Protection and indemnity clubs are taking a tougher stance on underwriting, according to Standard & Poor’s. The ratings agency said that clubs had “raised their game” in terms of greater financial discipline, having learnt the lessons of 2009, which S&P said was a “watershed year” in terms of unbudgeted calls. Clubs were now focussing on achieving underwriting profits, having realised that they can no longer rely on investment results, said S&P analyst Peter McClean. Clubs were also concerned that unbudgeted calls damaged their competitive position. Clubs’ greater discipline also reflected evidence of improved enterprise risk management as a result of changing European solvency regulations and better quality capital management, S&P said. “Solvency II is raising standards of capital and risk management as well as reducing clubs’ tolerance of investment risk,” said Mr McClean. “In future, clubs will be better run and we expect to see boards of P&I clubs with more financially aware members, probably with a stronger accounting background.” S&P acknowledged continued improvements in the sector’s financial strength, noting that all 13 of the clubs reported a surplus in the financial year ending February 2010, although this is unlikely to be repeated for the year ending February 20, 2011. With this in mind, the ratings agency has decided to maintain its stable outlook on the 13 members of the International Group of P&I Clubs. The stable outlook indicates that S&P regards downgrades as unlikely in the next two years. It recently upgraded Steamship Mutual to A- and placed Gard on a positive outlook. However, it does not expect many upgrades. The limited diversity of P&I club’s business means that financial strength ratings are close to as good as they will get for some clubs, said S&P analyst Ali Karakuyu. Gard could be upgraded to A+, but the likelihood of AA rated P&I clubs was low, he added. Negative factors influencing the sector’s capital and financial strength ratings included pressure from shipowners for clubs to limit premium increases, and even offer reductions. This trend is already being seen with the February 20 renewal where general increases are mostly between 0%-5%, the lowest levels since 2000. Weaker clubs could also come under pressure if the trend towards shipowners favouring higher rated P&I clubs continues. “Loyalty can only go so far,” said Mr McClean. “The renewal could result in an loss of members from one or two of the lower rated clubs where ship owners are concerned about the club’s financial strength.”
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