Strong investment returns at UK Club, but CR hits 120%

UK Club has released its full 2020 Directors’ Report & Financial Statements for the year to February 20th 2020

Chairman Nicholas Ingelssis said that the 2019/20 year, which was the 150th anniversary of the Club, saw free reserves grow by $54m over the year to $559m (2019: deficit of $32.4m). “The Club’s free reserves have grown steadily over recent years and continue to be among the strongest in the industry”, he said.

The surplus was driven by an exceptional investment return of 9.6% ($106m), with nearly all asset classes performing above expectations. The strong investment return was offset by a combined ratio of 120%, pushing the eight-year average to just above 100%.

“Premium rates have been falling across the P&I market for several years and are no longer sufficient to cover the associated claims and expenses. It therefore remains critical that the UK Club continues to focus on underwriting discipline and careful risk selection”, said Ingelssis.

The Club said in its strategic report that “the 120% combined ratio exceeds the Club’s long-term target range and the Directors continue to assess what actions may be required”.

Claims

Despite an increase in costs arising from International Group Pool claims during the 2019/20 policy year, the UK Club said that its own claims had been favourable when compared with the previous year. However, the overall cost of claims was adversely affected by some deterioration in prior year claims.

The downward trend in sub-$500,000 claims continued in the 2019 policy year, with the number of claims notified in 2019 down by 20% year on year, and 50% lower than 10 years ago.

Although large claims above $500,000 are relatively rare, they can have a significant influence on the total cost of the policy year, UK Club said. Just seven claims accounted for the $40m difference between the UK Club’s large claims experience over the past two policy years.

Also, the cost of IG pool claims to the UK Club had grown substantially in recent years, with the 2019/20 policy year costing 30% more than the previous year.

However, the club said that its Pool surplus in excess of $100m helped to mitigate the volatile cost of Pool claims. The total claims cost for the financial year was affected by some unusually late deterioration on the 2017/18 policy year and an increase in the reserve for occupational disease claims. These two factors added approximately 10% to the Club’s reported combined ratio.

Occupational Disease claims can relate to policies written as far back as the 1950s and 1960s. The long latency period between exposure and symptoms lead to uncertainty within the Club’s claims reserves and increases the Club’s regulatory capital requirements. The Club thereore decided to remove this uncertainty by signing a reinsurance contract which will cover any further claims deterioration, in anticipation of a full transfer of the liabilities in the near future.

At the recent renewal, mutual owned tonnage remained at a similar level to the previous year at 142m gt. For the first time all EEA tonnage was renewed into the Club’s new subsidiary undertaking in Rotterdam, UKNV.

Ingelssis said that the outbreak of the Covid-19 pandemic in the first half of 2020 had brought a new set of challenges to all businesses across the world. He said that the Club had responded well to the disruption. Managers adopted remote working practices in all offices, in line with local guidelines. All operations continued without interruption and Members should not have experienced any change to service levels offered by the Club, he said.

Although the pandemic led to a significant write-down in asset values in March, much of these losses were reversed in April and May. “Despite the volatility, the capital held by the Club remained in the AAA band of the S&P capital model throughout this period,” said Ingelssis.

Elsewhere, limitation rights were discussed with the Board in the context of an update on the claim pursued by the Spanish State against the P&I insurer of the Prestige for an alleged liability of $1bn, being a sum vastly in excess of the insurer’s limitation rights under the Civil Liability Convention. The attempt to circumvent limitation was viewed with concern and with hope that a more sensible outcome will eventually prevail, the Club said.

Preparations for the 2020 reduction in sulphur emissions gave rise to much discussion in the industry on prospective availability and quality of new fuels, the risks of changeover operations, effectiveness of scrubbers, and the impact on insurance if owners experienced difficulties in complying. Cover issues were discussed with the Board to ensure that Members would not be unreasonably penalized if problems arose beyond their control.

“As matters turned out, the industry made its preparations well, and implementation of the new regulations appeared to go smoothly with very few problems being notified or giving rise to P&I claims”, the club said.

Sanctions last year continued to present a moving target, “especially in the evolution of US expectations as to how non-US persons would adjust their business to avoid the risk of breaching US secondary sanctions in relation to Iran and Venezuela”. The vigorous efforts of the UN, US and UK in relation to DPRK sanctions was also a recurring theme, as was the increasing ability (with the aid of AIS and other tracking technologies) of companies (including P&I clubs) to be alerted to suspicious navigational patterns associated with sanctions breaking.

Several of the Club’s Members found themselves targeted by sanctions imposed on Venezuela, where the exact scope of executive orders as applied to non-US persons had been left somewhat vague by the US authorities. “There is no sign of any diminution in use of sanctions and compliance has now become an expected fact of life for shipping companies. All Members must be aware that the more often they trade within or close to sanctions risk areas, the greater the duty of care that is upon them”, the Club said.

Standard Club Fleet Profile (Sector by share of total gt – ships above 1,500 gt)

Bulk Carrier 35%
Tanker 28%
Gas 13%
Container 13%
Other 6%
Cruise Ship 5%

Geographic Profile

54% EMEA
36% Asia-Pacific
10% Americas

KPIs

Technical Account ($000s) 2020 2019
Gross premiums earned 305,037 322,398
Outward reinsurance (60,386) (64,860)
Net earned premiums 244,651 257,538
Inv return 106,414 9,279
Total Income 351 806 266,900
Net Claims Paid (280,771) (240,633)
Change in provisions for claims 29,064 (10,308)
Net Claims Incurred (251,707) (250,941)
Net op exps (43,724) (43,654)
Pre tax Balance 56,375 (27,695)
Post tax Balance 54,401 (32,395)

https://www.ukpandi.com/-/media/files/uk-p-and-i-club/report-and-accounts/2020-directors-report-and-financial-statement.pdf