Shipowners’ Club reports “strong headwinds” in SFCR for 2018

Shipowners’ Club Philip Orme referred to “another year of strong headwinds” in his preface to the Club’s Solvency & Financial Condition Report (SFCR) to December 31st 2018.

“As we reported last year, we anticipated this climate and chose to budget for a small deficit on our underwriting rather than call for an increase from our Members in such turbulent times” he said, noting that the combined ratio result of 104% was slightly better than the budgeted 105%.

He also noted that the Club, which has more than 20% of its investments in equities had faced “extremely volatile financial markets”.

Orme said there were signs that the tide was turning. “We have seen a tightening of insurance markets and the value of service over price gaining more recognition”, he said.

The Solvency Capital Ratio (SCR) at the end of the year was 185% (2017: 195%). Excluding contingent capital, the SCR at year end was 135% (2017: 145%). Orme said that, although the SCR had fallen year on year, the Club remained well capitalized, as was evidenced by the affirmation of the club’s ‘A’ rating from S&P. The Club has more than 7,400 Members, utilizing a controlled distribution model through owners’ brokers.

Shipowners’ Club works with more than 600 brokers worldwide, although just 20% of this network provides the vast majority of Membership based on premium.

Shipowners’ Club writes marine P&I insurance, plus incidental amounts of legal costs and personal accident cover for Members purchasing P&I cover.

Shipowners’ Protection Limited (SPL) fulfils the role of Club Manager. Business is underwritten from the Club’s London office, from branches in Singapore and Hong Kong and through a small number of delegated underwriting authority agreements. The Club also has a branch in Canada which is in run-off.

Solvency and minimum capital ratios by entity

EntitySolvency Capital Ratio (including contingent capital) %Solvency Capital Ratio (including contingent capital) %Minimum Capital Ratio %

Spandilux is a wholly-owned subsidiary of the Club. Under the terms of a quota share reinsurance treaty between Spandilux and the Club, Spandilux reinsures a fixed proportion of risks written by the Club, and in return is liable for the same proportion of claims in respect of the reinsurance ceded. Spandilux did not write any other business during the reporting period.

2018 Group technical account

Net earned premium195.0186.6
Claims incurred(151.0)(136.2)
Net operating expenses(52.2)(48.7)
Technical account balance(8.2)1.8

Snap facts:

Standard & Poor’s Rating‘A’ (Stable)
Combined Ratio104%
Membership Retention Rate99%
Total Tonnage27,252,461
Total Members7,444
Total Vessels34,094

Shipowners’ said that the soft market conditions appeared to be coming to an end. “The continuous downward pressure on premiums as a result of the increased market capacity has perhaps hidden the underlying truth that claims today are simply more expensive, as is the cost of doing business”, the club said, adding that “the soft insurance model is no longer sustainable and, as we look ahead, it seems inevitable that the market will change”.

Referring to the combined ratio of 104%, the club said that, as a not for profit mutual insurer, it expected to encounter such events and this was why it built reserves, to be able to respond to the occasional market downturns “and hence avoid passing on additional premiums to our Membership, especially at a time when some sectors of the shipping industry are still feeling the impact of the market downturn”.

In the year to December 31st 2018, the Club produced an underwriting deficit of $8.2m, a result it said was “consistent with the Club’s budget, which recognized the current state of the insurance market but also the strong capital position able to accommodate a small deficit in order to support the membership”.

The Club’s investment portfolio had a market value of $538.9m, inclusive of accrued interest, as at December 31st 2018, down from $597.0m 12 months previously.

The performance and composition of the Spandilux investment portfolio was similar, with a market value of $51.6m at the end of 2018, down from $54.0m at the end of 2017.

On a mid-market basis, the investment loss for the period was $28.8m, compared with a gain of $47.5m in 2017.

On a Solo entity basis, the Club has a limited investment portfolio comprised entirely of Canadian government and municipal bonds, held to support the liabilities of the Club’s Canada branch. This branch is in run-off. As the technical provisions reduce the assets they are being repatriated from Canada and invested in accordance with the Club’s investment strategy. On December 31st 2018 the market value of these bonds was $6.8m.

Taken together, the underwriting deficit and investment loss produce an overall deficit for the period of $37.9m on a mid-market investment valuation basis.