Financial Highlights and Chairman's Statement
"2016 has been another impressive year for the Club. Our year-end financial position is again our strongest ever despite some obvious headwinds that affect our industry."
I am very pleased to be able to report that 2016 has been another impressive year for the Club. Our year-end financial position by reference to a number of key measures has again been our strongest ever despite some obvious headwinds that affect our industry. Our numbers confirm the depth and stability of our operations and reinforce the predictable and robust trends that have been evident for some time in what continues to be a difficult economic environment for many of our Members with continuing low freight rates a depressing norm.
Our combined ratio reflecting our technical underwriting result is 87.2%, slightly higher than last year’s 83.6% but lower than our strategic target of better than 100% over a three-year rolling period. As was the case a year ago, this low ratio was mainly due to improvements in claims outcomes from our own Members for several policy years. Pool claims, especially for 2016, also proved to be lower than forecast. Notwithstanding another significant increase in entered mutual tonnage during the year from some 72 million GT to over 80 million GT for 2017, our Pool share has also remained low at about 7%, reflecting our continuing positive Pool record.
Our investment performance was also positive. Although a currency and valuation reduction on our office building in London arising primarily from the adverse effect of ‘Brexit’ on sterling assets reduced our overall investment gain to 1% for the year, a net overall return of $6.6 million together with a net underwriting surplus of $23.2 million gave rise to another significant increase in our free reserve from $276.7 million a year ago to $306.5 million at year end.
At this new level, the Club’s balance sheet is very strong from both Solvency II and rating agency perspectives with economic capital significantly in excess of the “AAA” capital levels from both S&P and AM Best. This now raises the question of the extent to which a pure mutual Club should continue increasing its capital strength. Your Board recognises that any potential for some form of a return, whether by a reduction in premium or by some other means, however modest, will be welcome for our Members, and a careful review of our position is to be undertaken later this year. What conclusions may be drawn will depend on a number of factors. In particular, the development of open policy year claims at mid-year and the extent to which recent positive claims trends look likely to be sustained will be relevant against a background of what appears to be steadily-declining premium across our industry as a whole. As I remarked a year ago, the Club’s capital adequacy should not be viewed in isolation at any particular time; it needs to be assessed in the context of the future risks to which our business as a mutual Club is routinely exposed and the extent to which it will be robust enough to counter future adverse volatility from whatever source, whether from escalating claims, low premiums or investment losses.
For that reason, a review this spring of our longer-term business strategy has already concluded that the Club should continue to be committed to being primarily a dedicated mutual Club providing cost effective P&I and FD&D cover through excellent high-quality service. This will ensure that we remain entirely focused on our core strengths.
As my predecessor and I have noted for some years, we remain open to the possibility of some form of diversification in future, provided it does not expose Club capital to inappropriate risks and provided it can be demonstrably of benefit to our Members. Excessive competition and unrealistically low premium confirm our caution in engaging in activities like hull and energy insurance, especially on fixed-premium terms. It remains the case that our decision some years ago to provide fixed premium cover for owned entries for vessels of up to 5,000 GT continues to be deliberately low key as planned. An overwhelming number of the Members that qualified for the cover has remained entered on a mutual basis, seemingly unimpressed by the availability of fixed-premium facilities that function in the commercial insurance market with varying degrees of success.
Ensuring sustainable financial strength is a core concern of both your Board and our Managers, but of equal importance to our future commercial success is our commitment to the provision of excellent, cost-effective service to our Members. This year, a focus of our business planning is to ensure that we continue to deliver claims and advisory services to the excellent level to which we aspire and for which we are well known. A year ago, we approved the opening of a new Asian branch office in Singapore to enhance and complement our branch in Hong Kong. It officially opened for business at the beginning of May and, like Hong Kong, it operates as a full function office for our Members based in the region providing for all their underwriting, loss prevention and claims requirements.
Further work has also been ongoing since last year in our plans for adopting best practice for the way our Board will operate to comply with the corporate governance rules which now apply under Solvency II. As I reported last year, the size of our Board is reducing as greater scrutiny has now to be devoted to the necessary skills and qualifications of all our Directors, whether executive or non-executive, so that we can respond effectively to the more complex technical challenges that arise, for instance, from capital and risk management and compliance. However, to ensure that the Club continues to operate as a mutual with the best interests of the Membership at the top of its priorities, a new Advisory Board is also to be established. Although its members will not have the same legal and fiduciary responsibilities as members of the Board, the Advisory Board will usually meet at the same time as the Board and will be charged with making, for example, recommendations on all matters relating to claims, whether discretionary or not, and on aspects of the Club’s financial operations. Generally, appointments to the Board will, in future, be made from members of the Advisory Board.
During the year, your Board has as usual considered other significant issues that may affect our Members. The entry into force of the Maritime Labour Convention (MLC) in January this year required all International Group Clubs to consider whether or not to issue guarantees for payment of liabilities for repatriation and unpaid wages for abandoned seafarers following an owner’s insolvency. As outlined in the Managers’ Review, a practical solution has now been found to provide the necessary certificates, albeit on the basis that Group Clubs have agreed that risks relating to unpaid wages should not be pooled. This pragmatic solution to a difficult problem provides an admirable illustration of the strong benefit we all derive from our membership of the International Group.
Another issue of interest to our Members will certainly be the entry into force this year of the Ballast Water Management (BWM) Convention. Fortunately, Club cover is already capable of responding to accidental breaches of the new rules and in certain circumstances, on a discretionary basis, for other types of breach.
Some questions have also inevitably been raised in the light of the ‘Brexit’ referendum in the UK. Although the Club’s management is based primarily in London, the effect of the UK’s eventual departure from the European Union on our business overall is unlikely to be significant since we are already entirely domiciled and regulated from within the European Union in Luxembourg. We must, however, assume that, in due course, our London branch will need some form of regulatory oversight by UK authorities once the separation is complete.
Since my last report, Geoff Woodford and Ali Abdulla Alharbi have retired from the Board. We are grateful to them both for their guidance and help in the steering of the Club’s affairs. In particular, Geoff Woodford, who has been a Director since 2003 has been a uniquely tireless and incisive contributor to the Board’s many and varied deliberations. His knowledge and wisdom will be greatly missed. May I also thank all my colleagues on the Board for their well-judged guidance on the Club’s affairs. Today’s responsibilities for us all are now more onerous than in the past and will require even more commitment as we move forward.
Finally, I would like to express our gratitude to our Managers. As usual, they have worked with great dedication and professional skill to ensure that we are well placed to meet the challenges that our industry faces. During the next few months they will be undergoing some significant change as a generation of our senior team is set to retire. In particular, Peter Spendlove stands down as CEO in September, to be succeeded by Tom Bowsher. Fortunately, Peter continues in the short term to be Chairman of the Management company so that there will be continuity in the way in which our new senior management team adapts to our strategy and business focus in 2018 and in the years ahead.