S&P Global Ratings has revised the London P&I Club’s insurer financial strength rating from BBB stable to BBB negative after its capital adequacy was affected by negative investment returns.
The ratings agency considers the London Club’s capital adequacy to be at the AA- level as a result of investment losses in the current policy year and the adverse development of prior year claims.
S&P Global Ratings expects the capital adequacy to be just below AA- next year before recovering to a more sustainable level in 2024.
“The negative outlook reflects our expectation of potential risks in the club’s plans to rebuild its capital base, and that capital adequacy could likely drop just below the AA- level under our risk-based model in 2023 before recovering to a sustainable surplus at the AA benchmark by 2024,” it said.
All 13 International Group of P&I Club members have suffered investment losses in the past year. Seven International Group members have been placed on negative outlook by S&P Global Ratings.
The losses are unrealised paper losses caused mostly by higher interest rates that negatively affect fixed-income products. Fixed-income bonds generally represent by far the largest portion of the P&I investment portfolio.
Although higher interest rates initially register as a loss, they are usually recovered once the bonds mature.
Commenting on the S&P Global Ratings decision, the London Club said: “These investment losses are for the most part unrealised losses on high-quality fixed-income assets which will be compensated for by higher future yields to maturity.”
Historic volatility
S&P Global Ratings noted that the London Club would most likely see investments recover.
“We are cognisant of the historic volatility observed in capital and earnings, although the higher interest rate environment could support future earnings through better investment results and lower capital requirements, which alongside an improving operating performance could rebuild capital surplus…” it said.
The agency also noted that the Bilbrough-managed club had improved its underwriting results and that it would probably break even on its technical underwriting next year.
