I am pleased to report another set of strong financial results for the Club in 2017, with the Free Reserve increasing to $308.5m, its highest ever level. This underlines the strength of the balance sheet and the Club’s robust financial health, with capital continuing to be well in excess of the S&P “AAA” rating levels and the requirements of Solvency II.
These results have however been achieved in the face of a significant change in the pattern of Members’ claims in 2017 when compared with previous policy years. Whilst more claims might have been expected because of the higher number of vessels entered in the Club, the magnitude of claims in 2017 is forecast to reach a level not seen for many years and has included an unusually large number of losses arising from collisions and navigational errors. Whilst claims on the International Group Pool in 2017 also looked to be more positive initially, two very large claims, the stranding of the “KEA TRADER” and the tragic loss of the “SANCHI” have now been notified. The full financial impact of these two casualties has yet to become clear.
It is also not clear whether or not the claims development in 2017 was simply an aberration or is evidence of a more sustained increase in claims across the industry. If claims values are moving away from the stable levels the Club has enjoyed over recent years, then premium will need to respond to meet this new pattern. This will be unwelcome news for ship owners, many of whom continue to trade in depressed markets, but caution dictates that to counteract increased claims, more premium will be necessary to avoid putting at risk the financial strength we have carefully built over recent years.
The claims performance I have described is directly reflected in an increase in our combined ratio to 116% for the year, but I am pleased to say that the Board’s objective of a rolling three-year average combined ratio of better than 100% is at a satisfactory figure of 95.6%. Volatile claims years are not new to our industry and are to be expected from time-to-time; it is testament to the inherent flexibility of the mutual system and the strength of our balance sheet that they can be absorbed without undue impact.
Our strong performance and commitment to high-value service were again recognised during the year by existing Members continuing to commit their new vessels to the Club. This support, combined with a satisfactory renewal, has seen entered mutual tonnage increase again to over 90m GT but as always growth must be tempered by sound underwriting to ensure that additional tonnage continues to be of the right quality and pays a premium which properly reflects the risk it brings to the Club.
The investment result was similarly positive, with an investment return of 4.8% which includes a revaluation gain in the value of our London office building, Tower Bridge Court. The building will not, however, feature directly in our financial results for very much longer because your Board took the decision during the year to sell it. As an asset it has served the Club extremely well since the freehold was purchased in 1997, both as an investment and as the main operational base for the Managers. However, the fabric has now reached an age at which the capital expenditure required to refurbish it to standards that are now demanded by the commercial rental market is considerable. At the same time, despite Brexit, values in the commercial property market in London continue to be resilient. Both factors were decisive in convincing your Board to conclude that a sale now is in the best interests of the Club. The decision will, of course, necessitate the Managers seeking new premises in London over the coming year.
Elsewhere and in support of our strategy of delivering excellent service to our Members, this year has seen our Singapore office enjoy its first year of operation and a new representative office open in New York. These developments reflect a growing demand to have local presence in important regional markets in addition to our long-standing and highly successful regional hubs in Greece and Hong Kong. We shall closely monitor the performance of these new offices to ensure that their presence results in the satisfactory generation of new business of the right quality and, in the case of Singapore, the effective delivery of underwriting and claims service locally in that region. The New York office currently provides valuable member and marketing support, but its role will be kept under review to see whether we might benefit by having some other functions for our North American Members performed from that office in future.
In my report last year, I wrote about the changing requirements of corporate governance under Solvency II, necessitating a reduction in the size of the Board and the need to create a separate Advisory Committee to ensure that the interests of the whole membership will continue to be reflected in the Board’s decisions. These changes were enshrined in a new Constitution and Corporate Governance Charter which were adopted at the EGM in February this year. The Advisory Committee met for the first time in Dubai in May 2018.
The pattern of the Board’s meetings will also change from 2018 onwards, with the AGM being held in Luxembourg in July and the September Board meeting, also in Luxembourg, now moving to October to allow the Board to take decisions further into the policy year and closer to the start of the renewal season. A consequence of this new timetable is that for this year’s Report & Accounts, your Board and the Managers decided in September last year that for future years our Managers’ Review, in which the Managers comment in detail on issues which concern our business, will be published separately in October each year.
As usual, your Board has been monitoring issues which will affect most of our Members. Although P&I Clubs were intended to be the guarantor of last resort under the certificates which Club Boards agreed to issue for the payment of wages for abandoned seafarers required by the amendments to the Maritime Labour Convention (MLC), experience has shown that the Club is often the first place to which a seafarer will turn when wages go unpaid for whatever reason. Whilst this is perhaps an admirable reflection of the Clubs’ culture of providing help and advice, we should be careful not to allow maritime regulators to form the view that Group Clubs are the de facto mechanism for dispute resolution between seafarers and their crew or an easy means of obtaining certificates against any number of other liabilities (including credit risk liabilities) which might more properly be the concern of others.
On sanctions we have seen that although the relaxation of prohibitions against some previously sanctioned states has allowed trade to expand again, problems remain in getting related payments made by banks. Although a trade may now be perfectly legitimate it appears to be increasingly the case that any linkage whatsoever with certain states may cause a bank’s compliance department to question and often decline a transaction. For ship owners who have had to endure a constriction in trade when sanctions were in place to now be denied the opportunity of legitimate trade simply because of banks’ diminished risk appetite is of concern.
More troubling, however, is the news as I write that the United States has unilaterally announced its withdrawal from the JCPOA in relation to Iran. The effect of this decision is unknown for now but is likely to be significant for our business.
Partly because of the governance changes to which I have already referred, this year has seen a larger number of changes to the Board than usual. My colleagues, James Drakos, Bullent Ergin, Paul Gripari, Ted Litton, Mathew Los, Vladimir Mednikov, Nicholas Notias, Iakovos Perantinos and Lucas Tsangarides have all retired. I am extremely grateful to them for the very considerable contributions they have all made to the affairs of the Club. I must, however, highlight some of particular value over the years.
When I took over as Chairman, I wrote in 2016 of Mathew Los’s distinguished tenure as Chairman of the Club for eight years in presiding over a continuous improvement in the Club’s affairs. Likewise, both James Drakos and Lucas Tsangarides have served the Board with great distinction for many years as long-standing Chairmen of the Class I and Class II Committees respectively. I am especially grateful to all three for the time they have given to the Board’s affairs and for their leadership, wisdom and guidance over many years.
Since the beginning of the year, the Advisory Committee has welcomed Omar Al-Khuwaiter, Laurent Cadji, Shahram Farahbod, Thanassis Mazarakis, Sergey Popravko and Kristin Schjoødt Bitnes as members. I very much look forward to their valuable contributions to the Committee’s deliberations over the coming years.
I would finally like to thank the Managers on behalf of the Board for all their hard work and dedication. Last year I told you that Peter Spendlove would be retiring as CEO during 2017 to be succeeded by Tom Bowsher but would remain as Chairman of the Management Board in the short term. At our Board’s meeting in May 2018 Peter retired from the management company after nearly forty years of distinguished service to the Club, the last twenty-three as CEO. He has been a constant and very valued source of guidance and expertise for myself, my predecessors and the Board. He has, moreover, been instrumental in leaving the Club in the healthy financial state it is in today. His expertise has also helped shape our industry by his role within the International Group and for which he served as Chairman between 2006 and 2009. On behalf of the Board I wish to express our sincere thanks to Peter for the outstanding contribution he has made to the Club and the management company. We look forward to continuing to work with Tom and the senior management team in meeting the challenges ahead.