American Club reports encouraging growth in fixed premiums, although Club combined ratio rises

In its annual management report American Club reported a combined ratio of 117% for the policy year 2019/20 to February 20th up from 108% the previous policy year.

Tonnage development over the recent renewal was:

Tonnage P&I FD&D Charterers Eagle Ocean Marine
Feb 20th 2020 17.1m gt 10.8m gt 3.0m gt 2.3m gt.
Feb 20th 2019 18.6m gt 11.4m gt 2.5m gt 2.0m gt.

Tonnage in the Club’s mutual P&I class declined by about 9% to approximately 17m gt overall. Its Freight, Demurrage and Defence (FD&D) entries also moved somewhat lower in tonnage terms, again by about 9% to 10.7m gt but, as mentioned above, almost all of this was offset by an increase in daily tonnage on risk in regard to the Club’s charterers’ business.

Eagle Ocean Marine

The Club’s fixed premium brand, Eagle Ocean Marine (EOM), which provides fixed premium insurance for P&I and FD&D risks for smaller vessels in local and regional trades, principally in East Asia, Europe, Africa and other areas outside the US, saw “encouraging growth”. The managers said that momentum in both tonnage and premium was maintained at the Feb 2020 renewals. Topline volume grew by approximately 20%. “Moreover, following a negative result for the 2018/19 facility year, the development of the current policy period is set fair to reverse the previous loss and restore the insurer’s profitability at an overall combined ratio below 80%”, the managers (Shipowners’ Claims Bureau – SCB) said.

In the middle of 2019, the Club renewed its participation in the EOM facility. The Club’s absorption of 55% of the first $10m tranche of exposure remained the same as it had been for the previous year, and as it continues into the current facility period. The EOM year runs from July 1st to June 30th and its reinsurances will therefore be subject to renewal in the middle of 2020. As has been the case for several years, the overall limit of cover available under the facility remains at $500m.

SCB said that EOM had made excellent progress in 2019. Year-on-year gross written premium increased by some 40% over the previous year. Further premium growth of approximately 15% is expected for the year ending June 30, 2020. The cumulative combined ratio for the business since its inception in 2011 is tracking below 80%.

The 2016 policy year closed with 22.5% supplementary call. At the same time, in light of a continuingly soft premium pricing environment and the gradual escalation of both retained and Pool claims over recent years, a supplementary call of 17.5% of estimated total premium was also ordered for the 2017 policy year. The 2017 policy year would be closed in May 2020 without further call.

There were no supplementary calls for 2018, 2019 or 2020.

American Hellenic Hull

Cyprus-based Solvency II-accredited American Hellenic Hull increased both premium levels and profitability amid a hardening market. That trend had accelerated into 2020. American Hellenic Hull’s financial 2019 year-end loss was about $440,000. The first five months of 2020 were showing a profit of $500,000-plus, SCB told Insurance Marine News, Its combined ratio year-to-date was 92%.

SCB said that “the challenging market conditions which attended the insurer’s early stages of development began to change substantially as 2019 progressed. Accordingly, the modest deficits of earlier years began to reverse themselves in the final two quarters of 2019 as a retreat of capacity from the hull market caused rates to increase significantly during that time. SCB said that the small loss recorded as of December 31, 2019 had been superseded in recent months by an encouraging level of profit, and it was expected that this trend would continue for the balance of 2020, and lend further impetus to American Hellenic Hull’s contribution to the Club’s financial strength.

Renewals

There was no general increase applied to premium for 2020 renewal, in line with the position taken for both previous years.  Also, as was the case a year earlier, there were to be no standard increases in deductibles. The same position was taken in regard to continuing entries in the Club’s FD&D and charterers’ portfolios. As in previous years, the release call for both P&I and FD&D was set at a margin of 20% over and above estimated total premium.

Members were informed in November last year that the Club’s Board expected to see a year-on-year increase in the pricing of risk for 2020 of a magnitude which would properly reflect future exposure.

In the result, the average rate per ton on renewing mutual business increased by approximately 10% as of February 20th 2020, which SCB said was “an encouraging sign in view of a continuingly soft market for P&I insurers”.

This percentage was a function of annualized premium volume having remained unchanged year-on-year. In fact tonnage reduced somewhat over the renewal period. There were also changes to insuring conditions, and deductibles, amplifying the effect of increased risk pricing.

SCB said that the risk profile of membership improved yet again for 2020, encouraging a positive outlook.

In the current policy year, SCB said that the Club and EOM had responded “energetically” to the challenges of the Covid-19 pandemic. Unimpaired customer service had been maintained.

The early impact of the pandemic on Club, EOM and American Hellenic Hull had been muted, but the longer-term consequences for the P&I sector remained uncertain.

Investments

The Club’s funds under investment generated the best return for a decade as of year-end 2019, earning 10.6% for the year. This compared with a slight loss recorded for 2018, which was largely caused by significant fluctuations to the equities markets toward the end of 2018, which, in every other respect, had performed rather well.

As of the end of May, 2020, in the midst of the pandemic, the Club’s investment portfolio had sustained a year-to-date loss of 1.9%, bolstered by the strong performance of the Club’s investments in the fixed income sector – municipal bonds having returned 2.6% during the month of May alone.

However, SCB warned that prospects for the remainder of the year remained uncertain.

Claims

On the claims side, 2019 Pool claims developed at levels similar to those of 2018.

SCB noted that it was clear that “the relatively benign years of modest loss development experienced from 2014 to 2017 are behind us”. Signs of claims escalation became discernible in 2018 – particularly in regard to the large claims which affect the International Group’s Pool. These trends developed steadily through 2019.

This became as true of the Club’s retained exposure during the year as it was of the Pool. The managers said that “commentators may point to tangible factors influencing these trends, but the vagaries of pure fortuity have arguably as much bearing on recent results as anything else”.

The freight market background against which the 2019 renewals were negotiated was not very different from that which had prevailed twelve months earlier. Although pricing power remained subdued, pressure on income was not as intense as it had been in previous years. SCB did note that “anaemic profitability among shipowners militated against any significant recovery of pricing in the marine insurance space generally”.

The American Club had no claims on the Pool in 2019, and has indeed not had any since 2016.

SCB observed that, although the experience of individual clubs varied, loss emergence in 2018 and 2019 began to describe a markedly upward trajectory, most vividly seen in the development of Pool claims for both years. Any causative link with rising freight indices was not obviously discernible in the case of these years, pure fortuity being a dominant factor, perhaps, especially in relation to larger losses, which are often caused by human error.

Although the American Club enjoyed a very favourable development of its retained exposure in 2018, its obligations to other clubs’ Pool claims rose substantially during that year, even though the American Club itself brought no losses to the Pool. 2019 was another year in which the Club had no claims on the Pool, but nevertheless saw its contribution to other clubs’ losses continue at an elevated level similar to that of 2018.

However, 2019 also saw an increase in the American Club’s attritional exposure. While claims below $250,000 per incident formed the overwhelmingly dominant category by number (98% of the total, a figure similar to that of previous years) there was a significant uplift in the aggregate value of larger exposures in the layer between $1m and $10m per incident, being in total about $12m more than the equivalent figure for 2018.

The total of incurred claims in the $1m to $10m layer (including Pool claim contributions to other clubs) in 2018 policy year was about $11.5m, while for 2019 it was about $23.5m (once again including Pool). “Curiously, the severity of claims below $1m declined by about 30% in 2019 by comparison with 2018, although their frequency rose by almost 20%. It was in claims above $1m that we saw the greatest movement, although the number of overall losses was small – only 10 in total”, SCB told Insurance Marine News.

SCB said that this increase in the frequency of larger, sub-Pool claims in 2019 did not appear to conform to any pattern, and seemed to be attributable to simple randomness. The overall exposure for the year remained largely within budget, albeit that the ultimate claims outturn for 2019 is likely to be of a higher order than that for 2018.

The opening months of the 2020 policy year had been dominated from a claims perspective by the impact of the Covid-19 pandemic. In terms of P&I exposure, claims so far had not been such as to cause concern, but the managers warned that “circumstances could change as the year unfolds”.

The vessel-type and trade profiles of both the Club’s and EOM’s constituency of Members and Insureds did not suggest a disproportionate propensity to Covid-19-related risk.

Premium income

In the result, year-on-year premium for the Club’s mutual P&I class remained flat, while a small decline in revenue for its FD&D business was matched by a commensurate increase in premium for charterers’ entries, so that income for 2020 was projected to develop at a level virtually identical to 2019.

Premium attributable to renewing P&I entries for 2020 saw an increase of approximately 1.5%. However, taking into account increases in deductibles, in some cases significant, the modification of terms applying to the application of deductibles generally, and changes to other insurance conditions, the overall premium increase, as if expiring terms had prevailed, was closer to 5%.

The profile of renewing tonnage by reference to management domicile and vessel type was generally similar to that of earlier years, save that the share of dry bulk vessels insured as a proportion of the whole grew substantially in 2020, mainly as a function of a decline in tanker tonnage.

The Club’s P&I business renewing into the 2020 policy year enjoys a trailing five-year loss ratio of only 41%, compared with 48% twelve months earlier.

SCB said that it was impossible to look back on the favourable results for 2019 without recognizing the great challenges which have emerged in the first few months of 2020 as a result of the Covid-19 pandemic. “The precipitous decline in equities, and the equally significant fall in the yields of first-class sovereign debt, cast a dark shadow over all markets. This is to say nothing of the currently bleak prognostications for the global economy, and the implications the pandemic has for every element of economic activity over the months ahead.”

SCB said that the Club’s Finance and Audit Committee, reporting to the Board, had maintained a close oversight over the Club’s portfolio in recent months with a view to controlling, as best can be done, exposure to the vagaries of the market and, at the same time, exploiting opportunities which may arise to generate enhanced returns when more normal economic conditions return.

Despite current challenges, it is pleasing to note that the Club’s invested funds – supported by the strong performance of municipal bonds – had sustained a loss at the end of May, 2020 of only 1.9%, a creditable figure by comparison with the steep declines recorded for most asset classes.

Net investment earnings for 2019, realized & unrealized were about $13.25m.

At year-end, the proportion of the Club’s total funds held in equities was about 28%, the remainder being in fixed income and cash. As of the end of May, 2020, following a recovery in the stock markets from recent lows, the equities proportion is approximately the same as it was at the end of the previous year, and may be expected to remain broadly within that range

American Club KPIs

Consolidated Statements of Operations and Comprehensive Income $000s 2019 2018
Net premiums and assessments earned $108,674 $ 73,405
Net investment income 4,544 4,081
Unrealized gains on investments 5,303
Net realized investment gains 3,327 2,302
Total Income 121,848 79,788
Losses and loss adjustment expenses incurred 71,443 45,905
Other operating expenses 43,545 39,805
Total Expenses 114,988 85,710
Income (Loss) Before Income Taxes 6,860 (5,922)
Income tax provision (4) 444
Net Income (Loss) 6,856 (5,478)
Comprehensive Income (Loss) $8,967 $(12,389)

American Steamship Owners Mutual Protection and Indemnity Association Inc is domiciled in New York State. It was organized in 1917 to provide P&I cover to maritime organizations. The Association is managed by Shipowners Claims Bureau, Inc (SCB), an unrelated party. SCB provides administrative, underwriting, accounting and claims processing services to the Association for an annual fee. Members are charged premiums based on the tonnage of their insured vessels. For the 2019 and 2018 policy years, at December 31st 2019 and December 31st 2018, the gross tonnage insured was 22,362,661 gt and 20,737,575 gt respectively.

https://www.american-club.com/files/files/2019_Annual_Report.pdf