Financial Highlights and Chairman's Statement
"Free reserves are up again, this time by some 13.5%, to a record $277 million and our combined ratio reflecting our operating performance has reduced from 97.4% to 83.6%."
A significant change for our Board this year has been Mathew Los’s decision to step down as Chairman after an extremely distinguished tenure of some eight years. As his successor, I am particularly privileged to have been able to take on his responsibilities at a time when he has presided with great knowledge, skill and good humour over a period of continuous improvement in the Club’s affairs. I am delighted that he will remain for the time being a member of the Board so that his experience and wise counsel will continue to be available to us all.
A year ago Mathew noted with satisfaction that 2014 had been the best financial year for the Club since his appointment in 2008. I am delighted to be able to report as his successor that 2015 has been even more satisfying. For a seventh successive year all our key numbers have been positive and have generally exceeded our forecasts. This again confirms a strong and well-established trend which reinforces the stability and reliability of our operations in what clearly are difficult times for the majority of our Members and the wider shipping community.
Free reserves are up again, this time by some 13.5%, to a record $277 million and our combined ratio reflecting our operating performance has reduced from 97.4% to 83.6%. This figure is well below our recently revised financial target of better than 100% and arises, I am pleased to say, from better than expected claims outcomes, mainly from our own Members. In particular, claims developments for the 2014 policy year over the past twelve months have been unusually benign, a pattern that we do not expect will be likely to be repeated for subsequent policy years.
An excellent claims trend from our own Members has not only ensured that our core cost is down, but also that our contribution to other Clubs’ Pool claims remains at a low level. Notwithstanding a significant and gratifying increase during the year in our entered mutual tonnage from 67.5 million GT to over 72 million GT, also a key measure of our Pool contribution calculation, our Pool share has remained at about 6%, reflecting our own positive Pool performance.
Our investment return was also satisfactory. Despite a 1% loss on pure financial assets in what was a distressed investment environment, especially in the final quarter, an increase in the value of our office building in London resulted in an overall net return of $2.8 million.
The effect of all these strong figures is a further strengthening in the Club’s free capital, which has enabled us to easily fulfill the capital demands of the new Solvency II rules that finally became effective in January 2016. These new rules are not only concerned with the adequacy of the Club’s capital. They also require us to be continuously focused on the way in which we assess and manage the risks to which our business as a mutual Club is routinely exposed so that our capital will be robust enough to counter future adverse financial volatility.
For that reason your Board has again concluded that strategically we should continue to be clearly committed to being a dedicated mutual Club providing cost effective P&I and FD&D cover through excellent, high quality service.
As Mathew Los has noted in previous reports, this does not mean that we are not open minded about diversification. We will not, however, diversify for its own sake or where the Club’s capital will be exposed to unknown or inappropriate risks. We remain cautious about engaging in activities like hull and energy insurance that for now at least appear to us to be over-subscribed and so are unlikely to add value. It is interesting to note that our decision in 2013 to provide cover for owned entries for vessels of up to 5,000 GT on a fixed premium basis has remained low key as planned. An overwhelming majority of the Club’s Members that qualified for the cover has remained entered on a mutual basis despite the availability of fixed premium facilities that have in the meantime proliferated with varying degrees of success.
The strength of the Club’s capital raises understandable questions about how much further a pure mutual should go in increasing its capital strength. Last year we highlighted the difficulty all mutuals face in striking the necessary balance between the requirements of our regulators and the demands of conforming to first-class financial strength ratings as determined by rating agencies. Your Board’s challenge is to ensure that we maintain the Club’s standing within the rating agencies’ “A” range without losing sight of mutuality and of the fact that a Member’s capital is held on trust and should not be more than is required, especially when trading conditions for many ship owners are so harsh. Clearly, this year’s results take us close to the point where any targeting of further capital growth can be more constrained.
Since last year’s report the Board’s and our Managers’ focus has been not only on the Club’s financial affairs but also on the need to make sure that we continue to offer excellent service and advice to all our Members. Since 1981 we have operated through a fully functional branch office in Hong Kong for our Members based in the region, which has serviced all their underwriting, loss prevention and claims needs. Rightly, it enjoys a high reputation in the industry. This year we have approved the opening of a second Asian branch office in Singapore to enhance and complement Hong Kong, which will enable us to take advantage of the expansion of the owning and operating community in that market and in South East Asia generally. We anticipate that it will be operational before the end of 2016. This latest change will, for the time being at least, complete our review of our regional offices which we began in 2013 with the relocation of our office in Greece to Akti Miaouli in Piraeus.
The structure of our Board itself is also undergoing some review this year as we adjust to the changes that result from best practice guidelines for corporate governance that arise under the Solvency II rules. The size of the Board is set to reduce as greater scrutiny will be devoted in the future to the necessary skills, qualifications and attendance of our Directors, whether executive or non-executive. Of course, this review will involve an assessment of how a balance can be struck between a more efficient board and the workings of a mutual P&I insurer in the context of proper corporate governance.
During the year I am delighted to report that we have welcomed Messrs Ali Alharbi, Mark Cameron, Ajay Hazari and Stelios Ioannou to the Board. They come from a diverse group of our Members and each will, I am sure, make valuable contributions to our business in the coming years. During the year Mohammed Al-Otaibi, Ali Al-Yabhouni and Qin Jiong have retired from the Board. We are most grateful to them all for their help and guidance.
Finally, may I thank our Managers on behalf of the Board. My colleagues and I are confident that we have a fully focused team of the highest quality that will continue to ensure that our results remain excellent in the years to come. Some changes during the year do call for special comment. Michael Kelleher, our Senior Claims Director, retires this June and is to be succeeded by Suzanne Byrne, who rejoined the management in 2015. Michael’s contribution has been of the highest calibre after some 38 years with the company. His detailed knowledge and experience that is widely acknowledged in the wider insurance and shipping communities will be hard to match. We also say farewell to our Loss Prevention Director, Mark Williams, whose tireless work to ensure that Members understand and adhere to best operating practices has also become widely recognised in our industry.