AJ Gallagher maintains claim that there is excess capital at Group Clubs

Broker AJ Gallagher is continuing its pressure on Group Clubs to return what it continues to describe as “excess capital”.

Looking ahead to the 2020/21 renewals, Malcolm Godfrey Executive Director, Marine P&I Division, noted that there were going to be changes in the International Group Agreement and its competition rules (IGA).

First, with effect from 2020/ 21 all time charterers’ liability business would be free from the IGA, even when part of a mutual entry.

Second, and to Godfrey more interestingly, if an owner moves an entry from a Club that subsequently reduces its deferred call or makes a return call, then the new Club will be allowed to match that reduction. That is to say, the competition rule will work on ultimate ETC rather than initially planned ETC.

“As we have said previously for the Clubs to justify increasing premiums for 2020/ 21, they need to address excess capital. Our report last year quoted a minimum of $750m surplus capital. and we stand by this with only $200m having been returned last year, half of which was the UK Club Hybrid loan redemption”, Godfrey said.

AJ Gallagher expected that at the next renewals the majority of Clubs would be demanding a general increase of between 5% and 10%.

However, the broker said that, subject to the incidence of unexpected events, Gard, Britannia and perhaps Steamship Mutual should be able to renew without a general increase.

The broker foresaw this being “the start of a three-year transitional cycle where all Clubs try to increase rates, as Lloyd’s has finally started to do.

Godfrey warned that the Clubs would also have to keep a close eye on S&P’s rating agency views “if they wish to avoid the recent unfortunate outlook downgrade of the London Club”.

Godfrey said that it was tempting to question the continuing relevance of the general increase and to consider whether it could be abolished. Skuld did this many years ago and had since introduced what are effectively “no-claims bonuses for good owners”. He added that the fundamental problem with general increases was that they penalized good owners in favour of bad owners: “but that is one of the cornerstones of mutuality”.

He said that a cessation of a general increase would also, in effect, drive the increase underground and reduce transparency, since the Clubs would still need to load internally the amount otherwise raised by the general increase into some sort of an overhead allocation.

AJ Gallagher said that it would explore this matter in an issue of P&I Confidential once the Clubs’ plans for renewal begin to emerge.

Unbudgeted supplementary call were now frowned upon, so the pressure was on to get pricing right first time. Although historical analysis suggested that a three-year cycle of general increases should ensue, AJ Gallagher said that the impact of competition might make one or more Clubs of the financially stronger Clubs break rank.

“Essentially the market remains cash rich and revenue poor. For the long term health of the market, it needs to boost premiums and ratings to a sustainable level, whilst at the same time recognizing that it still hold vast amounts of Members’ money. It is no longer good enough to use those reserves to soak up the losses, the underlying premium inadequacy has to be addressed now”, said Godfrey.

He said that it was important that premium integrity was both restored and maintained “in the fairest and least painful way possible” for Members, “before the upcycling seen in the claims environment takes a stranglehold and forces unacceptably high levels of corrective action later”.

Godfrey concluded by challenging the Clubs “to look inwards for the next three years to restore mutuality – of course within reason”.

Aggregate Financial Year Results $’000

The following table shows the composite results of the International Group Clubs for the last three years. Figures include the pledged assets of Boudicca Insurance Co Ltd. Figures for those Clubs which do not report as at 20th February are included on the basis of their results for the nearest year-end to 20th February of any given year. No adjustment is made to eliminate inter-Club transactions, in particular pooling transactions.

  2016/17 2017/18 2018/19
Original Call Income 4,098,741 3,819,421 3,760,733
Return Calls (181,594) (128,218) (51,008)
Actual Call Income 3,917,147 3,691,203 3,709,725
Acquisition Costs 368,143 369,296 388,807
Reinsurance 786,983 724,895 716.609
Claims Incurred 2,356,880 2,445,370 2,623,191
Administrative Expenses 255,572 234,634 309,535
Sub Total 3,767,578 3,774,195 4,038,152
Underwriting Result 149,569 (82,992) (328,427)
Investment Income 432,770 538,993 101,782
Exchange Gains / (Losses) etc. (71,331) 18,945 (63,791)
Taxation (22,329) (15,318) 19,700
Total 339,010 542,594 57,691
Overall Result 488,679 459,602 (270,736)
Cash and Investments 11,585,164 12,195,663 11,676,097
Other Net Assets 204,029 167,461 364,716
Sub-total 11,789,193 12,363,124 12,040,813
Net Outstanding Claims 6,460,879 6,605,208 6,686,899
Free Reserves 5,209,374 5,638,600 5,334,414
Debt Capital 118,940 119,316 19,500
Capital Transactions in Year 0 (30,000) (133,266)

For all years, figures include the non P&I operations, assets and liabilities of all Clubs e.g Gard Marine & Energy, Sunderland Marine, Skuld and Standard’s Lloyd’s syndicates etc.

In 2018/19 the Standard Club acquired the Strike Club, which added $18.5m to Free Reserves; in addition, during 2018/19 the UK Club repaid its $100m hybrid capital.

During both the 2017/18 and 2018/19 years, Britannia made $30m in capital distributions and have announced a further $10m payable to owners entered in the Club in May 2019.

Steamship Mutual also returned capital amounting to $21.9m in 2018/19.

Figures reflect prior year application of changed accounting policies, where appropriate. ls