S&P Global Ratings has downgraded financial strength ratings of West of England P&I Club and Swedish Club due to negative investment returns.
The move reflects the impact turmoil in the equity and bond markets is having on the financial strength of protection and indemnity clubs.
The ratings agency said that West’s capital position “remains materially below our AAA benchmark” and is not expected to return to that level until 2024.
It has been downgraded from A- to BBB+, with a stable outlook.
“The club, in common with its peers, has reported an improved underwriting result at half-year 2022, but we expect the volatility in the equity and bond markets during 2022 will lead the club to record a loss after tax for fiscal 2023,” S&P said in its assessment of the London-based insurer.
S&P noted the deterioration of its capital position following $87m in net losses run up between 2020 and 2022.
West’s most recent accounts for 2021 showed it had significantly improved its underwriting results with a profitable 97.9% combined ratio.
S&P said it would maintain West’s stable outlook to reflect its underwriting results.
“The stable outlook reflects that the club should record an underwriting profit in fiscal 2023 and continue to record combined ratios close to the breakeven mark over the next two years,” the credit ratings agency said.
S&P has also downgraded the Swedish Club’s financial strength rating from A- to BBB+ for the same reasons. The adjustment was made to reflect the impact the downturn in the investment income has had on its capital strength.
“Although, the club's technical profitability is showing signs of improvement, in line with our expectations, we do not believe this will offset losses on the investment side. Therefore, we envisage that the club will record another bottom-line loss at year-end 2022, which will further pressure its current capital level,” S&P said.
Disappointing
Swedish Club managing director Lars Rhodin said: “While this is disappointing, we appreciate that this decision was made as a result of the state of the investment market and is not a reflection of the club’s underwriting performance during the course of 2022.”
One issue for P&I clubs is that when interest rates rise it initially negatively affects earnings from bonds.
However, over time those losses are reversed, and the higher interest rates bring a higher return. Investment returns are also paper losses, or gains, that reflect the state of investments at a single point in time.
S&P estimated the Swedish Club should be able to turn around the erosion of its capital base by the end of 2023.
“The club notes that what is effectively a present value investment loss, which is expected to be recovered during the future rebound of the finance market, has had an impact on our current S&P ratings,” Rhodin said.
“We are, however, confident that our underwriting performance, the trust of our members, and our robust track record in business development point to a continued positive future for the club.”
