2015 october revie · financial highlights the continuing benign claims environment in 2014 and...
TRANSCRIPT
October Review 2015
CONTENTS Overview 1
Financial overview 2
Financial highlights 4
Claims 8
Investments 12
Risk and Capital management 14
OVERVIEW At the half year, the UK Club holds free reserves and hybrid capital of $559 million. The surplus achieved in the first six months of the year contributed to this increase in free reserves, despite uncertainty in global investment markets.The low number and cost of notified claims on the 2015 policy year is encouraging with few large claims falling within the Club or Pool retentions. Notified claims on prior policy years have also developed favourably.
Underlying claims inflation is currently running at around 4% per annum, however this has been offset by the continuing reduction in claims frequency. Although moving the premium forward to meet claims inflation remains a key objective of the Club, the Board is very aware of the continuing stress in certain sectors of the shipping market and has therefore set the General Increase for 2016 below the level of claims inflation, at 2.5%.
The Board has decided to lessen the impact of the General Increase decision by declaring a Mutual Premium Discount of 2.5% on the total mutual call for the 2014 policy year. This discount will be applied by way of a credit to the final instalment of the 2014 policy year mutual premium and will amount to a 10% reduction for all mutual Members for that instalment. This is the second such return made in the last four years.
P 1 UK P&I CLUB - October Review 2015
92%Half-year combined ratio
$4.33Per ton
$559mFree reserves and hybrid capital $m
0.2%Investment return
FINANCIAL OVERVIEW
The strong first half performance has enabled the Board to give a Mutual Premium Discount.
(STABLE)Standard & Poor’s rating
P 2-3 UK P&I CLUB - October Review 2015
2.5%Mutual Premium Discount
2.5%General Increase
FINANCIAL HIGHLIGHTS
The continuing benign claims environment in 2014 and 2015 has enabled the Club to deliver another good result.
• Large claims create volatility in the total claims cost of a policy year
• In the year to date, there have been few large claims on the 2015 policy year
Key
18 Months
6 Months
Large claim numbers
ATTRITIONAL CLAIMS FREQUENCY & VALUE
Net notified large claims (>$0.5m) at 6 and 18 months for policy years 2006 - 2015, $m
Tota
l net
not
ified
larg
e cl
aim
s ($
m)
Policy year
• The number of claims presented to the Club continues to decrease, despite the growth of the Club
• The total cost of attritional claims has remained broadly at the same level for the last 6 years. But the average cost of each attritional claim inflates at approximately 4% each year
Key
18 Months
6 Months
Claim numbers
Net notified attritional claims (<$0.5m) at 6 and 12 months by policy year • The combined ratio for the first half of the financial year was 92%
• The average combined ratio for the last five and a half financial years is 100%
Combined ratio for financial years 2008 - 2015
(%)
Key
Combined ratio (%) excluding supplementary premium and mutual premium discount
Target
Financial year
FINANCIAL STRENGTH
• Free reserves and hybrid capital increased to $559m
• The Club’s financial strength has enabled a reduction in the final call for the 2014 policy year
Key
Hybrid capital
Free reserves
Financial year
($m
)
CLAIMS VALUES
• There is some early evidence of an increase in cargo related claims over the last six months
• People related claims and casualties have reduced over the last few years, though the latter is dependent upon the frequency of large claims
• There have been few claims presented to the Pool in 2015 and none by the UK Club
Key
Pool Chartered
Illness & injury Casualty
Cargo
Total net notified claims for policy years 2006 - 2015 and by claims type at 6 months
Net
not
ified
cla
ims
($m
)
Policy year
Net
not
ified
att
ritio
nal c
laim
s ($
m)
Policy year
Num
ber o
f cla
ims
P 4-5 UK P&I CLUB - October Review 2015
120
100
80
60
40
0
2007
2008
2009
2010
2011
2012
2013
20
2015
140
2014
LARGE CLAIMS
UNDERWRITING DISCIPLINE
120
100
80
60
40
0
2007
2008
2009
2010
2011
2012
2013
20
2015
140
2014
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
40
0
140
80
20
2008
/09
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
Aug
201
5
60
100
120
Free reserves and hybrid capital for financial years 2008 - 2015
90
80
60
40
20
0
2007
2008
2009
2010
2011
2012
2013
2014
100
70
50
30
10
2015
2006
2006
2006
500
400
300
200
100
0
600
2008
/09
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
Aug
201
5
Num
ber o
f lar
ge c
laim
s
0
5
10
15
20
25
2007
2008
20092010
2011
2015
2014
2012
CLAIMS Prior policy years have developed favourably compared with expectations and the current policy year has suffered few large claims.
The 2014 and 2015 policy years are developing into favourable years for the Club, although the development of 2015 is still immature. This is reassuring after the rather more expensive 2012 and 2013 policy years, both of which were adversely affected by a small number of large claims.
Figure 1: Development of total notified claims (including the Club’s contribution to pool claims) for policy years 2006 - 2015.
The 2014 policy year continues to develop favourably. The pace of development of policy years tends to tail off after 18 months, when a more accurate estimate can be made of the total cost of claims for the year. The 2014 policy year, which is now at 18 months, will be one of the least expensive years on record.
Six months into the 2015 policy year there is limited data available with which to estimate the outcome of the year, and claims estimates are therefore maintained at prudent levels. However, the total cost of claims notified to date is broadly in line with the Club’s least expensive policy year, 2011.
Key
Pool
Chartered
Illness & injury
Casualty
Cargo
Net
not
ified
cla
ims
($m
)
Policy year
Figure 2: Total net notified claims and by claims type at 6 months for policy years 2006 - 2015.
After the first six months of the 2015 policy year, people claims (illness and injury) and casualties are markedly down compared with previous years at the same stage; conversely cargo claims are at the second highest levels since 2006. Although no trend has been established to date, it is still very early in the year’s development, there is some evidence that the collapse in commodity prices has had an influence on the increase.
P 8-9 UK P&I CLUB - October Review 2015
Key
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Not
ified
cla
ims
($m
)
Quarter
300
250
200
150
100
50
0
350
0 4 8 12 16 20 24 28 32
2013
CLAIMS ANALYSIS BY TYPE
Policy years where total claims levels are relatively high tend to be those influenced by higher levels of casualty claims.
90
80
60
40
20
0
2007
2008
2009
2010
2011
2012
2013
2014
100
70
50
30
10
2015
2006
2006
CLAIMS
Attritional claims The total cost of attritional claims (those under $0.5 million) is driven by the frequency of claims and the average cost of each claim. The frequency has fallen steadily over a number of years including a significant fall in 2008/09, following the end of the shipping super cycle.
The reduction in frequency has applied particularly to attritional claims. Despite this drop in the number of claims, the total cost of attritional claims has remained at broadly the same level for the past seven years as a result of the underlying increase in the average value of these claims.
Figure 4: Net notified attritional claims (<$0.5m) at 6 and 18 months for policy years 2006 - 2015, $m.
Tota
l net
not
ified
larg
e cl
aim
s ($
m)
Policy year
Key
18 Months
6 Months
Large claim numbers
Pool The Club’s excellent record on the Pool has reduced the Club’s Pool contribution steadily over recent years and shielded the Club from the increasing costs of the very largest P&I claims. The Club’s share of Pool claims remains below the Club’s market share.
After six months of the 2015 policy year, four claims have been notified to the Pool. None of these claims were brought by the UK Club.
Figure 6: UK Club’s share of Pool claims for policy years 2006 - 2015 at 6 and 18 months.
P 10-11 UK P&I CLUB - October Review 2015
Key
18 Months
6 Months
Claim numbers
Figure 3: Net notified large claims (>$0.5m) at 6 and 18 months for policy years 2006 - 2015, $m.
Net
not
ified
att
ritio
nal c
laim
s ($
m)
Policy year
Num
ber o
f cla
ims
Key
Average cost per claim
Trend line
Ave
rage
cos
t of a
cla
im (
$00
0s)
Figure 5: Average cost of a claim by policy year.
Key
18 Months
6 Months
Policy year
Con
trib
utio
n to
poo
l cla
ims
($m
)
Policy year
Large claims As reported in previous reviews, the number and severity of large claims (those with a total cost over $0.5 million) continues to have a significant impact on the overall cost of a policy year. Although the frequency of such incidents is low, the cost, in an average year, is approximately half of the total claims cost of the policy year.
The Club has purchased reinsurance to mitigate the risk of a run of large claims. This cover reduced the impact of the high number of large claims on the 2013 year.
The cost of large claims in the 2014 policy year was broadly in line with expectations. Encouragingly, the incidence of large claims on the 2015 policy year is particularly low after the first six months of the year.
120
100
80
60
40
0
2007
2008
2009
2010
2011
2012
2013
20
2015
140
2014
2006
120
100
80
60
40
0
2007
2008
2009
2010
2011
2012
2013
20
2015
140
2014
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2006
40
35
30
25
20
0
2007
2008
2009
2010
2011
2012
2013
10
45
50
2014
15
5
1999
2000
2001
2002
2003
2004
2005
2006
1998
60
50
40
30
20
0
2007
2008
2009
2010
2011
2012
2013
10
2015
70
80
2014
2006
0
5
10
15
20
25
Num
ber o
f lar
ge c
laim
s
Claims inflation The longer term trend in the average cost of claims is illustrated in figure 5 below. The annual rate of claims inflation is approximately 4%. Moving premiums forward to meet claims inflation remains a requirement if the Club’s financial objectives are to be met.
INVESTMENTS Our aim is to achieve a superior return on the Club’s assets whilst protecting the Club’s capital from excessive market risk.
The first half of the year produced a return for the investment portfolio of $5 million. The financial year started with reasonable equity and bond market returns along with a relatively stable Dollar. Despite the Greek debt crisis, European equities performed strongly.
However, equity markets declined as fears of a global economic slowdown emerged. The small but unexpected Renminbi devaluation and poor growth statistics emanating from China had a particularly negative impact on sentiment. Global corporate bond spreads also widened on the same slowdown fears, holding back returns from that part of the portfolio.
Global investment markets fell sharply in the days following the half year cut off. To date, recovery in these markets has been limited.
P 12-13 UK P&I CLUB - October Review 2015
Figure 7: Asset allocation at 20th October 2015.
37.7% Government Bonds
Corporate Bonds 29.9%
8.9% Cash
20% Equities
Asset allocation at 20th October 2015
Alternatives 3.5%
RISK AND CAPITAL MANAGEMENT
Capital strength has enabled the Club to give a Mutual Premium Discount on the 2014 policy year.
Capital strength At the 20th August 2015, the Club’s free reserves had grown to $460 million with a further $99 million of hybrid capital taking the overall free reserves and hybrid capital to $559 million. Total free reserves and capital therefore covers the net premium income of the Club by 184%, among the very best in the P&I market.
Key
Hybrid capital
Free reserves
Figure 8: Free reserves and hybrid capital for financial years 2008 - 2015.
At the 20th August 2015, the Club’s capital exceeded the targeted AA range. With claims on the 2014 and 2015 policy years developing favourably, the Board has decided that it is appropriate to give a Mutual Premium Discount on the 2014 policy year.
In recent times, the capital models of the insurance industry’s regulators have been revised and all insurers are now required to hold more capital than in the past. The mutual insurance market has not been sheltered from this process.
Figure 9: Composition of S&P capital requirement compared to Club’s forecast capital February 2016.
Cap
ital
($
m)
Key
Reserve risk
Premium risk
Concentration risk
Market risk
Credit risk
Total available capital (TAC)
TAC excl hybrid
P 14-15 UK P&I CLUB - October Review 2015
The Club’s target is to hold sufficient capital to remain in the AA range on the S&P capital model while also meeting all regulatory requirements, plus a suitable buffer. This buffer is designed to enable the Club to withstand a shock event and continue to hold sufficient capital to meet the standard regulatory requirement.
600
500
400
300
200
0
AAA
100
AA A BBB
TAC
TAC excl hybrid
Financial year
($m
)
500
400
300
200
100
0
600
2008
/09
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
Aug
201
5
UK P&I CLUB GLOBAL NETWORK
P 16 UK P&I CLUB - October Review 2015
www.ukpandi.com