Declining risky business paid off for this marine insurer
Saturday, May 27 2017 @ 10:12 PM AST
Contributed by: michaelariston
The following is S&P's full statement:
Marine Insurer The U.K. P&I Club 'A' Ratings Affirmed After Risk Management Review; Outlook Stable S&P Global Ratings today affirmed its 'A' counterparty credit and insurer financial strength ratings on U.K.-based marine insurer The U.K. P&I Club (the club) and its core group entities The United Kingdom Mutual Steam Ship Association (Bermuda) Ltd. and The United Kingdom Mutual Steam Ship Association (Europe) Ltd.
The affirmation reflects our view that the club has improved management of the volatility inherent in the marine P&I sector while maintaining its market share. The club's membership has been refined, reinsurance protection further strengthened, and the expense base controlled. We believe that underlying profitability has improved due to the loss of members with poor claims records.
The club has refused to quote on a significant proportion of business (20%-25% of quotes by gross tonnage over the past seven years, owing to its stricter underwriting criteria. Hence, the club's average combined ratio for the previous seven years was around 100% (excluding premium discount effect), and no individual year exceeded 105%. We consider this to be strong evidence that future returns will move within a narrower band than they have in the past. Increasing capital efficiency and disciplined underwriting has allowed the club to grow capital as well as return some $25 million to mutual members through premium discounts in three of the last five years. We view the club's enterprise risk management (ERM) as adequate with strong risk controls.
This is supported by our improved view on risk controls around underwriting, reserving, and market risks. The club has developed a risk appetite framework along with implementation of a partial internal capital model that has been approved by the PRA for The United Kingdom Mutual Steam Ship Association (Europe). In our view, this enables a robust and transparent relationship between the club's capital needs and strategic decisions like reinsurance purchase, asset allocation, or business planning. Our opinion of the club's strong business risk profile reflects the significant barriers to entry within the international group clubs and the U.K. club's high customer retention rates. Underwriting performance sustainability has helped the club to maintain extremely strong risk-based capital adequacy (measured using our model), which supports our view of a strong financial risk profile.
These factors lead to an anchor of either 'a' or 'a-'. We select the higher of the two anchors to reflect the club's underlying financial flexibility. We view the underlying financial flexibility of the club to be at least as strong as other clubs within the International Group (IG). The ratings are the same as the anchor because we view ERM and management and governance practices as neutral. The stable outlook on the U.K. Club and its core entities reflects our view that the club's capital adequacy will remain in the 'AAA' range. In addition, we expect the club's underwriting performance to remain on a par with a recent stabilization through February 2018–February 2020.
We anticipate that the club's conservative reserving, reinsurance program, and smaller share of the IG pool will serve to further stabilize the results that enhanced underwriting standards have improved in recent years. We could take a negative rating action should the club revert to its former pattern of unstable underlying results more than two years in a row or should capitalization, as measured using our model, fall below the 'AAA' range. We do not consider an upgrade to be likely over the two-year rating horizon. The competitive dynamics of the protection and indemnity (P&I) sector, and the fact that the club already enjoys the highest assessment for capital and earnings under our criteria, serves to limit rating upside.