S&P Global Ratings presents some comparative statistics on our 13 rated global marine protection and indemnity (P&I) clubs. The mutual, not-for-profit clubs comprise the International Group (IG), together representing more than 90% of global owned tonnage. The clubs are generally small insurers by global standards. They all had a premium base smaller than $1 billion in the latest financial year, and all bar one club--Gard P&I (Bermuda) Ltd.--have members' funds below $1 billion. In addition to providing third-party liability cover for their ship-owner members, the clubs offer services such as loss prevention and claims handling.

The niche sector and similarities of the products and services offered by the P&I clubs offer an opportunity to compare statistics across the portfolio. Although we consider many quantitative and qualitative factors when rating the P&I clubs, the following charts, graphs, and tables highlight some of the key ratios we consider in our assessments and provide additional transparency. The glossary explains the concepts and calculations of the reported metrics and ratios.

The P&I sector's technical performance has come under pressure in recent years. Inadequate rates on the traditional P&I business, an increase in the frequency of large insured losses, and adverse developments on prior years' reserves have all contributed to the recent poor performance. However, P&I clubs have generally managed to post positive return on members' funds in recent years thanks to investment return that has often provided a steady source of income to offset underwriting losses. For instance, despite a net combined ratio of 116% for the sector in 2019, return on members' funds was about 5%.

We think the sector's operating performance will improve over 2020-2021. A number of P&I clubs have applied general increases in the February 2020 renewals, ranging from 2.0% to 7.5%. Some clubs expect further increases in the 2021 renewals, although this remains uncertain, particularly given the difficult operating environment for ship operators in light of COVID-19.

10 of 13 P&I clubs have ratings at 'A-' or higher. This largely reflects their levels of capital adequacy as well as the competitive advantages they receive through the IG agreement (see chart 1).

Chart 1

More than three-quarters of the P&I clubs we rate are on a stable outlook. However, the recent run of poor technical performance has led us to revise our outlook on the London Club and Standard Club to negative from stable. The only positive outlook is on the Japan Club, which stems from the club's strengthening capital position (see chart 2).

Chart 2

The Insurance Industry and Country Risk Assessment (IICRA) forms part of our business risk profile analysis and addresses the risks typically faced by insurers operating in specific industries and countries. The global P&I IICRA's intermediate risk is broadly similar to many assessments of other developed markets, particularly those where P&I clubs are incorporated. Some Nordic P/C sectors--such as in Norway and Sweden--have a more favorable assessment, mainly thanks to stronger profitability prospects for the sector, and consequently a more favorable industry risk. Other Western European and developed sectors have a similar IICRA to the global P&I sector because we think country and industry risks are comparable (see chart 3).

Chart 3

Chart 4

P&I clubs have a relatively small premium base by global standards, all reporting gross premiums written below $1 billion in the latest financial year (see chart 5).

Chart 5

P&I clubs retain the majority of the risks, and reinsurance utilization generally ranges between 10% and 25%. The clubs' main source of reinsurance utilization is the IG pooling agreement, which protects clubs against large losses, currently those that exceed $10 million. The pooling agreement has historically mitigated the volatile operating performance. Nonetheless, it exposes clubs to claims over which they have no control (see chart 6).

Chart 6

Despite 11 clubs posting underwriting losses last year, 10 clubs reported positive net income, thanks to strong investment results in 2019. With the sector's technical performance unlikely to improve materially in 2020, the volatility in investment performance brought by COVID-19 could affect members' funds (see chart 7).

Chart 7

Investment return--which includes realized and unrealized gains and losses--has been a reliable source of profits to offset technical losses and generate positive return on members' funds. Nevertheless, the relatively modest net investment yields compared to total investment returns highlights the significance of the realized and unrealized gains (see chart 8). The investment returns are mainly due to riskier asset allocations for P&I clubs compared with other P/C insurers. See chart 12 for more details on investment allocations.

Chart 8

Inadequate rates on the mutual P&I business have harmed technical performance in recent years, with combined ratios well above 100% in 2018-2019. However, we note that some clubs have chosen to defer their right to call some installments. This means premiums for some clubs are understated, resulting in overstated combined ratios. Rate increases applied by most P&I clubs in the February 2020 renewals will support underwriting performance this year, but we think further rate increases will be required in future renewals (see chart 9).

Chart 9

The high standard deviation of net combined ratios highlights the volatility of the nature of the P&I business. Large claims frequency is unpredictable and has been on an increasing trend in recent years (see chart 10).

Chart 10

Despite underwriting losses, clubs have been able to post positive returns on members' funds thanks to investment returns that have offset the technical losses. That said, investment returns partly stem from realized and unrealized gains on investments, which largely explains the difference between return on members' funds and return on revenue (see chart 11).

Chart 11

P&I clubs' investment portfolios remain generally conservative. Fixed-income investments, notably bonds and cash, dominate the majority of the portfolios. Nonetheless, we note that a portion of bond investments are speculative grade, which we treat as high-risk. These have enhanced the investment performance of P&I clubs, particularly in 2019 (see chart 12).

Chart 12

Glossary

For more definitions see "Criteria: Insurers Rating Methodology" and "Guidance: Criteria: Insurers Rating Methodology," both published July 1, 2019.

Net expense ratio (%)

The ratio of operating expenses divided by net premiums earned.

Net loss ratio (%)

The ratio of the sum of loss expense and loss adjustment expense divided by net premiums earned.

Net combined ratio (%)

The ratio of the sum of loss expense, loss adjustment expense, and operating expenses divided by net premiums earned. Therefore, the net combined ratio is the sum of the net loss ratio and net expense ratio.

Reinsurance utilization (%)

The ratio of ceded premiums written divided by gross premiums written.

Return on members' funds (%)

Reported net income divided by the average of opening and closing reported total members' funds for the year.

Reported net income:   Reported net income is before remuneration of preferred stock and non-controlling interests.

Reported total members' funds:   Reported members' funds includes non-controlling interests and preferred stock.

Return on revenue (%)

EBIT divided by total revenue.

EBIT:   Earnings before interest (other than interest on nonrecourse or operational leverage) and taxes. We may apply analytical adjustments for items such as nonrecurring events; realised investment gains/losses; or impairments to goodwill.

Total revenue:   The sum of net premiums earned (or net written premium if net earned premium is not available), net investment income, and other income. We remove the effects of realised and unrealised gains or losses from investments and derivatives to provide a more complete picture of an insurer's revenue-generating abilities.

Related Research

• Global Marine Protection And Indemnity, Sept. 4, 2020
• Insurance Industry And Country Risk Assessment Update: August 2020, Aug. 10, 2020