Report and Accounts 2013
2012 has been the most positive financial year for the Club since I first wrote to you in 2008, despite the very difficult trading conditions that our Members have continued to face. Our headline numbers show that our Free Reserves are up by $18 million to $197 million and there has been an improvement for the fifth consecutive year in our combined ratio from 108.7% a year ago to 102.5% this February.
The continuing lower levels of our Members’ claims for 2011 and again for 2012 together with reductions in their claims for earlier policy years have been the main contributors to our strong financial performance. The figures now clearly demonstrate the benefit of our decision to reduce our exposure to a number of higher risk entries at the beginning of 2011.
We are also fortunate in that the positive impact of our Members’ claims was not significantly undermined by a second year of high cost Pool claims arising from other Group Clubs. Fortunately our own Pool claims performance has again improved so that our Pool contribution fell to less than 8.5% in 2012 and is forecast to reduce to around 6.5% in 2013 compared with nearly 14% in 2006.
As expected the investment environment continued to be difficult. Although we remain committed to retaining a diversified asset portfolio, we took further steps during the year to reduce the Club’s exposure to equities and other higher risk assets within our investment funds. Despite a more conservative asset allocation since last June, our investment return at 4% was more than twice our forecast for the year. The net overall return of about $22 million more than eliminated a net underwriting loss of a little more than $4 million. Our improved underwriting position and lower risk profiles for both our entered tonnage and our investments have all contributed to a further strengthening in the Club’s capital.
Looking ahead, the high cost of Pool claims and the prospect that investment returns will continue to be low indicate that the setting of premiums at appropriate levels remains a challenge for us and for the industry. Fortunately, early impressions for 2013 are encouraging. Total claims for the first quarter are very similar to the equivalent figures for 2011 and 2012. Prior policy years have also continued to improve. It is also pleasing to note that mutual tonnage entered since the beginning of the year is up by some 2 million GT demonstrating not only the long-term commitment of our existing Members but also renewed interest, now evident for some time, from new Members and their brokers.
During the year your Board as usual reviewed the Club’s long-term business strategy. A year ago, I stressed the need to further improve the underwriting result. That remains a core priority but selective growth, service quality and prudent diversification are also important objectives. Diversification in terms of new products or new services to supplement core P&I cover is desirable but only where it contributes to the Club’s overall financial strength. We see little practical benefit in entering markets which are already oversubscribed especially if the risks erode the Club’s capital position. With those limitations in mind we have for 2013 expanded the cover that we provide on a fixed premium basis to include not only cover for chartered entries, but also for owned entries for vessels of up to 5,000 GT. This enables us to compete more effectively in specific markets where commercial fixed premium facilities may otherwise appear to be more attractive.
In the last two years I have commented on the European Union’s enquiry into aspects of the International Group’s claims sharing arrangements through the Pool and the International Group Agreement (IGA). The enquiry is now at an end. Although time consuming and expensive, the outcome is satisfactory in that the valuable benefits that the Group’s claims sharing system has delivered so successfully for so many years appear to have been better understood and have not been affected. One consequence of the enquiry is that amendments have been made to the IGA for 2013 in relation to the setting of release calls. In future, Group Clubs when making their release call assessments will need to take explicit account of a variety of risks which can adversely affect a Club’s capital strength. In practice our calculations have for some years already been based on the risk factors which are now expressly set out in the 2013 IGA, so the impact of the change may not be very significant. The Club’s strong financial performance has enabled the Board, in reviewing the level of releases for open policy years at their meeting this May, to make reductions in the percentages that apply for 2011 and 2012.
New sanctions legislation passed by the European Union and the United States in terms which are not always clear is continuing to create uncertainty. As a result legitimate trade to a number of countries and in particular to Iran has suffered increased disruption. In contrast an apparent reduction in the incidence of piracy particularly off Somalia is a positive development for maritime trade. Close adherence to recommended best practice when transiting affected regions and the use of armed guards where permitted is having a positive deterrent effect. However, the increase in the number of alarmingly aggressive attacks in West Africa is a cause of serious concern because of more explicit threats to seafarers.
Key parts of the Maritime Labour Convention come into effect in 2013. In line with a long tradition of responding appropriately to legislation imposing important new liabilities on ship owners and operators, International Group Clubs agreed in 2012 to extend cover in respect of seafarers to fully cover these new liabilities and fulfill all the current insurance requirements under the new convention.
Since my last report, proposals made in 2008 by the International Salvage Union to introduce the concept of an environmental salvage award though amendments to the 1989 Salvage Convention were finally not supported at a CMI conference held in Beijing last October. This is a welcome outcome to what had been a long-running and ultimately unnecessary debate. The majority of delegates felt that compensation already available to salvors for protection of the environment is adequately addressed in the Convention’s existing provisions.
Our focus on delivering the very best cost-effective service for our Members remains a crucial priority especially in difficult trading conditions. Our claims teams in London, Hong Kong and Piraeus have all been strengthened during the year and in Piraeus we have re-located our office to a more modern and efficient building with sufficient extra space to meet the needs of our planned growth in Greece and the Mediterranean. Further upgrading at Tower Bridge Court in London is also due for completion this autumn.
Since my last report Kiril Domuschiev and Wang Haiming have retired from the Board. I would like to thank them for their contributions. On behalf of my colleagues I would like to welcome Ted Litton, Paul Gripari, Trinh Quang Tuyen, Feng Jianhua and Emil Yordanov who have joined the Board. We shall benefit greatly from their extensive and varied experiences in the shipping industry.
May I also thank all my Board colleagues for their invaluable support for the Club during the year and for their wise counsel and advice in realising the progress we have made. I must in particular thank all our Members whose confidence and commitment to the Club is as always greatly appreciated particularly in such testing times.
Finally, I would like to thank our Managers on behalf of the Board. It is they who represent the face of the Club from all our offices around the world. Their continued response with professional skill and dedication to all the complexities that ship operations of today demand is fundamental to the success of the Club. I am confident that they will keep us well placed to meet the many challenges and opportunities that lie ahead.