Best’s News & Research Service - August 21, 2020 09:04 AM (EDT)
AM Best Revises Outlooks to Negative for Korea P&I Club
- August 21, 2020 09:04 AM (EDT)
Hong Kong //BestWire// - AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of Korea P&I Club (KP&I or the Club) (South Korea).
The Credit Ratings (ratings) reflect KP&I’s balance sheet strength, which AM Best categorises as strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management. The ratings also acknowledge the wide range of support that the Club receives from the South Korea government.
The negative outlooks reflect KP&I’s recent deviation from its historically strong operating performance, which AM Best expects to persist over the medium term. Although the Club has a proven track record of profitable underwriting profitability and a stable investment income stream, it recorded a net loss of KRW 4.2 billion (USD 3.6 million), its first in 15 years, and a combined ratio of 166% in 2019, driven by a couple of unprecedented large claims that occurred during the year. With its small premium income base, AM Best expects that KP&I’s bottom line will continue to face pressure over the coming years, due to increased reinsurance costs after the large claim events, and an anticipated rise in the volume and volatility of net claims following changes in its reinsurance structure with higher net retention from 2020.
The Club plans to implement various measures to restore its profitability, such as strengthening its underwriting, a general increase in P&I premium rates for the upcoming renewal cycle, and maintaining tight control over its management expenses. AM Best will continue to monitor KP&I’s underwriting performance, as concerns remain over the execution risk of these initiatives.
Nonetheless, KP&I’s risk-adjusted capitalisation remains at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Although capital growth declined by 7.3% in 2019 due to a net loss during the year, KP&I continued to demonstrate stable growth of its free reserves at a compound annual rate of 4.6% from 2015-2019. The Club’s balance sheet strength is underpinned by low underwriting leverage, relative to its peers, and a liquid investment portfolio.
KP&I was founded in 2000 under the Ship Owners’ Mutual Protection and Indemnity Association Act as part of the government’s initiative to develop South Korea’s shipping industry. It has a relatively small presence in the global protection and indemnity (P&I) market in comparison with members of the International Group of P&I Clubs (International Group), as its business is concentrated mainly in South Korea, with limited diversification in terms of product offerings and vessel types. Nonetheless, the Club demonstrates a stable presence in South Korea’s P&I market. Amid heated competition in its domestic market, the Club has implemented strategic initiatives to secure its market position, including further expanding its partnerships with members of the International Group and prudently growing new business in overseas markets.
Since its establishment, KP&I has received KRW 8.5 billion (USD 7.3 million) in government subsidies. Although the Club has not received direct subsidies since 2015 due to its strong capitalisation, capital support from the government is viewed as highly likely should the need arise. Aside from its strategic role in the long-term development of the country’s marine infrastructure, the Club benefits from various support measures by the South Korea government, including corporate tax exemption and a no dividend payout policy to its members, as well as overseas marketing and diplomatic efforts.
Negative rating actions may be derived from a continued deterioration in operating profitability to a level that no longer demonstrates a positive distinction from its industry peers.
Negative rating actions also could arise if support from the South Korea government is reduced to a level that no longer supports the current credit enhancement.
Positive rating actions could occur if the Club’s underwriting profitability recovers and returns to a historical level, to support the current strong operating performance assessment.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.