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West of England downgraded single notch by S&P to BBB+, outlook stable

Rating agency Standard & Poor’s has downgraded Group Club West of England to BBB+ from A-, and said that it saw limited capital position recovery prospects over the next two years.

S&P said that West of England’s capital position remained materially below its ‘AAA’ benchmark, despite improvements in its underwriting performance in 2022. It did not expect the club to return to an excess position at the ‘AAA’ benchmark level during 2023.

The outlook at BBB+ was stable, reflecting the club’s improved underwriting performance as a result of the remedial actions taken by management in the past two years.

S&P said that West of England fell below the ‘AAA’ benchmark at the end of fiscal year 2021-22 on February 20th 2022, and that S&P thought it remained “materially below that level”.

The club had reported an improved underwriting result at H1 2022, but S&P expected that the volatility in the equity and bond markets during 2022 would lead the club to record a loss after tax for fiscal 2023.

“Although we think the club should return to a positive bottom-line result for fiscal 2024, we do not expect this will be sufficient to return the club to an excess of capital above the ‘AAA’ level that supported the previous ‘A-‘ rating”, said S&P.

Over the past two fiscal years West of England had recorded net losses of more than $87m. This had been driven primarily by underwriting losses, with the club reporting a combined ratio of 114.2% in 2022 and 139.6% in 2021.

S&P said that the club suffered in these years from a combination of Covid-19 claims and a much heavier-than-usual expense from the pooling mechanism that the 13 members of the International Group share.

S&P noted that the club had taken significant measures at the past two renewals to improve the position of its underwriting book. This included not offering renewal terms to poorly performing accounts and making material increases to rates. “We think these measures, combined with a much quieter year on the pool to date, have allowed the club to record much stronger half-year underwriting results with a 97.9% combined ratio”, said S&P.

In S&P’s view, the improvement in performance solidified the group’s position in the P&I market and should allow the club to improve its capital position over 2023 such that it will have an excess of capital above the ‘AA’ benchmark.

The stable outlook reflected that the club should record an underwriting profit in fiscal 2023 and continue to record combined ratios close to the breakeven mark over the next two years. “Improved underwriting performance should allow the club to rebuild its capital position to support an excess of capital above our ‘AA’ benchmark”, the rating agency concluded.

West stated that “while accepting of the rationale for S&P’s rating decision, the frustration for West is that it has been taken despite the improvements made to the underwriting book at the last two renewals, something S&P have commented positively upon, and which is reflected in the mid-year combined ratio of 97.9%”.

It added that “S&P have also recently commented favourably on the Club’s much improved brand and reputation in the market and this, together with on-going support from our Members, continued improvement in operating performance and a higher expected future yield from the Club’s investment portfolio, means the Board is confident its capital will return to in excess of ‘AAA’ in the medium term.”


Insurance Marine News 26th October 2022

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