Best Downgrades Lloyd’s Syndicate 1414 Ratings

A.M. Best Co. has downgraded the its Syndicate Rating to “A” (Excellent) from “A+” (Superior) and the issuer credit rating (ICR) to “a+” from “aa-” of Lloyd’s Syndicate 1414, which is managed by Ascot Underwriting Limited (AUL). The outlook for both ratings is stable.

“The rating actions follow receipt of notice of cancellation from American Home Assurance Company (a member of the American International Group [AIG]) of its unconditional guarantee of the syndicate’s liabilities,” said Best. “AIG’s management decided to terminate the guarantee in an effort to optimize capital efficiency and simplify AIG’s structure.”

In analyzing the move, Best said that “although the explicit support provided by the guarantee was an important factor in the rating,” it believes that, AIG is still “committed to syndicate 1414 as reflected in the continuation of its shareholding (currently approximately 98 percent) in Ascot Corporate Name Ltd., the syndicate’s sole capital provider.”

Best also took into account the Syndicate’s “good anticipated operating performance, its well diversified underwriting portfolio, as well as the financial strength of the Lloyd’s market, which underpins the security of all Lloyd’s syndicates.”

Best anticipates that Syndicate 1414 is “likely to generate good
earnings for the 2007 year of account and further ahead.” However its performance will “will continue to be dependent on catastrophe experience.” Ratings were “strengthened” by the relatively benign year in 2006 “across the syndicate’s core excess of loss, property and energy accounts. “A return on capacity after personal expenses in excess of 25 percent is likely for this year of account,” Best indicated.

However the Syndicate’s weaker than anticipated performance in 2005 is an offsetting factor. It’s expected to “produce a loss on capacity after personal expenses of approximately 18 percent, driven by its significant exposure to the U.S. hurricanes (net incurred loss of approximately £160 million [$319 million]),” Best noted. “On an annually accounted basis, the syndicate reported a profit of £158.3 million ($310 million) for 2006 (compared to a £91.7 million [$157.6 million] loss in 2005).”

In conclusion Best said it “believes that the syndicate’s portfolio is well diversified by account type with an emphasis on short tail, catastrophe-exposed business. The accounts written include excess of loss, property, energy, cargo, terrorism, specie, fine art, marine hull, marine liabilities, aviation war and political risks.”

Source A.M. Best