AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Korea P&I Club (KP&I or the Club) (South Korea). The outlook of these Credit Ratings (ratings) is negative.
The ratings reflect KP&I’s balance sheet strength, which AM Best assesses 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.
KP&I’s risk-adjusted capitalisation is assessed at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), and it is expected to remain at that level over the intermediate term. The Club’s balance sheet strength is underpinned by its low underwriting leverage and a highly conservative investment portfolio.
After a net loss of KRW 4.2 billion (USD 3.6 million) in 2019 owing to a couple of unprecedented large claims, the Club turned a profit of KRW 1.8 billion (USD 1.7 million) in fiscal year 2020 (FY2020) due to reduced claims and favourable reinsurance commission income following good loss experience during the year. Nonetheless, the negative outlooks reflect persistent pressure on KP&I’s historically strong operating performance despite the improved underwriting performance in fiscal year 2020. The Club’s five-year average combined ratios continued to compare favourably with global protection and indemnity (P&I) players. However, AM Best expects that the changes made to its reinsurance programme in recent renewals, with higher risk retention and the sliding scale commission scheme, will increase underwriting volatility and potentially put pressure on its bottom line in the event several large claims occur in a given year. AM Best also acknowledges that various corrective measures, such as underwriting strengthening, general P&I premium increases, and tight control over its management expenses, were put in place to improve profitability. However, it is yet to be seen whether these efforts will be sufficient in successfully managing such volatility.
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 limited diversification in terms of product offerings and vessel types. Nonetheless, AM Best notes the Club’s stable presence in South Korea’s P&I market. Amid heated competition in its domestic P&I market, the Club has implemented strategic initiatives to secure its market position, such as partnerships with members of the International Group.
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. 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 government subsidies, a no-dividend policy to its members, as well as overseas marketing and diplomatic efforts.
Negative rating actions could occur from a sustained deterioration in operating profitability to a level that no longer demonstrates a positive distinction from its industry peers. Negative rating actions also may arise if support from the South Korean government is reduced to an extent that no longer supports the current level of enhancement.
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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