July 22, 2004

S&P lowers American Club rating

Standard & Poor's Ratings Services said yesterday that it lowered its counterparty credit and financial strength ratings on American Steamship Owners Mutual P&I Assn. Inc. (American Club) to 'BB+' from 'BBB-' and then removed the ratings from CreditWatch.

The outlook is stable, says Standard & Poors.

"The downgrade reflects the company's recent operating performance, which was below Standard & Poor's expectations," said Standard & Poor's credit analyst Jason Jones.

"Results on policy years 2001 and 2002 deteriorated in 2003, resulting in substantial underwriting losses before the beneficial effects of unscheduled supplementary calls that were made in June 2004," he noted.

The ability of American Club to make unscheduled calls lends some strength to its capitalization and enabled it to prevent erosion of capital in 2003; however, American Club has recently been over-reliant on this mechanism, says Standard & Poor's.

The company's growth strategy in recent years has the potential to improve American Club's competitive position in time, says Standard & Poor's, but also increases risk in the interim due to high operating leverage and the difficulties of developing infrastructure suitable for a company of larger scale. The recent delay in providing year-end 2003 financials that due to technical problems when new IT systems were implemented illustrates this.

Standard & Poor's says it expects American Club to demonstrate improved operating performance based on maintenance of the modest profit so far on policy year 2003 and reasonable prospects for improvement in policy year 2004.

Standard & Poor's says the rating on American Club was placed on CreditWatch with negative implications on May 4, 2004, due to the delay of 2003 financial statements caused by implementation difficulties from the Club's new IT system. The Club has made substantial progress toward correcting the situation. American Club has now filed year-end 2003 statutory financials and has provided Standard & Poor's with draft GAAP financials.

Although statutory financials show the Club's risk-based capitalization to be slightly below authorized control levels, Standard & Poor's believes year-end 2003 GAAP capitalization will be substantially higher than statutory surplus because GAAP accounting allows the full amount of assessments announced in June 2004 to be booked in 2003--unlike statutory accounting. The Club is expected to substantially improve its statutory capitalization by year-end 2004, as revenue from the June 2004 supplemental call becomes recognized in statutory revenue and as improved operating performance helps to build retained earnings.


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