London P&I Club has had its credit rating outlook downgraded by Standard & Poor's (S&P) to negative from stable after a recent review.
While the club had maintained a stable outlook on its BBB rating in December last year, S&P undertook a fresh review after its methodology changed and the P&I mutual logged poor results for the 2018 policy year.
For 2018, London P&I announced a combined ratio of 140% and a $25.8m operating deficit.
Underwriting loss
It was the worst combined ratio of all 13 members of the International Group of Protection & Indemnity Clubs and indicated that the mutual had run at a substantial underwriting loss last year.
London P&I chief executive Ian Gooch told TradeWinds the club was “disappointed” by the downgrade, as it partly reflected a change in the methodology used by S&P.
But he said the club had taken steps to address the change.
“We are working with S&P to restore the stable outlook,” he told TradeWinds. “We are taking strategic steps for the business to deliver an improved combined ratio and underwriting performance.”
We are working with S&P to restore the stable outlook,” he told TradeWinds. We are taking strategic steps for the business to deliver an improved combined ratio and underwriting performance
Ian Gooch
The poor combined ratio, which indicates London P&I paid out more in claims and costs than it earned in premiums, was partly due to a higher number of International Group pooled claims, including two from London P&I.
Personnel injury claims
There was also a higher than expected payout on two US personal injury claims dating back to previous policy years.
However, Gooch pointed out that although the previous years’ claims were higher than expected they were still within the reserve that the club had set aside.
Among steps London P&I says it will take to improve its outlook will be to increase revenue. S&P is particularly keen for mutual insurers to diversify their business lines and demonstrate growth as a risk hedging strategy.
Gooch said London P&I had recorded substantial growth within the mutual P&I business.
Significant growth
Premium P&I income rose by $2.7m to $84m at the latest February renewal, while many P&I clubs registered a drop in revenue. Entered tonnage increased overall by 7%.
Gooch said he has also seen significant growth in its fixed premium and charters’ insurance business.
He also noted that London P&I’s regulatory capital of $171m is still 50% above the capital solvency requirements. He said that despite the poor combined ratio the balance sheet is still “robust on an absolute and historical basis as well as relative to other International Group clubs”.
Gooch pointed to a number of key performance indicators over recent years on claims, revenue and growth where London P&I is performing well by comparison with the International Group average.
General increase
The S&P outlook downgrade is also likely to boost the chances of a general increase in premiums in the upcoming policy year, starting in February 2020.
Although a decision will be taken by the club’s board later in the year, raising premiums is likely to be a key method to improve the underwriting performance.
Gooch said: “The 2018 financial year was a tough one for the association. However, its balance sheet strength was more than able to withstand the headwinds and it remains securely placed to deliver first-class, dedicated P&I support and advice to members and assureds.”
