a continuation of Steamship Bermuda's weak underwriting performance, driven by strong competition within the protection and indemnity (P&I) market, is likely to prevent a significant strengthening in its risk-adjusted capitalization. The Club is expected to make a substantial underwriting loss-after administration expenses-at year-end February 2007 of $50 million, and A.M. Best anticipates a further loss in 2007-08."

Best added: "The Club's position as an important member of the International Group of P&I Clubs should be considered as a positive factor."

Best said its decision to downgrade Steamship London reflected the downgrading of the Bermuda Club.

Best added: "Steamship Bermuda provides Steamship London with explicit support in the form of an annually renewable reinsurance covering 90 percent of the first $30 million of net liabilities for any policy year and 100 percent of liabilities in excess of $30 million.

"The absolute level of Steamship London's capitalisation is likely to remain low at an estimated $16 million as at year-end February 2007, reflecting the relatively modest level of the company's net exposure after reinsurance."

Steamship London had started underwriting in 2003 in anticipation of European Union (EU) regulations requiring the use of EU-based insurers by EU resident ship owners, the ratings agency added.

Best believes that Steamship London's portfolio is likely to grow in the longer term "as business naturally migrates from Steamship Bermuda to Steamship London."