Three-year rolling combined ratio at WoE rises to 105.9%

The three year average combined ratio at West of England rose to 105.9% for the year to February 20th, from 95.6% at same time last year. Group CEO Tom Bowsher said that there were two distinct components of the Club’s result. The year showed a deficit of $2.1mt, consisting of an overall underwriting deficit of $26.0m, partially cancelled out by a net investment return, after tax and revaluations, of $23.9m.

Bowsher said that the Club’s $26m underwriting deficit was reflected in a 2018/19 combined ratio of 114%. “The Club’s business objective is to operate at better than 100% over a three-year rolling period and the Club has moved out of tolerance on this measure, reporting a figure of 105.9%”, Bowsher said.

West of England reported “another strong financial result for the Club and one which clearly demonstrates our continued excellent levels of capitalisation and balance sheet strength underpinned by its Free Reserve of $306.4m and the highest ever solvency coverage reported”.

The Free Reserve declined by $2.1m year on year.

Club chairman Francis Sarre said that this had been achieved “despite ongoing adverse and divergent trends in claims and premium”.

He said that it was comforting to note that the level of attritional claims had not increased, notwithstanding the growth in the Club’s entry. Although the incidence of larger claims had moderated somewhat from the very high levels experienced in 2017, “the fact remains that the frequency of claims greater than $3m has been higher than previous stable levels”, said Sarre, noting that  this had been exacerbated by a greater number of claims notified by Clubs to the International Group Pool in 2018.

Sarre said that there was no obvious driver for this apparent change in claims pattern but noted that it was one that is “evidently now common to the whole industry”.

Sarre observed that shipowners continued to trade in challenging markets, but, as had been seen in the hull market in recent months, ultimately insurers would be unable to continue to provide cover at below expected cost for an extended period.

“If claims are set to rise then premium must reflect risk exposure and we are committed to addressing this imbalance in the best long-term interests of our Members”, Sarre warned.

Bowsher observed that “premiums across the market have been reduced to a level where it is difficult to foresee operating results being positive in the short-term”.

The Club noted that it had been domiciled in Luxembourg for many years; with the London branch registered under the Temporary Permissions Regime established by the Bank of England to enable it to continue underwriting UK risks, the Club was “fully insulated from the effects of Brexit without incurring any additional expense or disruption to its operations”.

The Club’s solvency coverage as measured under Solvency II reached 237%, reflecting the reduced volatility in the Club’s Balance Sheet following the disposal of Tower Bridge Court during the year and a strengthening in the Club’s claims reserves. S&P reaffirmed the Club’s ‘A-‘ rating in November 2018, reflecting their view that the Club will sustain its “extremely strong” level of capitalization.

Bowsher said that the net incurred claims cost for incidents up to $0.5m in value in the P&I Owned mutual class, which represent 99.5% of the claims received by the Club, could be predicted with reasonable certainty. Claims in the next band, $0.5m to $5m, showed more signs of volatility but neither Policy Year 2017 nor 2018 suffered particularly from claims up to $5m in cost. What was clear, said Bowsher, was that in these two Policy Years the Club experienced an unprecedented level of large losses. Policy Years 2011 to 2016 inclusive experienced on average less than two claims in excess of $5m in cost per policy year. By contrast, Policy Year 2017 had seven claims and Policy Year 2018 had five claims in excess of $5m in cost at the same development point. “The cost of the five claims in Policy Year 2018 was particularly severe with the Club notifying four claims to the International Group Pool. The Club’s reinsurance programme responded to lessen the effect of these losses, but the impact of this increased incidence of large losses for the Club and across the industry is nonetheless clear”, said Bowsher.

He noted that, despite its recent large loss experience, the Club continued to benefit from a positive loss record on the Pool, which reduced the contribution it had to pay towards claims.

As well as the International Group pool, West of England also places reinsurance for claims within its own retention. During last year it carried out a formal tender process for its reinsurance broking services. Significant changes were made to the programme and a more comprehensive reinsurance programme was placed for Policy Year 2019.

The Club said that it was pleased that a majority of its existing reinsurers continued to support the new programme.

The gross investment return for the financial year ending 20 February 2019 was $28.6m (3.9%), a 10th consecutive year of positive investment returns. The global return included a gain arising from the disposal of Tower Bridge Court, the Club’s former London property (bought in 1997). The portfolio of financial assets, excluding the contribution of Tower Bridge Court, returned 2.2% net of fees. WoE termed this return “highly satisfactory in the context of increasing market volatility, subdued inflation and slowing economic growth”.

The Liability Matching Portfolio, invested in U.S. corporate and Government bonds returned 3.1% while international bonds and high yield bonds returned 2.8% and 3.9% respectively. Equities returned minus 0.9% for the whole financial year.

Following the sale of Tower Bridge Court the Board decided to keep an exposure to real assets with the aim of maintaining diversification across asset classes, benefiting from the risk premium of less liquid markets and protecting the economic balance sheet against long-term inflation.

As of February 20th 2019 the investment portfolio was just under $700m, of which 20% was allocated to cash and short-term securities, 67% to bonds, 9% to equities and 4% to real assets. The Club’s Investment Committee has said that it continued to expect a moderate contribution of investments to the overall performance.

WoE allocates 58% to a liability matching portfolio, 20% to cash and 22% to the growth portfolio. Of the latter, 9pp are in Equities, 8pp in global bonds and inflation-linked bonds, 3pp in real estate and 1pp each in high-yield bonds and infrastructure.

For renewals the Club said that it had taken “a measured approach to renewal seeking to redress rates for Members with poorer records” and that it had “maintained a conservative growth strategy in light of the unsustainable premium levels prevalent in the market”.

It reported that “a number of Members left the Club and some new Members were welcomed but the modest growth in the mutual entry came primarily from support from our existing Members”. The mix in terms of areas and vessel classes remained consistent.

Entered tonnage by vessel type

Bulk cargo carriers 38.4%
Tankers and OBOs inc LPG/LNG 30.3%
Container vessels 18.4%
General cargo & reefers 10.1%
Ferries & passenger liners 1.7%
Specialist vessels & misc. 1.1%

Entered tonnage by area of management

Asia 39.7%
Middle East/Africa etc 7.2%
Americas 5.1%
Greece 20.7%
Other Europe 27.3%