Sveriges Angfartygs Assurans Forening (The Swedish Club)

Transcription

1 Sveriges Angfartygs Assurans Forening (The Swedish Club) Primary Credit Analyst: Robert J Greensted, London (44) ; robert.greensted@spglobal.com Secondary Contact: Mark D Nicholson, London (44) ; mark.nicholson@spglobal.com Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Related Criteria JULY 6, 217 1

2 Sveriges Angfartygs Assurans Forening (The Swedish Club) SACP* Assessments SACP* Support Ratings Anchor bbb+ + Modifiers = bbb+ + = Financial Strength Rating Business Risk Satisfactory ERM and Management Liquidity Group Support BBB+/Stable/-- Financial Risk Moderately Strong Holistic Analysis Sovereign Risk Gov't Support *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Satisfactory Membership of the International Group of P&I Clubs (IG) provides market access. Longstanding relationships with members. Although the club offers hull and machinery (H&M) and offshore insurance cover, the club like the majority of the protection and indemnity (P&I) sector, only writes marine related covers. Financial Risk Profile: Moderately Strong Capital adequacy is in excess of our 'AAA' requirement in our risk-based capital model. P&I sector is inherently volatile. The IG joint reinsurance program helps to manage exposure. High IG pool balance affecting operating performance, which in turn is a rating weakness. Other Factors Enterprise risk management (ERM) practices comparable to larger P&I peers. JULY 6, 217 2

3 Outlook: Stable The stable outlook reflects our view that Sveriges Anfartygs Assurans Forening (The Swedish Club or the club) will retain capital adequacy comfortably above the 'A' range and that it will maintain its positon in the P&I and fixed-premium markets. Upside scenario We could take a positive rating action in the next two years if: The club demonstrates an improved competitive position by leading on over half of the business it writes on subscription lines; and The club produces an operating profit, while maintaining combined ratios close to 1%; and The negative balance with the IG pool continues to decline, so that the Swedish Club is no longer an outlier compared to its IG peers. Downside scenario We might lower the ratings if, contrary to our expectations, earnings weakened to substantially less than our base-case assumptions due to an extraordinarily high frequency of claims. Base-Case Scenario Macroeconomic Assumptions Excess tonnage capacity continuing but at more sustainable levels. Freight rates will remain low. Scrapping activity expected to remain above the average of the last 1 years. We do not expect any significant change to IG pool structure or pool sharing methodology. Increased capacity in reinsurance markets will continue to have a positive impact on IG group reinsurance and retention protection premium/terms. We expect increased competition in the fixed-premium business. Company-Specific Assumptions Capital adequacy to remain above the 'AAA' level. Net earned premium for own account of close to $13 million in A net combined ratio between 98% and 12% in barring an abnormally high claims pattern. Aftertax operating income of around $5 million-$15 million per year for Investment returns of 2%-3% in 217/18. JULY 6, 217 3

4 Key Metrics --Year ended Dec Mil. $ 218f 217f Gross premiums written c.165 c Net income from ordinary activities Net combined ratio (%) Net investment yield (%)* >1 > S&P Global Ratings capital adequacy/redundancy Extremely strong Extremely strong Extremely strong Extremely strong Extremely strong Free reserves >2 > f--forecast data reflects S&P Global Ratings base-case assumptions. *Excluding realized/unrealized gains/losses. Company Description The Swedish Club was incorporated in 1872, and is a mutual marine insurer domiciled in Sweden. As a member of the IG, a group of 13 clubs providing P&I cover to more than 9% of world shipping, The Swedish Club operates within the framework of the IG Agreement (IGA). Members benefit from a substantial excess-of-loss reinsurance program and the pooling of risks. The club writes H&M, P&I business, and offshore energy, as well as ancillary covers such as loss-of-hire (LOH), war protection, and the freight, demurrage, and defense business (FD&D). The club is the 11th largest of the 13 IG clubs by premium. In 216, the club provided P&I coverage for vessels of 47 million tonnes, FD&D for tonnage of 33 million, and H&M insurance for 119 million tonnes. Business Risk Profile: Satisfactory Insurance industry and country risk: Global coverage, potentially volatile earnings We assess the industry and country risk for the club as intermediate, reflecting our assessment of the global marine P&I sector. For the purposes of our industry and country risk analysis, we view the club's hull business as global P&I. In our opinion, the risk profiles of the two industries are similar. The overall country risk assessment is low because the insurers operating in this sector typically write business in multiple countries around the world, resulting in high geographic diversification. Our industry risk score is moderate; although we see profitability and product risk as negative, these factors are offset by the sector's operational barriers to entry. One of the key strengths of the global Marine P&I sector is the existence of the International Group of clubs that provides the sector with a high barrier to entry. A weakening of the International Group's position in the marine market would probably lead us to revise our view of industry risk and change our overall view of industry and country risk to moderate. JULY 6, 217 4

5 The mutual marine sector is less focused on profitability than other sectors and is more exposed to high-risk assets than other non-life insurers, increasing earnings volatility. The size and frequency of claims are also unpredictable, increasing product risk. We do not expect our assessment of country and industry risk to change over the next two years. Competitive position: Membership of IG, presence in H&M, and increasing diversification support competitive position Unlike many of its competitors, The Swedish Club also offers H&M cover to its clients. In our opinion, the club's presence in the H&M and offshore energy markets (around 35% of net premiums in 216) has a positive diversifying effect, albeit within the bounds of the marine sector. The P&I renewals in 216 and 217 were challenging. At the 217/18 renewal, the club announced that they would not be seeking a general increase in premium for the second year in a row. However this year, they were joined by all of the other 12 clubs in not making an increase as pressure on rates is being felt right across the market. In 216/17, overall tonnage increased by 6.5 million tonnes. We expect premiums to be flat in 217/18 as rate pressures remain in all of The Swedish Club's main markets. The club's portfolio remains well-diversified by geography and type of vessel. The club has also enjoyed success in cross-selling multiple products on the same vessel. Table 1 Swedish Club Competitive Position (Mil. $) --Fiscal year ended Dec Gross premiums written Change in gross premiums written (%) (8.2) (6.7) (3.8) Net premiums written Change in net premiums written (%) (9.3) (6.) 16.7 (1.8) (4.7) Net premiums earned Total tonnage (mgt) Change in total tonnage (%) P/C: reinsurance utilization - premiums written (%) P/C--Property/casualty. Mgt--Million gross tons. Financial Risk Profile: Moderately Strong Capital and earnings: Strong capital and earnings based on extremely strong capital adequacy The club continues to enjoy extremely strong capital adequacy, according to our capital model. This is the key strength of the rating, even if we haircut the model outcome to reflect the club's small absolute size. In 216, the club recorded a 98% combined ratio and a profit before tax of $11.8 million. The profit figure was an improvement on the previous year, when The Swedish Club recorded a loss before tax of $3.1 million. This positive development came from an improved performance on the investment portfolio, where The Swedish Club recorded a JULY 6, 217 5

6 positive result of $9.7 million compared to a loss in the prior year of $5.1 million. Underwriting performance was in line with the prior year's combined ratio of 98%. While the club's P&I book recorded a small underwriting profit in 216, the club's hull book fell to another underwriting loss, although its combined ratio was an improvement on the prior year at 12% (111%). We expect results in 217/18 to remain at similar levels to 215/16 with a combined ratio between 98%-12% and a positive investment return of $1 million-$15 million, giving annual profits of between $5 million-$15 million. Table 2 Swedish Club Capitalization --Fiscal year ended Dec (Mil. $) Common shareholders' equity Change in common shareholders' equity (%) 6. (.6) Total reported capital Change in total capital (reported) (%) 6. (.6) Table 3 Swedish Club Earnings --Fiscal year ended Dec (Mil. $) Total revenue EBIT adjusted (9) EBITDA adjusted (9) Net income (attributable to all shareholders) 11 (1) Return on revenue (%) (6.6) Return on shareholders' equity (reported) (%) 5.9 (.6) P/C: net expense ratio (%) P/C: net loss ratio (%) P/C: net combined ratio (%) P/C--Property/casualty. Risk position: Moderate, in line with most of its peers High pool surcharge costs and exposure to high-risk assets weigh on the club's risk position. At the end of December 216, equities comprised 2% of total invested assets. Such a level of exposure is high compared with other non-life insurers, but credit quality and other exposure risks are good overall. We do not expect any material changes in the credit quality of the club's investment portfolio. Our assessment also reflects the volatility derived from fluctuating contributions to the IG's pooling arrangement and the inherent volatility of the P&I sector; the relatively small number of individual risks covered means that a small number of discrete losses can have a disproportionate effect on a club's results. JULY 6, 217 6

7 Table 4 Swedish Club Risk Position --Fiscal year ended Dec Total invested assets (mil. $) Net investment income (mil. $) Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Portfolio composition (% of general account invested assets) Cash and short-term investments (%) Bonds (%) Equity investments (%) Financial flexibility: Adequate, reflecting the ability to make unbudgeted supplementary calls, and somewhat offset by a relatively high proportion of fixed premiums Like its IG marine mutual peers, the club has a legally enforceable right to collect unlimited additional premiums on its mutual P&I business by making unbudgeted supplementary calls on open policy years--a right it last exercised in 28. It can also impose premium increases at renewal. Although the club has no debt and enjoys strong liquidity, we consider its financial flexibility weaker than that of some of its peers. The fixed-premium H&M book and the chartered P&I business comprise about 5% of gross premium income and dilutes the effect an additional call would have on the club's solvency. In the absence of a sharp fall in investment markets or an above-average frequency of high-value claims, our base-case scenario assumes that it is unlikely that the club would need additional capital during the next three years. Other Assessments The combination of the club's ERM and management and governance scores leave the 'bbb+' anchor unchanged. Enterprise risk management: Adequate with strong underwriting risk controls We have a positive view of the organization's risk and economic capital models and its risk controls. In addition, we consider that the club has greatly strengthened its ERM framework and its risk models--in particular its internal capital model. Consequently, we consider it unlikely that the company will experience losses that exceed its risk tolerance. The importance of ERM to the rating is low, under our definition, given the club's size, relatively simple structure, and focus on one line of business. Risk awareness workshops have been held across all departments and offices leading to an updated risk heat map with associated follow up tools. Key processes have been split into activities in order to place responsibility for risk mitigation with appropriate risk owners, and in order to identify any dependencies across organizational boundaries. Management and governance: Experienced management team and realistic strategic planning The club's strategy is generally realistic and consistent with its capabilities, taking into account marketplace conditions. Management is aiming to grow in line with the organic growth rate of the market (e.g. growing P&I tonnage equivalent JULY 6, 217 7

8 to the annual world tonnage growth), hence maintaining a stable market share. The club does not have aggressive premium growth plans, which we view positively from a credit risk perspective. We view the financial standards as comprehensive. In our opinion, the club's experienced management team has increased focus on financial strength and ERM and successfully improved its financial management. Management articulates and maintains conservative risk tolerances. The club has predetermined limits for all significant risks. The club now has an outstanding internal capital model, used daily, which greatly assists informed business and risk-related decisions (see ERM section). The club has a track record of diligent and realistic strategic planning. It sets rigorous but realistic targets (for example, a combined ratio of around 1% on a two-year rolling basis coupled with a high-single-digit return on equity on a three-year rolling basis). We believe recent revisions in marine strategy and further development of the marine line of business through diversification could improve underlying profitability further. Liquidity: Exceptional thanks to ample liquidity sources The club enjoys abundant sources of liquidity sources, mainly premium income, and an asset portfolio that contains around $383 million in cash and marketable securities. The club has no issued debt, nor do we expect any to be issued. Related Criteria General Criteria: Group Rating Methodology, Nov. 19, 213 Criteria - Insurance - General: Enterprise Risk Management, May 7, 213 Criteria - Insurance - General: Insurers: Rating Methodology, May 7, 213 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 212 Criteria - Insurance - General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 21 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 29 Ratings Detail (As Of July 6, 217) Operating Company Covered By This Report Sveriges Angfartygs Assurans Forening (The Swedish Club) Financial Strength Rating Local Currency Counterparty Credit Rating Local Currency Domicile BBB+/Stable/-- BBB+/Stable/-- Sweden *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@spglobal.com JULY 6, 217 8

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