Moody's has today downgraded the A Very Good performance rating of syndicate 557 - R J Kiln & Co Ltd - to A- Good. The move comes in light of management proposals to reduce the syndicate's capacity utilisation after discussions with the Lloyd's Franchise Performance Directorate (FPD) over the syndicate being outside Chairman's Strategy Group guidelines. A stable outlook has been assigned to the rating. The one notch downgrade and stable outlook are predicated on there being no further material adjustments to the syndicate's business plan that would affect potential future profitability.
The move reflects Moody's opinion that future returns are likely to be less than those historically achieved and more in line with a syndicate rated A- Good.
Moody's stated that R J Kiln syndicate 557 is one of the pre-eminentLloyd's catastrophe syndicates leading a significant amount of its business, writing a book that is focused on Property Catastrophe and Property Risk Excess business that is written on a fixed share basis with Kiln syndicate 510. For 2004 it has a capacity of £55m.
The syndicate has significant exposures to events such as a US$50bn Los Angeles earthquake, with limited reinsurance available, and is operating materially outside Capital Steering Group guidelines of a net loss of 20% of capacity from one event. It has an excellent track record based on a controlled and established book, with a 10 year average closed year profit to 2001 of 11% of capacity, only recording losses for 1992 and 2001 of 5% and 34%, respectively, despite losses from Hurricane Andrew and the US terrorist attacks, respectively. It is currently forecasting profits of 39% and 28% for the 2002 and 2003 accounts.
Following discussions with the FPD, the syndicate plans to reduce its utilisation in order to bring the syndicate closer to the Chairman's Strategy Group guidelines, although it will still remain outside the guidelines under the latest proposals. In Moody's opinion, the proposed reduction in utilisation is likely to lead to the syndicate's potential future profitability being more in line with the returns associated with an A- Good rated syndicate. The syndicate's rating has therefore been downgraded from A Very Good to A- Good.
The syndicate's business plan for 2005 has yet to be approved by the FPD but Kiln & Co have confirmed that they believe that it is unlikely that the FPD will insist on further material adjustments to the business plan that are likely to affect potential future profitability. It is also their understanding that the FPD do not intend to apply further adjustments to the syndicate's basis of operating on a staged basis in future years. Following confirmation of this position, a stable outlook has been assigned to the rating.
