In its pre-renewal review of the International Group Clubs, broker Gallagher Specialty observed that it was “perhaps typical of the asynchronous cycles that underpin the P&I marketplace that, having finally righted the balance on the underwriting side of the business, 2022-23 should be the year when the investment markets generated losses”.
In many ways, the broker said, this could be seen as fortunate, in that it has eased pressures on the clubs to move away from a hard-fought for sustainable level of premiums – “if indeed this is what has been achieved, rather than simply underwriting surpluses being due a freak good year for claims”.
The turmoil in the markets during calendar year 2022 and stretching into 2023 left no safe place for club investment managers to place funds. Rising interest rates caused substantial unrealized losses on fixed interest instruments such as corporate or sovereign debt. The impact of this, coupled with parallel declines in equity values, was to generate some $700m of unrealized investment losses across the market, which were booked against 2022-23.
To the extent that the clubs had the ability to hold the instruments to maturity, this amounted to no more than creating offsetting future profits as the instruments return to par value at maturity, or indeed if interest rates were to fall again, but in the interim the unrealized losses hit the balance sheet free reserves.
Key therefore was the presumption that the clubs had the cash flow such that they would not be forced to realize the paper losses prior to maturity at 100%.
To date the evidence had been that the clubs could do this, but, given the long term nature of P&I claims, most portfolios contained an element of long maturity investments, so it could be some time before the unrealized losses unwound.
In the immediate future the higher interest rates would improve earnings on cash and short term instruments and ultimately future investment yields would be better. This was being shown in the interim results of the clubs where investment returns are positive as yields improve and unrealized losses unwind. “It seems very likely that the decline in free reserves that has been seen in the past few years will reverse in 2023-24 if underwriting results hold up and investment results return to positive”, said Gallagher.
Financial year results
| $000s | 2018-19 | 2019-20 | 2020-21 | 2021-22 | 2022-23 | Cumulative |
| American** | -12,389 | 13,101 | -3,749 | -8,329 | -19,261 | -30,627 |
| Britannia | -23,996 | 31,827 | 42,467 | -13,950 | -77,837 | -41,489 |
| Gard* | -90,177 | 20,347 | 83,720 | 15,361 | -17,830 | 11,421 |
| Japan** | 11,352 | -1,941 | 7,731 | -62,980 | 24,784 | -21,054 |
| London** | -25,799 | 5,048 | -20,320 | 10,432 | -50,477 | -81,116 |
| North of England | 12,595 | -19,227 | 6,463 | -16,637 | -12,774 | -29,580 |
| Shipowners | -37,901 | 36,149 | 39,091 | 17,371 | -59,067 | -4,357 |
| Skuld | 10,697 | 13,122 | -6,766 | -29,016 | 15,884 | 3,921 |
| Standard | -45,300 | -41,000 | -33,400 | -50,100 | -45,200 | -215,000 |
| Steamship | -27,002 | 64,617 | -4,278 | -37,564 | -19,200 | -23,427 |
| Swedish* | -8,294 | 18,517 | 408 | -35,522 | -37,565 | -62,456 |
| United Kingdom | -32,395 | 54,401 | -51,796 | -19,092 | -57,861 | -106,743 |
| West of England | -2,160 | 31,774 | -47,013 | -39,949 | -20,433 | -77,781 |
| Aggregate | -270,769 | 226,735 | 12,558 | -269,975 | -376,837 | -678,288 |
Clubs with * under called in one or more of the years in question.
Clubs with ** levied excess calls in the period.
Results incorporate the effect of pension fund adjustments necessary in a number of Clubs, applied retroactively where appropriate.
Only two clubs enhanced their free reserves by generating an overall surplus in the year, and both of these were achieved with the involvement non-recurring events. Japan Club made an excess call of some $51m and Skuld sold its investment in its former Lloyd’s agency, Asta, at a profit.
Free Reserves
In aggregate, Free Reserves fell by $378m in the year and are now $870m lower than they were at the end of 2017-18 – which was a record high. Approximately $750m of the fall is down to a combination of net underwriting losses and net investment gains.
Gallagher said that “five years ago we were suggesting that the clubs were holding too much members money in their reserves – to the extent that they have lost ¾ of a billion of those reserves, this situation has been somewhat remedied!”
Notwithstanding this diminution in financial strength, Gallagher said that the clubs remained collectively well within the boundaries established by the solvency requirements.
However, at individual club levels there were some, predominantly smaller, clubs where this decline was perhaps more worrying, and may yet point to a need for further remedial action, said Gallagher.
The broker hoped that the positive sounds coming out of the market as the 2023-24 year had progressed would allow for a natural correction of individual club circumstances, It said that and it had to be noted that the negative outlooks that Standard & Poor’s applied to most clubs in the market had gradually been lifted.
Five-year development of reserves, 2019 to 2023 (financial year basis)
| $000s | Underwriting Result | Investment Income | Other Income Surplus/Shortfall | Outside Funding | Reserve Change | Total |
| American | (131,462) | 16,918 | 437 | (114,127) | 100,923 | (13,204) |
| Britannia | (105,833) | 80,263 | (15,955) | (41,525) | (90,000) | (131,525) |
| Gard | 84,856 | 79,876 | (17,211) | 147,521 | (136,100) | 11,421 |
| Japan | (109,229) | 48,729 | (11,987) | (72,487) | 51,433 | (21,054) |
| London | (199,775) | 44,882 | (2,522) | (157,415) | 76,299 | (81,116) |
| North of England | (125,406) | 103,472 | (7,666) | (29,600) | – | (29,600) |
| Shipowners | (18,419) | 39,022 | (24,960) | (4,357) | – | (4,357) |
| Skuld | (76,829) | 102.797 | (23,368) | 2,600 | – | 2,600 |
| Standard | (233,800) | 83.300 | (64,500) | (215,000) | 18,500 | (196,500) |
| Steamship | (101,765) | 102,612 | (24,173) | (23,327) | (38,241) | (61,568) |
| Swedish | (80,407) | 34,651 | (12,272) | (58.028) | (4,428) | (62,456) |
| United Kingdom* | (250,523) | 159,487 | (15.707) | (106,743) | (99,816) | (206,559) |
| West of England | (143,656) | 75,415 | (9,540) | (77,781) | – | (77,781) |
| Total | (1,492,269) | 971,424 | (229,424) | (750,269) | (121,430) | (871,699) |
*UK outside funding change includes amortization of subordinated loan of $100m
“Outside funding” in the table above is defined as both excess/return call income, actual or virtual, and other Free Reserve development caused by changes to loan capital in the case of the UK club who repaid its hybrid loan in the period under review. It also includes the impact of structural changes e.g. the acquisition of Strikes Club by Standard Club.
The underwriting result column is also adjusted to reflect the effect of returns of premium as well as excess calls for premium, thus is an ETC equivalent result.
Finally, the retrospective element of American Club change of accounting policy (EBUB) is included in the outside funding element as if it were an excess call – which ultimately most of it has crystallized into, with the exception of that element created to deal with costs of historic asbestosis issues from the previous millennium.