Gard’s first “holistic” annual report sees CR fall to 94%

Norway-based marine and energy insurer and Group Club Gard has reported much-improved results for policy year 2021-22

KPI

For the first time, Gard presented what it described as an “integrated” annual report which outlined its performance for the last financial year against a broad set of parameters, not only financial ones. “By looking holistically at all its activities, Gard can measure the value it creates both for its Members and clients and for society at large”, the insurer said

CEO Rolf Thore Roppestad said that the financial year ending February 2022 had been a very challenging one for the maritime industries, due to a variety of financial and operational difficulties.

Added to the financial report, other highlights of the report include:

• Gard’s decision to co-found the Poseidon Principles for Marine Insurance,
• a strong commitment to Equality, Diversity and Inclusion,
• the continued growth of Gard’s renewable energy portfolio.

Gard has also decided to start providing ESG assessments on all significant claims. It said that this added tangible value that Members and clients could use in their own sustainability and reporting efforts going forward.

The Equity Reserves grew by $15m, despite reducing the ETC for P&I mutual Members by a 5% Owners’ General Discount and returning $19m.

The insurer said that 2021 had been a challenging year for the P&I mutual book, with Pool claims a significant part of that. However, strong results from fixed price P&I and the Marine and Energy book meant that overall the group returned what it described as “a robust profit”.

Release calls

All open policy years are currently expected to close with no further calls.

GWP on an Estimated Total Call (ETC) basis recorded a $114m (12.4%) increase to $1.036bn. Gard said that the premium growth was driven by hardening rates across all classes of business and volume growth for both P&I and M&E. As a result of this, Gard group increased its overall market share.

The insurer observed that there was upward market pressure on the cost of reinsurance, but said that the impact on Gard had been acceptable “due to strong, long-term relationships with reinsurers, satisfactory claims records relative to the overall market and changes to our risk profile”.

Claims incurred for Gard’s own account were $629m, down by $3m compared to the previous year. Gard described this as “a satisfactory level considering the growth in volume, a high level of Covid-19 related claims and a higher-than-expected influx of pool claims from the International Group of P&I clubs in the first half of the 2022 financial year, which includes an adverse development on claims from prior years”.

Gard observed that the trend of increasing pool claims had continued the trend since 2019.

Operating costs were lower than expected for 2020/21 and 2021/22 due to limited activity level as a consequence of Covid-19. This was now expected to normalize for 2022/23.

The technical result is a profit of $44m and a combined ratio net on an ETC basis of 94%. The previous year there was a loss of $26m and a combined ratio net on an ETC basis of 104%. The non-technical result however was below expectation at a loss of $5m.

Gard said that the Group’s investment portfolio experienced a volatile year due to the Covid-19 pandemic and the tension prior to the Russian invasion of Ukraine. The net return of the investment portfolio for the Gard Group was 0.1%. The return for the previous year was 5.0%. The reason for the bottom line being a small loss was due to foreign exchange adjustments.

GWP in P&I on an ETC basis rose by 5.7% year on year to $534m. The Group said that the increase was driven by both hardening rates and increased volume within the P&I portfolio.

“After a period of declining rates, P&I premium levels have gradually started to recover. The main driver of higher rates is the increased level of International Group pool claims seen over the past years”, Gard said.

P&I claims incurred for own account reached $384m, down by $28m (6.8%) from the previous year. Gard said that this was “an acceptable level considering a high level of Covid-19 related claims”.

A higher-than-expected level of IG Pool Claims in the first half of the 2021/2022 financial year also included an adverse development on certain claims from prior policy years. The level of claims from Gard’s own P&I portfolio was below expectation, with only one large claim above $5m during the whole financial year. The technical result for P&I was a small loss $2m and a combined ratio net of 100% on an ETC basis.

However, for P&I mutual the combined ratio net on ETC basis was 109%, termed “below expectations”. The P&I area came out on an acceptable level due to the strong support from P&I Fixed.

Last year the technical result for P&I was a loss of $47m and a net CR of 112% on an ETC basis.

In Marine & Energy, GWP grew to $502m in the year to February 20th 2022, an increase of $85m (20.5%) year on year. The increase was driven by hardening rates for Marine, Energy and Builder Risk, as well as by growth in business volume for Marine.

M&E claims incurred for own account were $245m, up by $25m (11.6%) from the previous year. Gard said that this was at an acceptable level considering increases in the claims costs caused by Covid-19. These were due to restricted yard availability, delays and tougher infection control schemes. Gard noted that there had been an increase in frequency of Marine claims that exceeded the underlying volume growth, but the influx of energy and builder’s risk claims were lower than expected. There was only one large claim above $5m in Gard’s Marine & Energy portfolio in the 2022 financial year. The technical result for M&E was a profit of $46m and a combined ratio net of 87%. The previous year there was a profit of $20m and a combined ratio net of 93%.

Rolf Thore Roppestad, CEO of Gard, said that the developments of yet another major crisis had “rocked the foundations of our normal life”. While noting that the war in Ukraine was first and foremost a growing human tragedy, he said that it was also causing major disruptions throughout international politics and our global industry. “It would be unwise to speculate on the long-term effects of the conflict: my sincere hope, of course, is that fighting and the loss of innocent lives will cease at the earliest opportunity”, he said

There had already been significant consequences for global trade and the maritime industries. Supply chains were disrupted, energy and food prices were soaring, and hundreds of vessels were trapped in the Black Sea, unable to escape the conflict. “Once again, our seafarers are among those being hit the hardest. Add to that a sanctions regime that is increasingly difficult to navigate, and it is safe to say that we find ourselves in turbulent waters”, the CEO said.

He was particularly pleased with the continued growth within renewable energy – offshore wind now constituted more than 30% pf premium earned in the energy segment, almost double what it was a year previously.

Thore Roppestad said that Gard continued to push for data-driven solutions and insight-led decisions in underwriting, claims, and risk management, to the benefit of Members and clients. “We will continue to be an advocate for increased and improved knowledge-sharing within the IG, CEFOR, and in other industry associations. All with one core purpose in mind: to minimize risks, prevent losses, and to enable sustainable maritime development”, he said.

The holistic approach by Gard has thrown up some interesting numbers and it would be interesting to see similar numbers from all the other Group Clubs. The company noted that since 2010 the relative tonnage of “black flag” vessels entered with the Club had declined from 0.30% to less than 0.05%.

Gard currently has 88 objects insured with blacklisted flags. Gard noted that one of the blacklisted flag states had improved its security standards and was therefore removed from the list in the beginning of 2022, resulting in a significant reduction of insured objects with blacklisted flags. Objects with blacklisted flags are reviewed and assessed more thoroughly than others by Gard’s internal surveyors.

Meanwhile, the percentage of relative tonnage with non-IACS class declined over the same period from 0.23% to 0.10%.

The Club noted that as a general rule, Gard only insured ocean-going tonnage that are classified by the International Association of Classification Societies (IACS). In FY 2022 Gard covered 23 assets on P&I with non-IACS class (excluding small craft and specialty vessels). Gard said that this was an acceptably low number, and these assets had been subject to a thorough risk assessment.

IACS has withdrawn Russian register’s membership of IACS. Gard said that it had no immediate short-term concerns for this withdrawal, but that the impact this might have long-term was more uncertain. Gard said that it had limited numbers of Russian Registered vessel in the portfolio, and said that the number of objects was being reduced from one month to the next.

Gard Group said that it had limited exposure towards Russian entities and entities controlled by Russian interests. Neither did Gard have any exposure towards Russian reinsurers.

In addition to the Russian registered objects, Gard had some additional objects on risk which were partly owned by Russian interests and companies and objects with Russian co-insureds.

Gard said that going forward it would not engage in new business from Russia.

As of February 20th 2022 outstanding receivables related to insured vessels that were owned by Russian entities or entities controlled by Russian interests amounted to just $70,000. Gross claim reserve related to insured vessels that were owned by Russian entities or entities controlled by Russian interests amounted to $809,000.

The Covid pandemic continued to affect the insurer’s operations throughout 2021.

Gard implemented a Resilience & Well-being programme for all employees, providing professional advice in the form of short videos, webinars, and practical tools from a certified provider. Advisory videos on ‘remote leadership’ were also made available to all in its digital handbooks.

Gard said that digital meetings would likely remain a key feature “after we return to the ‘new normal’”, as it reduced air miles and thereby carbon footprint, and might also promote better work-life balance.

Gard observed that, while its office operations in Europe had returned to normal from early 2022, the pandemic continued to impact offices in Asia and the US. The insurer had no layoffs and had continued to pay full salary to all employees.

Gard’s investment strategy is relatively conservative for Group Club mutuals. 55.4% is invested in investment grade government/credit bonds. Global equities still make up 13.9% for the portfolio, while high-yield bonds make up a similar percentage. “Alternatives” make up 7.7% of the portfolio.

The Net Asset Value (NAV) for the investment portfolio ended the year at $2,227m. As inflation increased towards the summer, Gard noted that central banks started laying the groundwork for a tightening of financial conditions towards 2022 through increasingly hawkish commentary by the US Federal Reserve. This led to a significant change in the US yield curve, with major increases in the US three- and five-year interest rates, whilst the 10-year increased by a smaller amount, flattening the overall curve. The yield of a US three-year treasury bond increased from 0.21% at the beginning of the year to 1.68% on 20 February 2022. This was not good news for Gard because its fixed-income portfolio tends to have a duration of 2-to-3 years, meaning that it was particularly affected by changes in this part of the yield curve. Fixed income was a net negative contributor to portfolio performance with an estimated loss of 2.5%. The other negative contribution to performance for the year was emerging market debt, (about 5.5% of the total portfolio), which returned an estimated minus 5.9%.

The globally diversified equity portfolio returned 1.8% for the year. “We continued to be relatively underweight in US equity market beta and in general have a higher exposure to value and quality than growth”, said Gard.

Performance was impacted by holdings in emerging-market equities which, as debt, suffered from currency depreciation and inflationary pressures.

The credit portfolio (high-yield bond and corporate bonds) delivered a return of 2.4%, helped by holding a significant portion of assets in floating-rate debt and seeing only limited changes in corporate debt spreads over the year.

Investments in privately held corporate debt returned 9.4% for the year. Real estate and alternatives where the strongest contributors to performance, with returns of 15.2% and 13.8% respectively. “Our real-estate portfolio benefitted from strong markets, especially in industrial and logistical properties, which continued to be in demand. Our investments in global macro funds also performed well due to increasing market volatility, especially across interest rate, currency and commodity markets”, the insurer said .

https://www.gard.no/annual_report/2022/home