S&P: Steamship Mutual Group Upgraded To 'A' On Track Record Of Strong Earnings; Outlook Stable
The upgrade reflects Steamship's track record of capitalization comfortably above the 'AAA' confidence level in our RBC model. The club's capital position has been bolstered by strong bottom-line earnings. We assess Steamship's capital and earnings as very strong. Going forward, we anticipate that its earnings will increase at a steadier pace and free reserves will stay above $400 million over the next two years.
The combination of a strong financial risk profile and strong business risk profile leads to two possible anchor outcomes, 'a' or 'a-'. For Steamship, we now use the higher 'a' anchor, reflecting its track record of excess capital at the 'AAA' level, under our capital model. Our expectation is that the club will maintain this level of capital through to 2018.
Steamship's management's actions since 2013 have helped the insurer to deliver better underwriting performance than its peers. For the financial year ending February 2016 (financial 2016), the club generated a combined ratio of 71%, which is a further improvement on the prior year's 76%. However, we note that these were particularly favorable years for Steamship given the significant improvement in the projected claims costs for prior policy years.
In our base-case scenario, we expect Steamship's underwriting results to align with peers, with a combined ratio of 96% for financial 2017, and 97%-102% in the financial years 2018-2019. We expect premium growth to remain low (between 2%-5%) over the same period given the competitive pressures in the marine marketplace. We expect the club to post bottom-line earnings of $14 million in February 2017 and $12 million-$15 million over 2018-2019, excluding the effect of material prior-year claims reserve releases.
The stable outlook reflects our expectation that Steamship's stable underwriting and earnings performance will continue over the next two years. We also expect the club to keep its capital adequacy above our 'AAA' level of confidence under our RBC model.
We consider a positive rating action to be unlikely over the next two years. An upgrade would likely depend on Steamship achieving product diversity without compromising operating performance.
We might lower the ratings if, contrary to our expectations, we saw significant volatility in earnings and underwriting results such that the club were unable to sustain capital comfortably at the 'AAA' level in our RBC model.