AM Best Downgrades Credit Ratings of Korea P&I Club

HONG KONG--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating to “bbb+” (Good) from “a-” (Excellent) of Korea P&I Club (KP&I or the Club) (South Korea). The outlook of these Credit Ratings (ratings) has been revised to stable from negative.

The ratings reflect KP&I’s balance sheet strength, which AM Best assesses as strong, as well as its adequate 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 rating downgrades reflect the revision of AM Best’s assessment of KP&I’s operating performance to adequate from strong, following a deterioration in underwriting profitability in recent years. After unprecedented large claim losses in 2019, the Club experienced high net reinsurance costs (after considering ceding commission) and elevated claims frequency, which led to another net loss of KRW 4.6 billion and a combined ratio of 169% in 2021. Although its underwriting profitability has outperformed global protection and indemnity (P&I) players in prior years, two significant losses in recent years led to a deteriorated five-year average combined ratio of 114% (2017-2021), which no longer demonstrates a positive distinction from its peers.

AM Best notes the Club’s mitigative actions to restore its underwriting profit fundamentals, such as general premium increases, non-renewal of unprofitable policies and enhancing terms in major programs. While AM Best expects these initiatives to offset the potential volatility partially, underwriting performance is likely to remain vulnerable to high severity losses or increased claims frequency over the medium term. This is especially so under the Club’s current reinsurance structure, given its increased net retention and loss-sensitive commission scheme when compared with the pre-2019 loss event level.

The balance sheet strength assessment remains at the strong level, underpinned by the strongest level of risk-adjusted capitalisation of KP&I, as measured by Best’s Capital Adequacy Ratio (BCAR). The strong assessment is also supported by its low underwriting leverage and a highly conservative and liquid investment portfolio.

KP&I has a relatively small presence in the global P&I market in comparison with members of the International Group of P&I Clubs, as its business is concentrated mainly in South Korea, with a focus on small-to-medium size vessels. Nonetheless, the Club leverages its local expertise and strong network among South Korean shipping companies to maintain a stable presence in its domestic market.

Underpinned by its strategic role of supporting the long-term development of maritime infrastructure in South Korea, the Club receives a wide range of support from the government, including subsidies, a corporate tax exemption, no dividend payout policy to its members, as well as overseas marketing and diplomatic efforts.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

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