We think most P&I clubs will record breakeven results or better in the financial year ending Feb. 20, 2024. All 12 of the P&I clubs in the International Group (IG)--which underwrite 90% of the world's oceangoing fleet liability insurance--have benefitted from a low level of pool claims over the last 18 months. The clubs are also poised to reap the benefits of a higher interest rate environment, as well as a pull-to-par effect on their fixed income portfolios as marked-to-market losses from 2022 start to unwind as bonds mature.

The P&I sector's operating performance has improved, consistent with S&P Global Ratings' projections from 12 months ago, mainly because of lower pool claims (claims of $10 million-$100 million are shared between IG members under an excess-of-loss pooling system). In financial 2023, the average combined ratio was 97% (a combined ratio of greater than 100% signifies an underwriting loss). The incidence of attritional claims is also down, post-pandemic. Results from the clubs that publish half-year results suggest that financial 2024 may trend similarly to 2023 (see chart 1).

For the full 2024 financial year we expect the majority of clubs to record breakeven results or better, which in turn will somewhat relieve those clubs whose capital adequacy has deteriorated in recent years. The clubs will also benefit from the higher yields they are now receiving on their bond portfolios. Hikes in interest rates across the globe in 2022-2023 have enabled clubs to reinvest in bonds offering higher returns. The investment portfolios of a majority of clubs will likely help enhance their technical results over the next three years, thereby offering some relief to the underwriting aspect of their operations.

Chart 1

Pool Claims Saw A Modest Return In 2023

The policy year ending February 2023 marked a departure from the trend of significantly high pool claims seen in the previous four years. The absence of pool claims in the first half of the policy year was very unusual for the sector. Nevertheless, as illustrated in chart 2, pool claims gradually began to materialize toward the 18-month mark, aligning more closely with the patterns observed during the 2016-2017 policy year.

Pool claims for the first half of the policy year ending February 2024 already appear to have returned to historical norms seen before the heavy-claim years of 2020 and 2021. This has eased IG clubs' concerns and shown them that there is, after all, no "new normal" of higher pool claims. Nonetheless, pool experience is volatile and, as the policy years ending February 2019 and 2020 show, a quiet first half does not necessarily lead to a quiet year overall.

Chart 2

Clubs Are Set To Impose Moderate Rate Increases At Renewal

In October and November, P&I clubs will again announce the general (premium) increase members can expect when renewing policies. In our view, the average general increase is likely to be more modest than in recent years, at just over 5%. While this is materially lower than the previous year's 7.5%, clubs will also continue to seek increases to their deductibles (the portion of the claims that shipowners must meet before their cover kicks in) for shipowners that have large fleets.

With inflation at its highest for decades, particularly in developed economies, the clubs' management teams will be keen to secure sufficient premium to counterbalance any surges in the cost of claims over financial 2024. As inception for nearly all mutual P&I premiums is on Feb. 20, IG clubs are unable to adjust premium throughout the year--whereas most other insurers can--leaving them somewhat exposed to a rapid acceleration in inflation.

Chart 3

We Have Seen Some Focus On Diversification and Consolidation

We anticipate clubs with a more diversified portfolio of business will show less performance volatility in the 2023-2024 period compared to clubs focused solely on mutual P&I. The inclusion of hull- and marine-related energy lines gives the clubs some diversification. We have seen clubs report strong results in their non-mutual commercial portfolios over past last 18 months and expect they will continue to grow these lines.

Earlier this year, Standard Club and North Club successfully finalized their merger to establish NorthStandard, which now ranks among the largest P&I Clubs in the sector. We expect the merger to significantly increase the club's scale, leading to advantages such as enhanced revenue synergies, reduced claims volatility, and greater cost efficiencies. However, in the short term there may be some negative fall-out from shipowners who may have split their fleet insurance among different clubs. The merger has reignited interest in consolidation in the sector and talks to that end among certain clubs are likely to have happened this year. But barriers to consolidation persist, particularly for clubs that have management companies overseeing operations. However, we still think the NorthStandard example will serve as a catalyst for other clubs to pursue potential consolidation opportunities within the market.

Rating Actions We've Taken In The Past 12 Months

The year to October 2023 was again one of the most active in terms of rating actions on P&I clubs. We observed a decline in several club's capital adequacy due to years of strain on their results and the impact of investment losses, leading us to take some negative rating actions. However, in response to rate increases during the 2023 renewals, improved technical performance for the current year, and a more stringent approach to terms and conditions, we have subsequently revised our outlook on several clubs to stable, from negative, over the past year.

Presently, our long-term ratings on nine clubs have a stable outlook, while three still have a negative outlook.

We took six rating actions between October 2022 and October 2023:

• In October 2022, we lowered our rating on West of England from 'A-' to 'BBB+' and assigned a stable outlook. This action reflected constraints related to the company's capital position and our expectations for its recovery prospects in the next two years.
• In October 2022, we downgraded Swedish Club from 'A-' to 'BBB+' and assigned a stable outlook, reflecting the erosion of its capital adequacy. This primarily stemmed from underwriting and investment losses sustained in 2021 and 2022.
• In November 2022, we revised our outlook on our long-term rating on London Club to negative from stable and affirmed the 'BBB' ratings. The negative outlook reflects uncertainty related to the evolution of the club's capital adequacy.
• In February 2023, Standard Club and North Club merged to form NorthStandard. We affirmed the 'A' rating and assigned a stable outlook, reflecting the merged entity's improving operating performance and sound capitalization.
• In June 2023, we revised our outlook on our long-term rating on Skuld to stable from negative and affirmed our 'A' rating. The stable outlook reflects our expectation that the club will maintain a solid capital position and is likely to achieve results close to breakeven in the coming years.
• In August 2023 we revised our outlook on our long-term rating on Steamship to stable from negative and affirmed our 'A' rating. The company's performance improved, driven by enhanced underwriting results and better investment margins.