S&P said that the downgrade was the result of “eroded capital adequacy”. The Swedish Club’s capitalization, as per the S&P risk-based capital model, remained materially below the ‘AAA’ confidence level as of H1 2022 after it was eroded by underwriting losses in 2021 and investment losses during H1 2022. Despite improvements in underwriting, with a combined ratio of about 91% for H1 2022, S&P said that it did not consider this sufficient to restore Swedish Club’s capital base to its ‘AAA’ benchmark in 2023.
As a result, S&P lowered its financial strength and issuer credit ratings on Swedish Club to ‘BBB+’ from ‘A-‘. The outlook is stable, reflecting S&P’s expectation that the club would maintain capital at the ‘AA’ benchmark in S&P’s model, and that its operating performance would be in line with its expectations over the next two years.
Swedish Club experienced poor underwriting results in 2020 and 2021, with combined ratios of 123% in 2020 and 129% in 2021. This was due in part to continued high industry-wide pool claims in P&I policies.
The bottom-line loss in 2021 was followed by investment losses in H1 2022, leading to a sharp decrease in the club’s equity.
S&P said that Swedish Club’s technical profitability was showing signs of improvement, but that it did not believe this would offset losses on the investment side. S&P expected that the club would record another bottom-line loss at year-end 2022, which would further pressure its current capital level.
Swedish Club’s management had taken measures to improve its technical performance, and the lack of pool claims in 2022 through September, in combination with S&P’s expectations of further rate increases at renewal, “should translate into improved underwriting performance”.
S&P’s base-case scenario was that the club would post a breakeven net combined ratio at year-end 2022, improving to about 98% by year-end 2024. The rating agency also expected that the club would return to a net bottom-line surplus, and therefore halt further erosion of its capital base, by year-end 2023.
However, it did not consider such performance sufficient to restore Swedish Club’s capital base to the ‘AAA’ level.
S&P revised its liquidity score down to adequate from excellent because it noted that Swedish Club’s ability to cover its liquidity needs in a stress scenario had deteriorated slightly. “However, we believe the club faces no material liquidity risks”, the agency said.
The stable outlook reflected S&P’s expectation that the club would maintain capital at the ‘AA’ benchmark in its model, and that its operating performance would improve over the two-year outlook horizon.
Swedish Club said that it recognized the rationale behind S&P Global Ratings’ decision to adjust its ratings of the Club from A- (negative outlook) to BBB+ (stable outlook). “While this is disappointing, we appreciate that this decision was made as a result of the state of the investment market and is not a reflection of the Club’s underwriting performance during the course of 2022.” The Club added that “there are general concerns about capital levels within the industry as a whole; however, Management shares S&P’s expectation that the Club will maintain capital at the ‘AA’ benchmark in S&P’s capital model.”
Swedish Club noted that what was effectively a present value investment loss, which was expected to be recovered during the future rebound of the finance market, hads had an impact on its current S&P ratings. “We are, however, confident that our underwriting performance, the trust of our members, and our robust track record in business development point to a continued positive future for the Club.”
Insurance Marine News 26th October 2022