Standard & Poor’s Ratings Services has revised its outlook to positive from stable on Oslo-based marine insurer Assuranceforeningen SKULD (Gjensidig) (Skuld or the club). At the same time, they affirmed to ‘A-‘ the long-term counterparty credit and financial strength ratings on the company.
The ratings reflect the club’s strong competitive position, strong technical operating performance, and strong capitalization supported by strong financial flexibility. These positive factors are offset by the lower level of reserving relative to its peers.
S&P considers Skuld’s competitive position to be strong. It is supported by Skuld’s membership of the International Group of Protection & Indemnity Clubs (IG; a group of mutual organizations that insures approximately 90% of the world’s shipping for third-party liability); compared with peers, Skuld is a midsize, albeit increasingly prominent and diversified, protection and indemnity (P&I) club. S&P believes that Skuld’s recent setting up of its own syndicate within Lloyd’s of London has the potential to constitute a strong differentiating factor relative to the club’s peers.
S&P considers Skuld’s operating performance to be strong. In the year to Feb. 20, 2011, it recorded a combined ratio of 87% and a record pretax surplus of $68 million, based on positive contributions from underwriting and investments. Skuld has achieved eight consecutive years of underwriting profitability, which remains the strongest underwriting track record in the IG.
Capitalization is strong and supports the rating. Free reserves increased by 32% to $266 million at the February 2011 year-end, although this has been offset by the club’s investment in its new Lloyd’s syndicate and by capital charges derived from an increase in higher risk investments. Consequently, Skuld’s capital adequacy, as measured by Standard & Poor’s risk-adjusted model, is in the lower end of the ‘AA’ range.
However, the overall view of capitalization is constrained by Skuld’s lower level of reserving relative to its peers. In 2010/2011, the ratio of outstanding claims reserves to net premiums written (153%) increased slightly. Although Skuld has generally recorded a positive run-off of reserves relating to claims from previous policy years, this ratio still appears low by comparison with the IG average, which is around 200%. S&P largely attributes this to Skuld’s policy of settling claims with the minimum of delay. Despite operating in P&I, a long-tail class of business, Skuld’s average duration is 2.5 years, which is lower than the IG average.
The positive outlook reflects Skuld’s strong underwriting track record and S&P’s ensuing expectation that Skuld will maintain capital adequacy at least at a strong level. They therefore expect the combined ratio to remain at the lower end of the IG average over the medium term. Although the club’s level of investment risk has fallen below its target range, any significant shift into higher-risk investments is not to be expected.
The ratings could be upgraded should Skuld meet the expectations outlined above and also demonstrate a satisfactory outcome from the new Lloyd’s syndicate’s first year of operation which would not impair Skuld’s operating performance and capital. S&P expects growth in this area to be carefully managed to ensure that financial strength and member service are not weakened. If Skuld does not meet expectations, the outlook would likely revert to stable.
Source : S&P
