Financial Highlights and Chairman's Statement
Report and Accounts 2015
The 2014 year has been the most satisfying financial year for the Club for many years and certainly since I began writing this report in 2008.
A year ago I was pleased to note that 2013 had also been a very positive year, with improvements in our key numbers for a sixth consecutive year. Continuing this trend and despite the very challenging times in the industry, it is very satisfying to be able to report further substantial progress this year which has exceeded our forecasts.
Free reserves have increased again, this time by 12.7%, to a record $243.7 million and our combined ratio which reflects the Club’s operating performance, has improved for a seventh successive year from 100.8% last year to a very positive 97.4%. This latest figure falls well within the key objective set in our business plan of achieving better than 105% and compares favourably with a perfect mutual Club result of 100%.
The most satisfying element in all our numbers is the consistent progress that has been made by our own Members. Their claims for 2014, both in value and frequency, are at a similar low level as for all the policy years since 2011. Claims incurred for earlier policy years have also continued to reduce as the years have matured, confirming a trend which has been evident since 2009. This may, to some degree, be attributable to luck but good luck rarely smiles on poor ship management.
We have also benefitted from our own sound claims record with the International Group’s Pool. That record continues to keep our Pool share at about 6%, which for 2014, has been complemented by the cost of Pool claims for the year appearing at this early stage to be developing well below the levels of the previous three years.
The effect of these satisfactory claims figures is that the contingency margins included in our balance sheet for liabilities are at even stronger levels. They will help to ensure that our operating performance continues to be in line with our key objective. This will, I hope make it possible for premium levels to remain stable for our Members at a time when there is an acute awareness that freight markets for so many regrettably remain so difficult.
In previous reports I have commented in some detail on our long-term business plan, which was again reaffirmed by your Board in 2014 in the light of a Member and Broker Survey that our Managers undertook last summer.
For several years it has been central to our strategy to remain a fully focused P&I and FD&D mutual committed primarily to the provision of excellent claims and advisory services through our London and regional offices in Hong Kong and Greece. We have consistently resisted pursuing a policy of diversification into activities like hull and energy insurance which appear to your Board to be already oversubscribed and, we believe, will struggle to add value especially if the risks threaten to erode the Club’s capital base.
Such a traditional view of the purpose of an International Group Club may not have been so fashionable in recent years given the extent to which some Group Clubs have sought to diversify into other risks, whether correlated or not. Recent developments suggest, however, that the traditional view may be re-asserting itself more widely. Market competition, and excessive levels of cheaply priced alternative capital, make it difficult to see that other classes of marine business, underwritten on a fixed premium basis, can deliver the necessary returns in the foreseeable future without risking the strong capital base that has been painstakingly built up over the past few years.
The setting and maintenance of the appropriate level of capital for the Club has become a constant theme for all Group Clubs in recent years. Any indication that a Club may be either over or under capitalised will be a matter of concern to any Club Board. The difficulty, however, is the conflicting nature of the environment in which the assessment has to be made.
On the one hand all Clubs must be capitalised to the levels now required by the Solvency II capital framework which, after several postponements, is now set to take effect in January 2016. For us this presents no issues as the Club’s capital today is greatly in excess of the Solvency Capital Requirement set by the regulations. On the other hand, to meet increasing market demand that Clubs conform to first-class financial strength ratings as determined by rating agencies, we also have to set our capital requirements so that we are capitalised to the levels indicated by rating agencies’ capital models. Your Board’s difficult task is to achieve a position which will maintain the Club’s position within an “A” range with rating agencies without losing sight of the fundamental concept of mutuality and of the fact that a Member’s capital is held on trust by the Club and that there is a duty on Clubs not to hold more capital than is required, especially at a time of such commercial stress for so many of our Members. A Club that diversifies and moves away from mutual business to a significant extent will most likely need to apply a different business model targeting a higher level of capitalisation. But we have explicitly chosen not to adopt that model.
During the year your Board has as usual considered other significant issues that affect our Members. Sanctions legislation has become more widespread in particular against Russian and Ukrainian individuals, and the anticipated relaxation of sanctions against Iran has not in practice materialised. Whilst the threat of piracy may have apparently abated especially in the Gulf of Aden and the Arabian Sea, hijackings in South East Asia and West Africa have increased with a sharp escalation in acts of violence against seafarers resulting in tragic loss of life. Vigilance to avoid these threats has to be maintained and the Club’s managers have always remained available to give advice on these difficult issues where security regulations may differ from flag state to flag state.
Last year I wrote about the Board’s serious concerns over the dispute between a Group Club and the 1971 International Oil Pollution Compensation Fund (IOPC Fund) which arose from an oil spill from the tanker NISSOS AMORGOS in 1997. Since then the matter has reached a most unsatisfactory conclusion following legal action before the English Courts and the subsequent decision to wind-up the IOPC Fund. This raises fundamental questions about how a partnership between the Group Clubs and the 1992 and Supplementary Funds – which is vital if the compensation conventions are to operate successfully – will work in future oil spills. Discussions between the parties are continuing and it is hoped that a satisfactory outcome can be reached for the benefit of all.
More information about these and other issues that are affecting our Members appears in our Managers’ Review elsewhere in this Report and Accounts.
With regard to the Board, I would like to welcome to the Board Messrs P G De Brabandere, Ye Weilong and Qin Jiong. May I thank Messrs Liu Guoyuan and Zhang Denghui who retired from the Board in 2014 for their help and guidance. Since the date of these Accounts, Trinh Quang Tuyen has also advised us of his wish to retire. His appointment to the Board was the first of a Director representing our Vietnamese entries and marked a long-established and much valued relationship for the Club. We wish him a very rewarding retirement after much significant work in building a durable relationship with those Members. I would also like to say a personal thank you to Philip Aspden, now finally retired, who first stepped down as General Manager in 2010 after many years of service and then returned to assist us so valuably pending the appointment of Thierry Brevet as his successor in Luxembourg last year.
As always, I wish to thank all my colleagues on the Board for their constant, valuable and very dedicated contribution to the success of the Club. On their behalf I must also thank our Managers under the ever watchful leadership of Peter Spendlove for their dedication in ensuring that our interests will continue to be served so well in the future.