Equity volatility has varying impact on Group Clubs: Gallagher

In broker Gallagher’s webinar update last week on the state of the Group P&I Clubs, the contributors noted that free reserves recovered well in 2019-20, with $650-$700m in investment returns pulling back about half of the decline recorded in free reserves the previous year.

Gallagher noted that their update only had full reports from seven of the 13 clubs, with the Covid-19 pandemic leading to a later appearance than usual of the formal statements. However, Gallagher’s internal research, plus guidance from all but one of the group clubs (Japan), had enabled them to put together the numbers.

Roger Ingles of Elysian Insurance observed that if anybody had not previously appreciated the impact of volatility on Group Clubs’ free reserves, the volatility of the markets in the past few years should have disabused them of that notion.

“This is even more exaggerated when you consider that 2021 is likely to see another drop in the yield curve, possibly back to about zero”, Ingles said.

Putting these shifts in revenue into context, Ingles noted that a 1% shift in investment income was probably equivalent to about a 5% shift in the General Increase, once acquisition costs and the reinsurance knock-on effect were factored into the equation.

“So the change in investment income in 2019/20 was probably equivalent to about a 30% General Increase. The problem is that the probability is the next year will see an impact equal to a 35% General Decrease”, said Ingles.

The investment yield for all Clubs increased significantly for 2019-20, with the exception of the Japan Club, which is not permitted to invest in equities under its incorporation statute.

Ingles also noted that the assigned date of “year-end” has had an impact over the past couple of years, because of volatility in January and February

American Club, Shipowners and Swedish Club all have December year-ends, which meant that for the 2018 year they missed out on the dramatic recovery in stocks in January and February 2019. However, since that benefit was shifted forward to the 2019 year, they are amongst the better performers in the current year.

London Club revalued (upwards) its property in 2019-20. Ingles said that if this were included in investment returns it would push the Club to the top of the 2019-20 table, resulting in a yield of 9.88% rather than 7.76%. That revaluation helped London Club to an increase in Free Reserves last year. Otherwise there would have been approximately a £3m decline in free reserve levels.

Club Inv Yield 2019-20
American 7.93%
Britannia 7.30%
Gard 5.37%
Japan 2.0%
London 7.76%
North 6.40%
Shipowners’ 6.90%
Skuld 4.76%
Standard 9.70%
Steamship 5.83%
Swedish 8.57%
UK 9.60%
West 6.50%

Looking at the portfolio balance of the various clubs, Will Baynham, Gallagher Divisional Director, said that information was not yet available from every club, but there were interesting deductions to be made from the information available.

He said that there were two real camps. There were those who rebalanced their portfolios more defensively – American Club, London Club, Shipowners’. They all reduced their equity portfolios in the region of about 5pp in their 2019-20 policy years. Secondly, there were those where their balance in equities rose on the rising tide of equity valuations throughout 2019-20.

Adopting neither stance, or perhaps both, was Gard, where there seemed to have been a small rebalancing, said Baynham, noting that the clubs that reduced their equity exposures almost certainly did so because of a feeling that the market was overheating, rather than any sort of crystal ball relating to the impact of Covid-19.

Back in 2013 equities made up just over 20% of the Group Club’s overall equity portfolio. This dropped down to 17.5% in 2016-17, but then pushed back up to about 19.5% in 2019-20. Baynham said that this figure could drop slightly when the full figures become available.