The combined ratios of Group Clubs averaged 121% in 2019-20, continuing a significant upward trend for the past five years, for which the rolling average was 103%, said broker JLT Gallagher on Wednesday July 22nd in its webinar update on the Group P&I Clubs’ financial performance.
This was a lengthy presentation full of relevant information, so IMN will be splitting it into three or four articles, for reasons of length and readability.
Part One: Combined Ratios are high
William Baynham, Divisional Director, Gallagher P&I, reported that the Clubs had been somewhat tardy this year in releasing their official financial statements, noting that “so far only seven clubs have released their formal financial statements for 2019/20. This is later than normal and no doubt the delays are attributable to Covid.”
In fact Britannia released their full financial statement on the morning of the webinar (see yesterday’s IMN), bringing the number now to eight, but this was obviously too late for Gallagher to incorporate it into its update. The eight clubs that have released financial statements so far are now Steamship, Shipowners, American, Swedish, Skuld, Gard, London and Britannia. Financial statements are still awaited from West, UK Club, North, Standard and Japan. In the case of Japan Club there has not yet even been a commentary on the policy year.
The data presented is a combination of Gallagher’s internal analysis and each club’s own comments.
Baynham said that, looking at the most recent underwriting results “what immediately stands out is that just one club made a positive underwriting result, that being Steamship”.
He said that a few things stand out. Firstly the American Club made excess calls last year, which means that $24.7m of unanticipated prior year income distorted their performance in the current year. If the calls are excluded then the underlying combined ratio is 145%, rather than 106.6%. “And that ratio itself has been positively influenced by the fixed premium facility Eagle Ocean Marine, but adversely impacted by the results at American Hellenic Hull”, said Baynham.
Conversely, Gard, perhaps provisionally, had not called the final instalment of its 2019/20 premium. That is 20% of the estimated total call (ETC) or approximately $72.5m. If they finally choose to call this amount in the autumn the final combined ratio would improve from 116.83% to 102.3%.
|American||106.6%||Includes $24.7m excess calls, 145% without it|
|Gard||116.83%||Reflects undercall on PY 2019-20|
Baynham observed that “it is clear that for the past three years the underwriting results for all clubs have broadly speaking been negative, with only the occasional positive blip disturbing the pattern. With regard to the Japan Club we don’t have 2019-20 figures at all since they haven’t commented on their combined ratios.”
Baynham said that a couple of individual circumstances were worthy of note. Firstly, the Standard Club, with a combined ratio of 126%, had again been badly hit by its involvement with its Lloyd’s syndicate, which went into run-off in 2018 and had now been sold off, so no adverse impact in future years was expected. “However, the experiment has cost the club in excess of $100m in underwriting losses over the past five years. To put that into context, that is the equivalent of an almost 10% call being made in each of the past five years.”
This had resulted in a negative outlook from S&P, which Baynham thought was “perhaps a trifle harsh, given the fact that other clubs have equally poor results, the fact that they have had an unprecedented number of five pool claims in the year, and the staunching of the bleed regarding the syndicate has been dealt with”.
Baynham pondered what S&P had in store for the London Club, given a negative rating outlook by the rating agency 12 months ago, and which had a 142% combined ratio for 2019-20, worse than that of Standard Club.
Baynham also observed that North of England, “to the surprise of many”, revealed a further deficit on its defined benefit pension fund, “which had supposedly been resolved in prior year and would not result in any more pain. Unfortunately it seems as though it has done.”
Seven Year Group Club Average Combined Ratio
“This is self-explanatory and scary in the same breath”, said Baynham.
It showed the effect of the recent three or four-year freeze on premium increases.
“However, free reserves continue to rise, despite five years of worsening combined ratios. The Clubs still remain broadly healthy.”
Group Total Free Reserves
Alex Vullo, Divisional Director, Gallagher P&I, said that Gallagher leaned towards the following viewpoints:
The majority of clubs were still underperforming on technical underwriting and after four consecutive years of technical loss-making the average combined ratio for 2019 stood at 121%. The five-year average is 103%. This provided a clear indicator of where the market was heading, said Vullo. “The Clubs need to increase rates to restore technical balance”.
Vullo said that we should keep in mind that the past five years ending in 2019 were the softest five years in the P&I market’s history. “And while we talk about technical underwriting being out of balance, the Clubs show little sign of underwriting discipline, as we still see ultra-competitive rates for 2020”. “Clubs are still chasing down business”, Vullo said.
“The technical problem isn’t going away in the short term, and the Clubs will find it hard to get rates up”.
In Monday’s IMN, Free Reserves helped by investments. Is it sustainable?