A.M. Best Affirms Rating of Lloyd’s Syndicate 1243

August 8, 2003

A.M. Best Co. has affirmed the Best’s syndicate rating of A- (Excellent) of Lloyd’s Syndicate 1243, which is managed by Euclidian Underwriting Limited. The outlook is stable.

The rating reflects the financial strength of the Lloyd’s market—rated A- (Excellent)—which underpins the security of all Lloyd’s syndicates, in addition to the syndicate’s diversified business profile. Offsetting factors include weaker than expected performance for the 2000 closed year of account, deterioration in 2001 forecasts and adverse reserve development, in addition to the risks associated with significant year on year growth. The rating is based on A.M. Best’s specific syndicate criteria. (See A.M. Best’s Rating Methodology for Lloyd’s Syndicates at www.ambest.com.)

Capital adequacy—The capital adequacy of syndicate 1243 reflects that of the Lloyd’s market overall. Capital at Lloyd’s is determined using Lloyd’s risk-based capital system and includes an element of mutualization through the Central Fund.

Diversified business profile—Syndicate 1243 has evolved from a
specialist insurer of niche markets into a diversified Lloyd’s insurance
and reinsurance subscription writer, with an increasing focus on short-tail business. Capacity has grown at a compound rate of almost 80 percent from GBP 20 million in 1998 (USD 32.2 million) to GBP 350 million in 2003 (USD 563.6 million), which although partly rate driven, in A.M. Best’s opinion carries significant risk. In the syndicate’s relatively short trading history, poor performance largely in long-tail accounts has already prompted the withdrawal from contingency and professional indemnity business.

Weak operating performance—The syndicate’s overall financial
performance to date has been weak and below A.M. Best’s expectations, although in line with the Lloyd’s market. This is largely owing to deteriorating underwriting performance, unfavourable exchange rate movements, the increase of bad debt provisions and adverse reserve development in 2001 and 2002 calendar years relating to liability and professional indemnity business. The reported closed year losses of 8.1 percent for 1999 and 27.33 percent for 2000 deteriorated from third quarter Syndicate Quarterly Return (SQR) forecast losses of 3.5 percent and 14.3 percent respectively. The forecast loss for the 2001 open year has also deteriorated to 15.15 percent from a third quarter SQR forecast loss of 2.75 percent.

A.M. Best expects a return to profitability for the 2002 and 2003
years of account, reflecting stricter underwriting controls in addition to substantial rate increases across all lines of business.

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