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 provide 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. The glossary explains the concepts and calculations of the reported metrics and ratios.

The P&I sector has struggled to post a technical profit in recent years, with a clear deterioration in operating performance. This was because of soft, yet improving, pricing conditions in the P&I sector, as well as an increase in the frequency of large claims. The poor track record is continuing in 2021, and despite an expected improvement in combined ratios from record highs, operating performance will remain weak overall. We expect net combined ratios to range between 107% and 110% over 2021-2022. Yet, despite the underwriting losses, P&I clubs have generally managed to post a positive return on members' funds in recent years thanks to investment returns.

In our opinion, factors that should help improve the operating performance include general increases at the February 2021 renewals, with expectations for further increases in the February 2022 renewals; revised terms and conditions increasing deductibles in the event of a claim; some diversification into fixed-premium and charter lines, offsetting the P&I lines' poor performance; and enhanced risk management frameworks and loss-prevention programs that should help control the technical performance in the longer term.

Ten of 13 P&I clubs have ratings at 'A-' or higher, largely reflecting P&I clubs' risk-based capital adequacy, which allows them to absorb the expected underwriting losses. P&I clubs also benefit from competitive advantages, thanks to the IG agreement (see chart 1).

Chart 1

We expect the difficult operating environment to continue over 2021-2022. We therefore have six of 13 P&I clubs on negative outlook. The only positive outlook is on the Japan Club, reflecting 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 remains in line with other global sectors, but it now has the weakest industry risk assessment among its peers. This is due to the sector's weak profitability prospects over 2021-2022 as well as its poor operating track record. The more favorable industry risk assessment of the other sectors is mainly attributable to stronger profitability prospects (see chart 3).

Chart 3

We rate most clubs in the 'A' range, but nearly half of them are on negative outlook. With most clubs continuing to hold a material buffer above our 'AAA' capital requirements, their financial risk profiles remain relative rating strengths, mitigating the poor performance. However, the subpar operating performance weighs on our assessment of competitive position and, consequently, financial strength ratings (see chart 4).

Chart 4

P&I clubs have a relatively small premium base by global standards, with an average gross premiums written below $300 million. Clubs are also concentrated in the marine industry, although some are more diversified than others (see chart 5).

Chart 5

Reinsurance utilisation remains modest, with P&I clubs retaining most of the written risks. The main source of reinsurance is the (IG) pooling agreement, which protects clubs against large losses (those that exceed $10 million). Yet the pooling agreement exposes clubs to claims over which they have no control. In addition, the increased frequency of large losses could result in increased reinsurance costs for the sector; that is, the commercial reinsurance that kicks in on pooled losses exceeding $100 million (see chart 6).

Chart 6

The sector remained profitable overall, despite the underwriting losses. In fact, 12 of 13 P&I clubs reported underwriting losses, which is a combined (loss and expense) ratio exceeding 100%. While strong investment results in 2020 helped offset the technical losses for some clubs, nearly half remained loss-making in 2020 (see chart 7).

Chart 7

Investment returns--which include realized and unrealized gains and losses--have been a reliable source of profits to offset underwriting losses. Nevertheless, the relatively modest net investment yields (which exclude realized and unrealized gains and losses) compared with total investment returns highlight their significance. Investment yields of 12 clubs were below 2% in 2020 (see chart 8).

Chart 8

The poor performance in recent years is mainly attributable to inadequate rates on mutual P&I lines, together with an increase in the frequency and severity of large pooled claims (see chart 9). However, some clubs have chosen to defer their right to call some instalments, resulting in understated premiums and overstated combined ratios. While this weakens their performance, it serves to support member service and retention, factors we consider in our assessment of competitive position.

Chart 9

The recent run of large losses has all but added to the volatility of P&I clubs' technical performance. 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

In our view, the reliance on realized and unrealized gains on investments is risky and may not always save clubs' performance. Excluding the impact of these gains, clubs' performance was poor in 2020, showcased by the weak return on revenue when compared with the return on members' funds. With interest rates at historic lows and some clubs de-risking from the higher-risk, higher-returning securities, clubs are unable to consistently rely on investment results to counter underwriting losses (see chart 11).

Chart 11

P&I clubs' investment portfolios remain generally conservative. Fixed-income investments, notably bonds and cash, dominate the majority of P&I clubs' portfolios, with less than 10% of bonds invested in speculative-grade securities. These high-risk securities, together with equities, have helped P&I clubs generate decent investment returns to counter the poor underwriting results (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. 21, 2021
• Insurance Industry And Country Risk Assessment Update: August 2021, Aug. 31, 2021