Gallagher Group Club pre-renewal report 2023: Diversification

In its analysis of the group clubs in general and specifically, broker Gallagher Specialty observed that increased diversification meant that most clubs now had revenue streams arising from outside their core owners P&I activity (albeit some more than others).

Gallagher observed that it was not possible to split owned and chartered P&I premium in all cases, or even fixed and mutual owners entries, it was possible to estimate with a fair degree of accuracy the impact of diversification on financial year premium income:

Financial Year

Premium IncomeP&IFD&D/War etcM&EOtherTotal
American*166,6796,50015,200 188,379
Britannia*249,9898,151  258,140
Gard512,064 469,439 981,503
Japan241,1801,932  243,112
London*120,75915,701  136,460
North of England336,32522,086 91,661449,572
Shipowners264,664   264,664
Skuld*317,821 155,455 473,276
Standard305,50013,100 27,500346,100
Steamship*367,90039,000  406,900
Swedish124,4249,14992,304 225,877
United Kingdom*442,951  33,044475,995
West of England274,76818,402  293,170
Approx Split78.5%2.8%15.5%3.2%100%
  1. * In certain cases premium income splits are interpolated from policy year information or solvency returns etc. Amounts shown across two columns are not split by the respective club.
  2. * More than 53.4% of Skuld’s 2022-23 policy year premium income is in respect of fixed premium business, mostly their charterer’s book and a growing amount of diversified physical damage business written under Skuld corporate security. This figure has grown slightly in the recent year, but has been consistently around 50% for a number of years.
  3. * 9.1% of the Japan Club premium is fixed, split approximately 80% coastal craft and 20% charterers business and other etc. This percentage has fallen from 14% in 2021-22, predominantly because of the excess calls levied on the mutual book of business during the year – in practice the fixed premium rose 10% year on year.
  4. * The figures shown for the UK Club as P&I includes fixed premium MAT business derived from Thomas Miller Specialty and includes fronted business. The remainder includes motor, fire and general liability business. It is understood that there is only limited risk retention in these arrangements and so the quantum of diversified premium is not necessarily indicative of proportionate risk diversification: in the main it represents more of a move into fixed premium P&I rather than purely mutual premium P&I.

Across the market, the proportion of premium attributable to diversified operations has been steady at between 75% and 80% of the group’s total premium income, despite various strategic U-turns over the past five years.

M&E premium remains the predominant diversified revenue stream, albeit for a limited number of clubs. During the year the M&E sector returned a decent profit, albeit that this was an unusual outcome when one looks at the past 20 years, and this might have vindicated the decision of the diversified clubs to adopt this strategy.

However, the strategy has been justified as an investment by the clubs on the basis that returns are expected to be better than conventional investments in equities and bonds. Gallagher conceded that “during a turbulent year such as 2022-23, negative investment yields have dominated the conventional investment portfolios, this is undeniable”. However it then observed that, with spot interest rates now around 5% to 6%, the returns from diversification are under a very different spotlight than when interest rates were 0% to 1%. In other words, if one takes as a base the cost of capital (as all the reinsurers were keen to do at this year’s Rendez-vous de Septembre in Monte Carlo) then higher interest rates create a greater financial hurdle that diversification has to jump.

The H&M business enjoyed a successful 2022 with total losses at a recent low and a generally good outlook for underwriting, but this phenomenon tended to attract new capital to the market (which has only limited barriers to entry) and Gallagher observed that this would suppress the ability of underwriters to increase, or even maintain, premium rates.

Therefore, the broker said, while the three established, dominant Scandinavian diversified clubs would seek to grow market share in M&E, it might prove more of a challenge for other clubs, such as the recently merged NorthStandard, to gain a foothold in the market – even assuming that this remained a priority, given the opportunity cost of the alternative conventional investment yields.

Outside of what might be defined as “pure” diversification – into new classes of business – the Group Clubs looked set to continue to explore the fixed premium alternatives. Most clubs had facilities to offer these options and the alternative markets were either contracting / consolidating or aligning themselves with particular P&I clubs for capacity. Fixed and mutual P&I products are mutually complementary; Gallagher said that it was “hard to see where the existing fixed premium P&I insurers go next for their own diversification”.

On Wednesday: Overall results and free reserves.