The reinsurance subsidiaries of Bermuda-based New Cap Reinsurance Corporation Holdings Ltd. (New Cap Re) have had their claims paying ability ratings lowered by Duff & Phelps Credit Rating Co. (DCR).

New Cap Re faced significant underwriting losses and a net loss for the first six months of 1998, which led to the rating downgrade.

The ratings of New Cap Reinsurance Corporation (Bermuda) Ltd. and New Cap Reinsurance Corp. Ltd. (Australia) have been lowered to 'BBB ' (Triple-B-Plus) from `A' (Single-A). The rating outlook is stable.

The poor underwriting results were considerably below expectations. They led to an 11 percent reduction in shareholders' equity from year-end 1997 levels.

New Cap Re was formed to provide additional international reinsurance capacity in the Australian market sector. A primary source of premium for the company is large brokers with offices in Australia.

DCR said the company faces considerable challenges in improving operating profitability and developing a viable reinsurance franchise over the longer term, given an extended soft reinsurance pricing environment, and continued trends of consolidation in the reinsurance market.

The rating also considers New Cap Re's adequate capital position; continued strong broker relationships, particularly in the Australian market; and conservative investment portfolio, which consists mainly of US dollar-denominated government and high-quality corporate securities.

Underwriting results have been below expectations in the last 18 months relative to the company's business plan target to earn a significant underwriting profit.

New Cap Re reported a combined ratio of 108.6 percent on earned premium of $148.2 million in 1997. The combined ratio increased to 124.7 percent on earned premium of $82.9 million for the first half of 1998.

New Cap Re reported a net after-tax loss of $7.8 million for the full year 1997 and a loss of $14.8 million in the first half of 1998.

Operating results in 1997 were marred by several large claims in the fourth quarter and higher than anticipated start up costs.

Losses thus far in 1998 are attributable to adverse claims development from the 1997 policy year, particularly on aviation and marine business.

These losses have led to a reduction in shareholders' equity to $127.5 million at June 30, 1998, from approximately $150 million at inception.

Several steps have been taken to promote operating profitability going forward. These actions include changes and additions to underwriting staff, additions to administrative staff to enhance development of financial controls, diversifying the book of business by class and geographically, shifts in underwriting focus, and greater utilisation of retrocession coverage.

The company is also exploring alternatives for raising new equity capital in the near term.

New Cap Re was formed with a perceived advantage relative to typical start-up operations in that the company attracted a seasoned book of reinsurance business at inception, largely made up of accounts written by its former lead underwriter while at another reinsurance organisation.

Given the substantial re-underwriting of portions of New Cap Re's book of business in light of this poor underwriting performance, the company faces the same challenges going forward as other smaller reinsurance organisations in an increasingly more competitive environment: to identify and retain the most attractive pieces of its book of business, and find new opportunities to expand its business on a profitable basis.

New Cap Re was incorporated in Bermuda in August 1996 and has shares traded on the Australian Stock Exchange. The company reported total assets of $466 million at June 30, 1998.

New Cap Re provides reinsurance coverage worldwide through its subsidiaries, with an emphasis on property business, and an objective to provide specialty reinsurance capacity to a select number of clients with whom the company can develop long-term relationships.

The company primarily writes on an excess of loss basis with treaty terms that include aggregate loss limits and protect against large underwriting losses from individual accounts or events.