The Standard Club Europe Ltd.

Primary Credit Analyst:

Simran K Parmar, London (44) 20-7176-3579; simran.parmar@spglobal.com

Secondary Contact:
Mark D Nicholson, London (44) 20-7176-7991; mark.nicholson@spglobal.com

Table Of Contents

Rationale

Outlook

Base-Case Scenario

Company Description

Business Risk Profile

Financial Risk Profile

Other Assessments

Accounting Considerations

Related Criteria

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SACP* Assessments SACP* Support Ratings

Financial Strength Rating

Anchor a + Modifiers 0 = a + 0 =
Business Risk
ERM and Group
Management 0 Liquidity 0 Support 0
Strong A/Stable/--

Financial Risk
Holistic Sovereign Gov't
Analysis 0 Risk 0 Support 0
Strong

*Stand-alone credit profile.

See Ratings Detail for a complete list of rated entities and ratings covered by this report.

Rationale
Business Risk Profile: Strong

• International Group of P&I Clubs (IG) membership provides market access.

• Sustainable operating performance.
• Longstanding reputation within the market, contributing to a high customer retention rate.

Financial Risk Profile: Strong

• Sustained improvement in underwriting performance, which has helped maintain the club's extremely strong
capital adequacy, a key strength for the rating.
• Underlying strong financial flexibility due to the club's ability to make unbudgeted supplementary calls and
impose premium increases for mutual business.
• Extended stop-loss arrangement and 'AAA' level capital surplus, with the potential to mitigate the extent of
future capital and earnings volatility.

Other Factors

• S&P Global Ratings has elected to assign the higher of the two possible anchors, reflecting Standard Europe's
excess of capital at the 'AAA' level, under our capital model, stable operating performance and our expectation
that the club's capital adequacy will remain at the 'AAA' level through 2018.

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Outlook: Stable

The stable outlook reflects our expectation that Standard Europe will maintain capital and earnings at the 'AAA'
level measured according to the S&P Global Ratings capital model. We also anticipate that the club will maintain
its operating performance at a level consistent with our base-case forecast of a combined ratio of less than 105%
and deliver positive post-tax surplus in a typical year.

Downside scenario
We might lower the ratings if, contrary to our expectations, we consider that Standard Europe's capital adequacy is
no longer likely to remain at the 'AAA' confidence level in our risk-based model.

Upside scenario
We do not consider an upgrade to be likely over the two-year rating horizon.

Base-Case Scenario
Macroeconomic Assumptions

• Global shipping companies will continue to face difficult operating conditions in 2017, characterized by fragile
demand and chronic structural oversupply in the industry.
• Charter rates might finally be bottoming out in subsectors such as drybulk, container liner, and liquefied natural
gas shipping. That said, they remain subdued and this, combined with the rising price of the oil-based fuel used
to run ships (bunker fuel), will continue to constrain cash flow generation for most ship operators.
• Neither the IG pool structure nor the pool sharing methodology will change significantly.
• Increased capacity in the reinsurance markets will continue to have a positive impact on IG group reinsurance
and retention protection premium and terms.
• Competition will continue to increase in the fixed premium business with all IG clubs now offering a fixed
premium alternative in some form.

Company-Specific Assumptions

• Capital adequacy within the 'AAA' range when modelled by our capital model.
• A net combined ratio of less than 105%, in the absence of any abnormal large loss events.
• A group post-tax surplus of around $5 million-$12 million annually for 2018 and 2019.
• Operational risks and capital requirements from the Standard Syndicate 1884 will be managed within the club's
risk appetite.

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Key Metrics

--Financial year ending Feb. 20--

($ Mil.) 2019F 2018F 2017 2016 2015

Gross earned premiums 350 345 339 354 354
Net income 5-12 5-12 41.2 10.5 11.8
Combined ratio (%) <105 <105 92.4 92.9 100.2
Capital adequacy Extremely Strong Extremely Strong Extremely Strong Extremely Strong Extremely Strong

Company Description
Standard Europe is a midsize marine P&I mutual club with owned and chartered tonnage of 150 million gross tons. We
regard Standard Reinsurance (Bermuda) Ltd. and The Standard Club Asia Ltd. as core group entities to Standard
Europe. Combined with Standard Europe, they comprise The Standard Club (or the club). The financial figures
included in this report are based on the consolidated group position.

The club is a member of the IG, an association of 13 mutual clubs, which between them write 90% of global P&I
business. IG members benefit from a joint excess-of-loss reinsurance program and from the pooling of risks. If a
member incurs large claims, it may access the pool for funds to settle those claims, but will then have to repay those
amounts to the pool over time.

The Standard Club also owns a stake of the Standard Syndicate 1884, which commenced operations in 2015. As of
February 2017, the club has a 47% share (40%: 2016) in the syndicate. The syndicate writes hull, marine, and
nonmarine risks. In 2017, the club's share of the syndicate comprised premiums of $30.4 million and losses of $12.6
million.

The club is managed by Charles Taylor & Co. (Bermuda).

Business Risk Profile: Strong

Insurance industry and country risk
We assess the industry and country risk for the Standard Club as intermediate (3; on a scale of 1 to 6, where 6 is the
highest risk). Our assessment reflects the risks that P&I insurers operating in the global marketplace typically face. We
also factor in our assessment that the global P/C reinsurance sector as a whole faces intermediate representing
industry and country risk; this affects the premiums generated from the club's share of Syndicate 1884.

For the P&I insurance sector, we assess country risk as low. This reflects that P&I insurers' exposures are heavily
weighted to developed markets, most of which present low country risk. Since we do not anticipate any significant
shift in the P&I sector's weighting to developed markets with low country risk, we think it unlikely that we would have
cause to revise our view of the sector's country risk. We believe the domicile of a P&I insurer has relatively little
impact on the aggregate industry and country risks it faces and therefore we do not differentiate by domicile.

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Our P&I sector insurance industry risk score is moderate. Although we see profitability and product risk as negative,
these factors are offset by the sector's operational barriers to entry.

Despite a recent improvement in underwriting profitability over the past four years, and in our short-term forecasts, we
continue to view profitability of the global P&I insurance sector as negative. Our view reflects the inherent volatility in
operating results and still significant reliance on investment returns to bolster earnings. We assess the potential for
product risks to trigger earnings volatility as negative. The nature of the business is such that it is susceptible to the
random size and frequency of claims, as reflected in the high year-on-year variation in combined ratios. We consider
the barriers to entry for the global P&I insurance sector to be positive. This assessment incorporates regulatory and
operational barriers; we view the former as low and the latter as high.

Table 1
The Standard Club Europe Ltd. Insurance Industry & Country Risk
Sector *IICRA (%) of premiums
Global protection & indemnity 3 91
Global property & casualty reinsurance 3 9
Overall IICRA 3 100

*On a scale of 1 to 6 ; 1 is the lowest risk

Competitive position
Standard Europe's membership of the IG is a key part of our assessment of its competitive position. Historically,
non-IG players and fixed-premium providers have had limited success in the sector.

Our assessment is also based on the high level of control that Standard Europe has over its sources of premium. The
club has a high customer retention rate, in part due to the IG's restrictions on price competition, but also due to
Standard Europe's reputation within the market. The club also has a wide geographic spread of members in many
different markets. The largest geographic areas are Europe and Asia, accounting for over 70% of the club's tonnage.
We do not expect the club to be directly impacted by the U.K.'s vote to leave the European Union.

The club has demonstrated a track record of reporting sustainable and stable combined (loss and expense) ratios. For
example, the club reported a headline combined ratio of 92.4% for the year ending February 2017 and 92.9% for
February 2016, partly aided by the benign claims environment currently prevailing in the sector. We believe that the
club will implement further general rate increases in their P&I book and at a level sufficient to sustain technical
break-even and maintain performance in line with peers. In our base-case scenario, we expect Standard Europe's gross
premium to grow at around 1.5%-3% per year over the next two years, with a slowdown in the P&I segment offset by
an increase in the premium base of Syndicate 1884.

Table 2
The Standard Club Europe Ltd. Competitive Position
2017 2016 2015 2014 2013
Gross premium earned (mil. $) 339.0 354.0 354.0 336.1 294.1
Change in gross premium earned (%) (4.4) 0.1 5.3 14.3 2.8
Total assets (mil. $) 1,059 1,033 1,024 988 978
Change in total assets (%) 2.5 0.9 3.6 1.0 5.8

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Financial Risk Profile: Strong

Capital and earnings
We view Standard Europe's capital and earnings as very strong and a key factor in our ratings analysis. The club's
current capitalization, as assessed by our capital model, is extremely strong, supported by a conservative reserving
record. Under our base-case scenario, we expect Standard Europe to maintain extremely strong capital adequacy over
2017-2019.

The club reported a bottom-line surplus of $41 million at the February 2017 financial year end (2016: $10.5 million).
Our base-case scenario assumes that Standard Europe is likely to achieve breakeven underwriting, a strategic priority
for the club, and combined ratios below 105%, barring a series of major losses. This reflects the club's disciplined
pricing, as well as its mutual status. We anticipate that the club will produce a surplus of $5 million-$12 million a year
over the next two years. We expect the club to maintain capital commensurate to our 'AAA' requirement in our
risk-based capital model, with sufficient buffer to manage risks from its P&I operations and from its share of the
Syndicate 1884.

Table 3
The Standard Club Europe Ltd. Capital
2017 2016 2015 2014 2013
Adjusted free reserves (mil. $) 431 390 380 369 363
Capital adequacy Extremely Strong Extremely Strong Extremely Strong Extremely Strong Extremely Strong
Change in adjusted free reserves (%) 10.4 2.6 3.2 1.6 2.8

Table 4
The Standard Club Europe Ltd. Earnings
2017 2016 2015 2014 2013
Net income (mil. $) 41.2 10.5 11.8 5.9 10.0
Expense ratio (%) 19.0 15.9 12.2 11.1 13.8
Loss ratio (%) 73.4 77.0 87.9 90.1 107.1
Combined ratio (%) 92.4 92.9 100.1 101.2 120.9

Risk position
We base our assessment on the club's exposure to capital and earnings volatility through the unpredictable nature of
claims size and frequency that is inherent to the P&I sector and from writing marine business at Lloyd's.

Standard Europe has historically experienced earnings volatility as a result of the IG pool reinsurance mechanism.
However, the club's share of the IG poolable arrangement has been reducing, which we see as positive. Pool claims are
large and unpredictable, so a lower share of the pool reduces the club's claims volatility. This also aids the
predictability of premium requirements.

For the 2016/2017 policy year, the club purchased a reinsurance stop-loss policy, limiting the loss on a policy year.
We view these developments positively because they mitigate the effects of potential capital and earnings volatility.

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Offsetting these factors are the exposures linked to the P&I sector and the risks associated with Syndicate 1884.
Although underwriting discipline and risk controls embedded in the club's framework have improved, we consider the
P&I sector to be highly cyclical. We believe that sluggish shipping conditions have had some positive influence on the
club's track record of stable earnings and capital. In our view, the capital requirements associated with the syndicate
are currently manageable, but add operational challenges to the club's performance. Generally Lloyd's syndicates
require scale to operate efficiently and Syndicate 1884 is still in a start-up phase.

Table 5
The Standard Club Europe Ltd. Risk Position
2017 2016 2015 2014 2013
Total invested assets (mil. $) 922 899 888 887 852
Bond investments (%) 63 62 70 63 70
Equity investments (%) 23 21 17 21 18
Cash investments (%) 12 13 10 13 10
Real estate investments (%) 3 4 4 4 3

Financial flexibility
Financial flexibility--defined as the ability to source capital relative to capital requirements--remains strong, based on
the club's ability to collect unlimited additional premiums (by making unbudgeted supplementary calls) from members
on open policy years, or to impose significant premium increases at renewal. However, unlike many of its IG peers,
Standard Europe has not utilized this right for over 10 years, which we believe should enhance its capacity to do so if
needed. The club currently has no debt on its balance sheet. As such, a debt issue represents a further potential
funding source for the club. In the absence of a sharp fall in investment markets or an above-average frequency of
high-value claims, our base-case scenario assumes that Standard Europe is unlikely to need additional capital over the
next three years.

Other Assessments
We regard Standard Europe's enterprise risk management (ERM) and management and governance practices as
neutral for the rating.

Enterprise risk management: Adequate with strong risk controls

We view Standard Europe's enterprise risk management (ERM) as adequate, with strong risk controls. This is
supported by our view on the risk controls around the underwriting, reserving, and market risks. We believe the club
has developed sophisticated approaches to investment risk exposure measurement with clear appetite and limits. The
club's strategic asset allocation is constrained by its investment guidelines, while exposure to interest rate risk is
managed through tight asset-liability management gap monitoring.

Management and Governance: Satisfactory

We view management and governance as satisfactory. The club's strategy is target-driven, while it has maintained a
conservative and selective approach to growth through the quality of members and operations. The club's senior
management is stable and has extensive experience in the sector. Management has shown its ability to convert

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strategic decisions into constructive action, reflected in the board's commitment to break-even underwriting
performance and the subsequent sustained improvement in underwriting results. For example, the club has reported
net combined ratios in the range of 92%-102% over 2014-2017, compared with 120% in 2012 and 121% in 2013. The
change in strategic mind-set over the recent years has translated into a track record of sustainable operating
performance and actions to prudently manage potential financial volatility.

Liquidity: Exceptional, supported by a liquid portfolio

We regard the club's liquidity as exceptional, owing to the strength of its available liquidity sources, mainly premium
income, and liquid asset portfolio. Were claims to increase in size or frequency, we would consider the club
well-positioned to meet any liquidity needs that may arise, largely because of the generally high credit quality of its
bond portfolio.

Accounting Considerations
As the IG pooling agreement provides a mutual reinsurance mechanism for the IG, we treat the amount paid into the
pool--$32.4 million in 2017--as ceded reinsurance premiums, rather than gross claims incurred.

Related Criteria
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• Criteria - Insurance - General: Enterprise Risk Management, May 7, 2013
• Criteria - Insurance - General: Insurers: Rating Methodology, May 7, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,
Nov. 13, 2012
• Criteria - Insurance - General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy
Using The Risk-Based Insurance Capital Model, June 7, 2010
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Ratings Detail (As Of July 10, 2017)

Operating Company Covered By This Report
The Standard Club Europe Ltd.
Financial Strength Rating
Local Currency A/Stable/--
Counterparty Credit Rating
Local Currency A/Stable/--
Domicile United Kingdom
*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable
across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

Additional Contact:
Insurance Ratings Europe; InsuranceInteractive_Europe@spglobal.com

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