North raises free reserves to $463m on combined ratio of 105.1%

North of England Club said that diversification was a factor in helping the Club increase its free reserves rise $13m year on year to $463.1m.

Chairman Pratap Shirke said that it was “heartening” to see the benefits of the Club’s business diversification strategy.

He noted that North enjoyed the highest retention levels in both the mutual and fixed sides of the business. Renewal saw owned and chartered membership tonnage in P&I exceed 200m gt for the first time in the Club’s history, while FD&D surpassed 150m gt.

Shirke said that the P&I sector overall had seen a dilution of premium rates over the past five years; he said that this was “the single largest contributor to our overall combined ratio of 105% for 2018/19”.

Shirke noted that North continued to support its Members at the 2019/20 renewal by not announcing a general increase, with renewal negotiations being “robust and fair”.

“Because of our rigorous approach, the Club’s premium base was protected with minimal levels of erosion at the February 2019 renewal”, the chairman said, adding that “whilst we will endeavour to keep premiums as low as we can to support our Members going forward, we continue to believe that an adjustment is needed to premium levels over future renewals if clubs are to underwrite sustainably”.

On the investment side, North booked a gain. Shirke noted that “somewhat fortuitously for P&I clubs with a traditional 20 February year-end”, the major world equity markets recovered to finish 2018/19 a little higher than they were at 12 months previously.

North’s funds, which Shirke said were “invested appropriately for an uncertain environment” produced an investment return (net of fees) of 2.45%. Shirke said that this was “a respectable contribution given the economic background, albeit not one which is sufficient on its own to subsidise current rating levels in the longer term”.

Claims trends

The chairman said that it was not possible to conclude that the industry was seeing an upwards claims trend based on the 2018/19 claims experience. “However, what we can say is that the year did produce a greater number of large claims (over $1m) for North and more incidents reported across all clubs involved in the International Group pool”.

The 2018 policy year showed an increase in the retained values of P&I claims with estimated value of $23m higher than 2017. The values remained in line with the relatively benign claims environment experienced by the Club since 2015 and remained significantly below the average retained claims cost over the 2011 to 2014 period, notwithstanding year-on-year growth in tonnage and ship numbers over the same timeframe.

Claims numbers were also consistent with recent experience, falling slightly from the 7,625 claims reported in 2017 to 7,063 in 2018. This year’s figure tracked experience since 2015, with claims numbers averaging 7,331 per year since 2015, down from an average of 8,350 claims per year in the four years preceding 2015.

Shirke noted that claims numbers generally tracked economic activity, and the lower average numbers of the past four years reflected relatively weak freight markets over that period. He said that, as freight markets strengthened and returned to pre-2015 levels, “we would expect to see both the number of claims and the aggregate values increase”.

Shirke observed that about half of one percent of all claims by number account for more than 50% of the value of retained claims. In 2018 Members had 34 claims which were estimated to cost more than $1m at the twelve-month point. These 34 claims accounted for 53% of the value of retained claims.

In 2017 there were 33 such claims, accounting for 51% of retained claims by value. Most of these large claims were admiralty-related.

Shirke said that, although the shipping industry had a good record of reducing the number of major casualties over the last 25 years, the cost of such incidents when they did occur had increased significantly, particularly in relation to wreck removal and cargo recovery operations.

By the twelve-month point of the 2018 year 18 claims had been declared to the IG pool, five more than the 2017 year at the same point.

Last year North had two pool claims, up from one claim the year before.

There as a 99% retention rate and both P&I and FD&D owned tonnage increased through the renewal period.

Average ship age (North owned tonnage only) rose to 12.2 years from 11.8 years on Feb 20th the previous year. Average ship size (P&I, North owned tonnage only) rose to 39,073 gt, from 38,201 gt at the same point last year.

North P&I Club CEO Paul Jennings said that “North was the first Club to confirm its post-Brexit trading arrangements with the establishment of our subsidiary in Ireland, and our Members continue to draw great confidence from the foresight, strength and stability of the Club. North has provided premium predictability and no unbudgeted calls for more than 27 years. This stability that has also been recognised by Standard and Poor’s which gave us an ‘A’ rating for the 15th consecutive year.”

Income Statement (US$m)2018/192017/18
Premium income345.0387.6
Underwriting result(13.1)(8.0)
Inv res & FX29.528.6
Movement in pension scheme deficit(3.8)2.1
Revaluation of land and buildings(2.9)0.6
Change in free reserve12.619.8
Net assets (as of Feb 20th)1,084.71,093.9
Net outstanding claims(621.6)(643.4)
Free reserves463.1450.5
Combined ratio105.1%103.8%