Noting that the downgrade reflected a potential reduction in profits, Moody's said, it's action reflects the fact that, in its opinion, "future returns are likely to be less than those historically achieved and more in line with a syndicate rated A-minus (good)."

While the Moody's action hinges on profit potential, syndicate and Lloyd's officials highlighted the goals of reducing volatility, in responding to the rating action.

Kiln's chief executive officer, Edward Creasy, said, "The Moody's downgrade to A-minus is still a very high rating for a syndicate at Lloyd's," noting that Kiln's flagship syndicate 510 is also rated A-minus.

"This is a straightforward reflection of our decision to reduce the syndicate's premium income and hence the inherent volatility of its underwriting portfolio following a review of the capital levels required for the syndicate and after discussion with the Franchise Performance Directorate at Lloyd's." he wrote in an e-mail response to National Underwriter.

Franchise Performance Director Rolf Tolle said, "The Franchise guidelines exist to improve the long-term performance of the market and reduce volatility."

For its part, Moody's seemed to indicate in its ratings announcement that the syndicate would be more profitable if it did not attempt to follow the guidelines.

In setting forth its rating rationale, Moody's gave a historical perspective, noting that R J Kiln Syndicate 557, which Moody's described as "one of the pre-eminent Lloyd's catastrophe syndicates leading a significant amount of its business," has an "excellent track record based on a controlled and established book."

Moody's reported that the syndicate's 10-year average annual profit through 2001 was 11 percent of capacity, with the syndicate only recording losses for 1992 and 2001. Those two losses, Moody's said, were 5 percent and 34 percent, respectively, despite losses from Hurricane Andrew and the U.S. terrorist attacks.

R J Kiln writes 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 ?55 million ($101 million).

Historically, the syndicate has operated on the basis of having significant exposures to events such as a $50 billion Los Angeles earthquake, with limited reinsurance available, and is operating materially outside Lloyd's Capital Steering Group guidelines of a net loss of 20 percent of capacity from one event, Moody's noted, elaborating that the syndicate's profitable track record came despite this high level of exposure.

Following discussions with the Lloyd's Franchise Performance Directorate, the syndicate is proposing to reduce its capacity utilization in order to bring the syndicate closer to the guidelines, Moody's said. However, the rating agency noted that the syndicate will actually still remain outside the guidelines under the latest proposals.

Moody's said its 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, adding that such material adjustments are not expected.